Legislature(2001 - 2002)
04/27/2001 08:10 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
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
April 27, 2001
8:10 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
SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 190
"An Act levying and collecting a tax on certain North Slope
natural gas in place if certain requirements relating to its
sale and delivery are not met, and imposing a limit on the
Department of Natural Resources that relates to the issuance or
extension of oil and gas leases containing natural gas that is
capable of production in paying quantities; and providing for an
effective date."
- HEARD AND HELD
HOUSE BILL NO. 220
"An Act establishing an exploration and development incentive
tax credit for persons engaged in the exploration for and
development of less than 150 barrels of oil or of gas for sale
and delivery without reference to volume from a lease or
property in the state; and providing for an effective date."
- BILL HEARING CANCELED
PREVIOUS ACTION
BILL: HB 190
SHORT TITLE:NATURAL GAS PIPELINE INCENTIVE/ GAS TAX
SPONSOR(S): REPRESENTATIVE(S)WHITAKER
Jrn-Date Jrn-Page Action
03/16/01 0627 (H) READ THE FIRST TIME -
REFERRALS
03/16/01 0627 (H) O&G, RES, FIN
03/22/01 0688 (H) SPONSOR SUBSTITUTE INTRODUCED
03/22/01 0688 (H) READ THE FIRST TIME -
REFERRALS
03/22/01 0688 (H) O&G, RES, FIN
03/22/01 0688 (H) REFERRED TO O&G
04/27/01 (H) O&G AT 8:00 AM CAPITOL 124
WITNESS REGISTER
LORI BACKES, Staff
to Representative Jim Whitaker
Alaska State Legislature
Capitol Building, Room 411
Juneau, Alaska 99801
POSITION STATEMENT: Made a brief state on behalf of the
sponsor.
GEORGE FINDLING, Manager
External Strategies
Phillips Alaska
PO Box 100
Anchorage, Alaska 99510
POSITION STATEMENT: Provided the committee with information and
testified in opposition to [SSHB 190].
BARBARA DONATELLI, Executive Vice President
Cook Inlet Region, Inc.
PO Box 93330
Anchorage, Alaska 99509
POSITION STATEMENT:
JACK CHENOWETH, Assistant Revisor
Legal Counsel
Legal and Research Division
Legislative Affairs Agency
Alaska State Legislature
Capitol Building
Juneau, Alaska 99801
POSITION STATEMENT: Provided opinion on state's ability to
terminate a lease.
JOE MATHIS, Senior Operations Manager
NANA Development Corporation
1001 E. Benson
Anchorage, Alaska 99508
POSITION STATEMENT: Testified in opposition to [SS]HB 190.
CHRIS JOHANSEN
Flowline Alaska
1881 Livengood
Fairbanks, Alaska 99701
POSITION STATEMENT: Testified in opposition to [SS]HB 190.
TOM WILLIAMS, Alaska Tax Counsel
BP Exploration (Alaska), Inc.
PO Box 196612
Anchorage, Alaska 99515
POSITION STATEMENT: Testified that BP opposes [SS]HB 190.
JOHN MINIER, President
NANA Colt Engineering
5900 Bluebell Drive
Anchorage, Alaska 99516
POSITION STATEMENT: Testified in opposition to [SS]HB 190.
BILL STAMPS, Manager
Business Development and External Affairs
Peak Oilfield Service Company;
President, Alaska Support Industry Alliance
2525 C Street, Suite 201
Anchorage, Alaska 99503
POSITION STATEMENT:
JUDY BRADY, Executive Director
Alaska Oil and Gas Association
121 West Fireweed Lane
Anchorage, Alaska 99503
POSITION STATEMENT: Testified in opposition to SSHB 190.
LARRY HOULE, General Manager
Alaska Support Industry Alliance
4220 B Street, Number 200
Anchorage, Alaska 99503
POSITION STATEMENT: Testified in opposition to SSHB 190.
MARY SHIELDS, General Manager
Northwest Technical Services
330 Arctic Boulevard, Suite 201
Anchorage, Alaska 99503
POSITION STATEMENT: Testified in opposition to [SSHB 190].
SALLY ANN CAREY, Secretary
[Alaska] Support Industry Alliance
3264 Montclare Court
Anchorage, Alaska 99503
POSITION STATEMENT: Testified in opposition to [SSHB 190].
JACK LAASCH, Member
Executive Board
Alaska Support Industry Alliance
3264 Montclare Court
Anchorage, Alaska 99503
POSITION STATEMENT: Testimony in opposition to [SS]HB 190 read
by Mr. Carmichael.
BOB CARMICHAEL
3264 Montclare Court
Anchorage, Alaska 99503
POSITION STATEMENT: Testified in opposition to [SSHB 190].
BOB STINSON, President
CONAM Construction Company;
Vice President, Alaska Support Industry Alliance
3015 Seawind
Anchorage, Alaska 99516
POSITION STATEMENT: Testified in opposition to [SS]HB 190.
ACTION NARRATIVE
TAPE 01-33, SIDE A
Number 0001
CHAIR SCOTT OGAN called the House Special Committee on Oil and
Gas meeting to order at 8:10 a.m. Representatives Ogan, Dyson,
Chenault, Fate, and Joule were present at the call to order.
Representatives Kohring and Guess arrived as the meeting was in
progress.
HB 190-NATURAL GAS PIPELINE INCENTIVE/ GAS TAX
CHAIR OGAN announced that the only order of business before the
committee would be SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 190,
"An Act levying and collecting a tax on certain North Slope
natural gas in place if certain requirements relating to its
sale and delivery are not met, and imposing a limit on the
Department of Natural Resources that relates to the issuance or
extension of oil and gas leases containing natural gas that is
capable of production in paying quantities; and providing for an
effective date."
Number 0071
LORI BACKES, Staff to Representative Jim Whitaker, Alaska State
Legislature, made the a brief statement on behalf of the sponsor
as follows:
The sponsor of HB 190 requested at the time this bill
was introduced, and has maintained since then, that it
not be heard unless, after appropriate testimony, a
vote be taken by the committee for passage or against
passage.
The sponsor's position has not changed. However,
Representative Whitaker recognizes the chairman's
prerogative, and therefore does not object to HB 190
being heard.
That concluded my statement. I have not been
authorized by the sponsor to answer questions from the
committee.
CHAIR OGAN explained that he wanted to hear HB 190 "in response
to a number of questions" he had submitted to the producers.
Number 0187
CHAIR OGAN read an excerpt from a talk given by former Senator
Bob Bartlett to the Alaska Constitutional Convention on November
8, 1955, which he read as follows:
... [The] various bills for statehood enabling
legislation which have been introduced in [the]
Congress in recent years have ... uniformly called for
large grants of land from the United States public
domain to be made to the State of Alaska. The figure
mentioned has been in excess of 100 million acres, an
area roughly equal to the total land area of the State
of California. The 100 million acre figure would
appear to be approximately the figure which will
finally be adopted.
The State of Alaska would choose almost all this
acreage from the lands not included in the present
federal reservations and withdrawals, or which is
otherwise unappropriated. The 100 million plus acres
represents a veritable empire, a wealth of land and
resources never before conferred on any state, saving
only Texas which, upon its entry into the Union, was
allowed to retain all its public lands. Alaska will
receive also, in addition to the 100 million acre plus
land grant, an uncounted but tremendous acreage of
submerged lands, [land] which under decisions of the
Supreme Court of the United States have been held in
trust for the future state. These submerged lands
include lands under [the] beds of navigable rivers,
lakes, [and] streams; the tidelands proper; and the
submerged soils of the marginal sea out to the three-
mile limit. ...
Two very real dangers are present. The first, and
most obvious, danger is that of exploitation under the
thin disguise of development. The taking of Alaska's
mineral resources without leaving some reasonable
return for the support of Alaska governmental services
and the use of all the people of Alaska will mean a
betrayal in the administration of the people's wealth.
The second danger is that outside interests,
determined to stifle any development in Alaska which
might compete with their activities elsewhere, will
attempt to acquire great areas of Alaska's [public]
lands in order not to develop them until such time as,
in their omnipotence and the pursuance of their own
interests, they see fit. If large areas of Alaska's
patrimony are turned over to such corporations the
people of Alaska may be even more the losers [than] if
the lands had been exploited.
Number 0437
CHAIR OGAN remarked that some of those fears haven't come to
pass and there has been responsible development of Alaska's
lands. However, he felt that the excerpt did contain some
wisdom in that not all of Alaska's resources have been
developed. The argument could be made that Alaska's natural gas
is still in the ground.
CHAIR OGAN noted that a number of questions have been asked of
the producers such as the type of contracts they enter into,
specifically with Australia and Indonesia. Exxon was asked
about Yemen, Qatar, Natuna, and Sakhalin. However, Exxon was
nonresponsive and claimed that the terms of their agreements
with other governments contain confidentiality agreement
provisions that limit their ability to discuss them.
Furthermore, obtaining information from those countries on their
regimes is very difficult. Chair Ogan did note his appreciation
of the candor of the discussion of Phillips and BP. Some
discussions revolved around the petroleum mining code in
Australia with Phillips. [That code] includes a "use it, lose
it" provision in that if there is no commercial development,
then it [the petroleum] is relinquished to the country. Chair
Ogan expressed interest in Phillips and BP coming to the table
to discuss [the information from the countries].
CHAIR OGAN offered his congratulations regarding how the
contracts were let out on the Lower 48 pipeline. He was pleased
that Alaskan companies were acknowledged.
Number 0839
GEORGE FINDLING, Manager, External Strategies, Phillips Alaska,
announced that a letter detailing the licensing provisions is
being developed. Mr. Findling then proceeded to give the
committee a quick overview. He explained that there are two
kinds of licensing provisions covered in the Timor Sea area.
First there are the licensing provisions in the Timor Sea gap,
which are under a production sharing contract that is authorized
under a treaty that was originally between Australia and
Indonesia. Although Mr. Findling noted that he isn't an expert
on the exact politics, he understood that Indonesia relinquished
Timor to the control of the United Nations who will administer
Timor until there is a vote on independence. The United Nations
adopted the treaty that was originally developed between
Indonesia and Australia and then basically [agreed] to
administer the production sharing agreement. Mr. Findling
pointed out that new rules have changed inside the Timor gap
since [Phillips] obtained its license in 1991 and discovery of
the Bayu-Undan field in 1995.
MR. FINDLING turned his discussion to the provision of a
production sharing contract in the Timor gap area, the so called
"treaty area." In the first three years, these are licenses as
opposed to leases, which are achieved through a bonus bid in
Alaska. The licenses are achieved through a commitment to a
work program. For the first three years, there is a firm
exploration, evaluation work program, including necessarily
seismic and well drilling. This is a six year contract. He
explained that originally there is a bid on the work program
that is basically adjusted to the results of the third year.
The production sharing agreement basically ensures that the
first three years are executed. Contracts can only be
terminated for breech. However, if the work program isn't
completed, then there are opportunities for remedies. Mr.
Findling pointed out that in the last three years contracts can
be terminated by mutual agreement.
MR. FINDLING addressed the Bayu-Undan field for which the
original execution of the exploration license was in December
1991. The discovery of the field occurred in 1995, after which
Phillips determined that it had a gas and condensate field. The
condensate is important because it is liquids that can be
recovered at the platform through a gas cycling project. Then
Phillips immediately were authorized to develop a condensate
recovery plan in February 2000. He pointed out that the costs
for the exploration and development of the [Bayu-Undan] field
are being recovered through the condensate recovery. He noted
that there is a second phase of development for the Bayu-Undan
field, which is the gas development plan. However, the decision
to proceed with that project will be determined separate from
the gas condensate recovery and depends upon securing a gas
market and co-owner support of a commercial venture. Mr.
Findling said, "In no way is our concession at risk for some
lack of development of gas. Gas is completely dependent upon
developing a market ... and approval of the co-owners."
CHAIR OGAN related his understanding that the project is now in
question due to a dispute between East Timor and Australia over
royalty percentages or production sharing percentages.
MR. FINDLING agreed with Chair Ogan's understanding. He pointed
out that an entity is receiving a certain percentage of the
economic rent from the production sharing. That entity was
originally Australia and Indonesia, but will eventually be Timor
and Australia, he thought. The dispute is over how the sharing
of the rent that's paid from the contractor is going to be
[divided]. Currently, there hasn't been any direct indication
that the rules of the production sharing contract will be
changed.
CHAIR OGAN related his understanding of Phillips' position that
(indisc.) intent in the production agreement and thus isn't in
jeopardy of being relinquished. The gas is a side production
(indisc.).
MR. FINDLING agreed.
Number 1396
MR. FINDLING turned to the Northern Territory Petroleum Act and
the area outside of the gap area, specifically in the Sunrise
field. The Sunrise field straddles the border of the gap and
undisputed Australian water. Therefore, part of the area is
covered by the production sharing agreement and part is covered
by the Northern Territory Petroleum Act. The act is basically a
license in which a work commitment is made and then a series of
steps are taken. Under the act there are three contractual
positions. First, there is the permit, which is basically the
manner in which one enters and explores. The permit term is
usually 2-5 years and the regulations provide for a renewal at
least twice. The permit time, just for exploration, can be up
to 15 years. He posed a typical situation in which a block of
land with a 2-5 year lease [with] a 5-year term and if one
desires to renew, one must collapse and open the acreage for
others. The acreage has to be collapsed in two steps in order
to renew. Therefore, one would be down to a quarter of their
acreage if renewing for the 10-15 year time period. Mr.
Findling pointed out that such is very similar to the
discussions regarding the exploration licensing debate in
Alaska.
MR. FINDLING moved on to the contractual position of a retention
license. The act foresees a situation in which one has found
hydrocarbons, but they're not commercially available. He said,
"There's a way to hold the acreage position even though there's
no way to move forward with actual commercial development in
hydrocarbons." He noted that the term of these retention
licenses are five years and are indefinitely renewable.
However, one must obtain approval from the minister to do so.
It seems that there must be a good-faith program in place to
continue working in direct field activities or in some
commercial activities in order to commercialize the prospect.
Mr. Findling felt that the government recognized, through this
regulation, that retention licenses are a good idea. Mr.
Findling pointed out that there is a notice to apply for a
production license, which involves a situation in which the
minister is looking at the prospect during either the
exploration permit or the retention license. In that situation
the minister can request that a development program be presented
and the licensee has six months to respond. If there is [no]
response, the minister can cancel. However, if this occurs
during the exploration permit process, the minister has to
consider a retention license application before he can ask for a
production license.
MR. FINDLING continued with the production license. If one has
a discovery in commercial quantities and there is a proposal to
the minister to move forward on a production license that can be
related to some of the blocks in the permit area, there is a
technical work program commitment. "Basically, this comes out
in a term of 25 years," he said. He noted that some literature
has indicated that the term is 5 years with a renewal to 25
years. However, he understood that the term is 25 years and can
be indefinitely renewed as long as there is production. He also
noted that it grants exclusive rights to move forward.
Number 1661
MR. FINDLING addressed cancellations. The primary criteria for
cancellations under the Petroleum Act seem to be that one hasn't
complied with a permit or licensed condition. Again, there is
the opportunity to remedy the situation because the minister
notifies the entity hasn't complied. He indicated that
cancellations can also be due to noncompliance with the law or a
lawful directory by the minister. Therefore, the procedure for
cancellations is to serve notice with the reasons and the
licensee has a month to respond. The minister has to consider
the response and some resolution is achieved.
MR. FINDLING concluded by noting that there are two licensing
methods one of which is what he described under the gap and the
other is under the Petroleum Act. Under the Petroleum Act,
there is no requirement that gas has to be commercialized or it
is lost.
CHAIR OGAN asked if Phillips has any holders in Indonesia.
MR. FINDLING answered that he believes so, but he wasn't sure.
CHAIR OGAN mentioned that he has an Indonesian production
sharing contract paper that says, "If commercial petroleum
discovery is not made by the end of the exploration period, the
contract shall be automatically terminated." Chair Ogan
expressed the importance for the committee to [compare] Alaska's
competitors in the international gas market in order to
determine whether anything hurts Alaska's ability.
CHAIR OGAN asked if there was anyone present from BP that would
like to comment.
Number 1890
PAUL KANEL(PH), Director, Government Affairs, BP Exploration,
related his understanding that today's hearing would be in
regard to HB 190. Therefore, he had not asked anyone to be
present to answer the specific questions [the chair] asked.
CHAIR OGAN referred to a portion of BP's answer to [question 21]
which he read as follows: "Once oil or gas is found, the
concessions contemplate that it will be brought into production
within a reasonable time. ... certain provisions are imposed
that include acreage relinquishments and spending commitments."
Number 2024
BARBARA DONATELLI, Executive Vice President, Cook Inlet Region,
Inc. (CIRI), said:
I am here today on behalf of CIRI to testify in
opposition to House Bill 190 as proposed. ... as most
of you know CIRI is an Alaska Native regional
corporation formed under the Alaska Native Claims
Settlement Act [of] '71 (ANCSA). We at CIRI operate
as a for profit company with the mission of serving
the economic, social, and cultural needs of our
shareholders. CIRI is interested in House Bill 190,
in part, because we are in the oil and gas business,
as a lessor and landowner, not only of current
producing property, but of large tracts of prospective
oil and gas lands which we [the company] would like to
see explored in the future. We're also interested in
the bill because we are in the oilfield service
business ... where the success of such operations,
including the employment of many shareholders, is
dependent on a strong oil industry in the state, which
is incentivized to explore and pursue new oil and gas
properties.
The most important reason that CIRI is interested in
the bill, however, is not because of its direct impact
on these particular lines of business. Rather, we're
concerned because CIRI is an Alaskan company with
about two-thirds of our seventy-two hundred
shareholders living, working, and raising their
families in the state. And they understand, as we do,
that sending a message to the outside world that
Alaska is truly open for business is crucial to the
economic well-being of the state and its people. We
believe that this bill sends the opposite message.
The bill, as we understand it, would tax North Slope
natural gas reserves in place and will not, and cannot
be expected to spur development of natural gas any
faster than market forces would otherwise allow. If
natural gas cannot be produced and sold for a
reasonable profit, it simply will not be produced and
sold. This bill, rather than providing an incentive
to development, appears to simply place an additional
tax burden on the oil industry. Thereby increasing
the overall cost of development and exploration in the
state. The result, we believe, would be detrimental
to all Alaskans in that [it would] inhibit economic
growth and the vitality in this crucial sector of our
state economy.
Even more directly, we believe the bill would provide
a disincentive for producers to explore for new gas
reserves because such reserves would become ...
immediate liabilities on the producers' books if they
were not found in sufficient quantities for near-term
development and sale. While the bill purports to
limit its effects, in this regard, to the North Slope,
we believe it sends a message to producers statewide
that they could face a similar fate at the hands of
the state in an era when we're facing declining oil
reserves. The effect could be to lock up further
exploration just at a time when we really need to
encourage new discovery and development.
The viability of large scale gas production on the
North Slope offers significant opportunities for the
state, and it's important that the state government,
at all levels, [does] what it can to encourage prompt
and responsible development of the resource. We think
the state should not rush to judgment with a short-
term fix which has the potential to backfire in the
end. Rather, the state should proceed carefully
considering all options to encourage prompt
development of the North Slope gas reserves, while at
the same time avoiding any approach that would burden
the industry to the point of [dis]couraging future
investment.
In summary, CIRI supports prompt and aggressive
development of North Slope gas reserves and we do not
think that House Bill 190 is the way to ensure that
this is accomplished. We respectfully urge you not to
advance this bill out of committee.
Number 2246
REPRESENTATIVE DYSON asked if it would be fair to surmise, from
CIRI's position, that the oil industry would never warehouse
Alaska's gas while commercializing investments elsewhere.
Representative Dyson clarified that he was asking if CIRI
believes that.
MS. DONATELLI replied:
No, I do not believe that that's been the case. ...
my understanding is the development of the gas
reserves on the North Slope of Alaska really have been
mostly dependent on ... market forces at a time when
it would be economically viable to expend the money it
would take to develop a pipeline to ... get the
reserves to market. And that not so much just a fact
of warehousing them, but ... the reserves are there
and it's just a timing matter of when it's
economically viable to get the resource to market.
REPRESENTATIVE DYSON posed a situation in which ten years from
now, the industry that owns the gas on the North Slope had other
gas supplies other places in the world. The other gas supplies
were close to being the same economic value and commercial
potential and the industry developed those gas supplies and was
not interested in supplying gas to the people of Alaska. He
asked what CIRI would propose to encourage the development of
Alaska's gas. He also asked whether CIRI would provide
disincentives for leaving Alaska's gas in the ground [so that
Alaska could access it when necessary].
MS. DONATELLI related her belief that [Alaska] is in a position
such that the development of a pipeline to get the natural gas
reserves from the North Slope into other parts of Alaska and the
country is approaching a point that looks viable. Therefore,
the state continuing to encourage the industry to invest is the
best way to ensure that the gas will be available to the state
and other markets in the near future. It looks as if the timing
is here.
Number 2443
CHAIR OGAN remarked then that this bill is a moot point.
MS. DONATELLI said that she wasn't sure the bill would be a moot
point. She related her understanding of the language, which she
interpreted as a possible disincentive to exploration and
development.
CHAIR OGAN agreed that the bill has a flaw that needs to be
fixed. He didn't want anything to discourage [anyone].
However, he understood the bill sponsor's point to be that the
gas has been there for 30 years and is still there.
Number 2518
REPRESENTATIVE KOHRING inquired as to the chair's intent with HB
190.
CHAIR OGAN announced that he intends to hold HB 190.
REPRESENTATIVE KOHRING expressed concern that merely having HB
190 before the committee opens the prospects of moving HB 190
from committee, which he strongly opposes.
CHAIR OGAN remarked that a bill doesn't move out of committee
unless the chair so desires. If a motion is made, then the
chair can [adjourn] the meeting.
REPRESENTATIVE KOHRING commented that he didn't even see the
point in having this meeting.
CHAIR OGAN turned to AS 38.05.180(m), which Jack Chenoweth
referenced in response to questions posed by Chair Ogan
regarding the circumstances under which a lease could be
terminated. Chair Ogan characterized AS 38.05.180(m) as a "use
it or lose it" clause due to the state's ability to let a lease
that isn't producing expire. He understood Mr. Chenoweth's
[email] to mean that if production of oil or gas never
initiated, then the lease is subject to termination. He asked
if that would be a fair interpretation.
JACK CHENOWETH, Assistant Revisor, Legal Counsel, Legal and
Research Division, Legislative Affairs Agency, Alaska State
Legislature, agreed with Chair Ogan's interpretation. In
response to Chair Ogan, Mr. Chenoweth said that leases that
haven't had anything commercially shipped or sold could be
terminated. He was sure that there must be procedures in place
in the department's own regulations. Mr. Chenoweth clarified
that it is a question as to whether oil or gas is being
produced. In further response to Chair Ogan, Mr. Chenoweth said
that he wasn't familiar with the specifics of leases on the
North Slope.
Number 2770
JOE MATHIS, Senior Operations Manager, NANA Development
Corporation, testified in opposition to HB 190. Mr. Mathis
provided the following testimony:
NANA Development Corporation is a major employer and
contributor to the economy in Alaska. We employ 1,500
people who work for NANA's 35 subsidiary companies and
business affiliates, 30 percent of which are involved
directly with the oil industry. Our businesses are
focused on generating profits and providing
opportunities for over 10,000 shareholders represented
by our parent corporation, NANA Regional.
NANA is a leader in developing resources in our State
of Alaska. Our corporation is the owner of the
resources at the Red Dog Mine, the largest zinc
deposit in the world [and] a partial owner of the
Endicott oilfield which, as you know, [also] contains
significant gas reserves. Because of our status as a
broad resource developer in the state, NANA would be
negatively impacted by this legislation, as would the
producers that are partners with NANA in generating
economic prosperity in Alaska. It is NANA's view that
House Bill 190 does the opposite of what the sponsors
intend, which is to facilitate [the] commercialization
of North Slope natural gas. In fact, the imposition
of a tax, if the gas were not commercialized within
what seems to be an arbitrary timeframe, would add to
the risk of bringing the gas to market. Producers are
already trying to get the resource to market as
quickly as they can, but certain economics have to be
in place for commercialization. As you know, the
producers have joined together to determine whether
there is a commercially viable project for bringing
the gas to market.
The most concerning aspect of the legislation is the
dangerous signal its passage would send to all
resource development activities. Any time there is a
tax on resource reserves; there is a disincentive to
explore. Exploration, already the highest risk
dollars, is discouraged because Alaska has decided it
is willing to tax people on the product of exploration
regardless of their ability to produce it. The
legislation would create an environment of fear on the
part of producers of all other undeveloped resources,
whether it's oil or minerals.
In the case of Endicott, if House Bill 190 becomes
law, NANA and other producers are going to be
discouraged from exploring for more oil and gas
because of the probability of also discovering gas
that could be taxed even if it is not commercialized
or exempted from the legislation as in the Alaska
Statutes 43.58.220, that's for the consumption, field
operations, or sold for use in production activities.
NANA already pays the state a 20 percent royalty and
80 percent of the net profits from oil production at
Endicott. Our analysis is that applying these types
of taxes to the existing or new gas reserves
[discovered] may absorb most of NANA's profit on that
field. This certainly does not encourage us to invest
more money.
NANA's position is that it's simply bad public policy
to consider carving out a tax on just one resource.
We are equally concerned about the potential of a
future tax on mineral reserves or other undeveloped
resources that the legislature decides should be
commercialized. There is a multitude of resources in
remote areas that could be of great benefit to the
state if developed but, again, the economics must be
favorable for the producers to bring those resources
to market. ...
I urge the members to abandon this legislation and let
the producers group complete their feasibility studies
of the gas project.
TAPE 01-33, SIDE B
[The portion of Mr. Mathis' testimony in brackets was taken from
the written testimony that he read.]
MR. MATHIS continued:
[Why establish an antagonistic relationship between
the state and producers before we even have
information about the feasibility of the project? We
are in a competitive world; the legislature should be
in the] role of providing incentives to develop North
Slope gas, instead of disincentives [such] as a gas
reserve tax.
Number 2937
CHRIS JOHANSEN, Flowline Alaska, informed the committee that
Flowline insulates all the pipe on the North Slope. Mr.
Johansen testified in opposition to HB 190. Mr. Johansen
informed the committee that over the past couple of years,
there's been a tremendous effort to find, develop, and produce
oil on the North Slope. This past winter, over 800 Fairbanks
residents were directly employed in support of those activities.
Flowline Alaska shipped over 1,600 truck loads of pipe to the
North Slope this year. Another 1,500 truck loads of materials
were shipped in support of drilling, exploration, and
construction activities. Mr. Johansen said:
I believe that House Bill 190 will have a profoundly
negative effect on future North Slope activities,
seriously impacting the jobs of hundreds, if not
thousands of working men and women across the state.
It is illogical to believe that the producers will
continue to spend money to locate and identify
reserves on which they will be heavily taxed. Over
the past five years, the oil industry has made a
serious commitment to buy from Alaskan vendors, hire
Alaskan workers, and contract with Alaskan companies
to provide services. And this year, the producers
will spend an additional $75 million to study, design,
permit, and model an optimum design and route for the
gas line. This is a substantial amount of money and
clearly shows the intention of the producers to move
this project forward. Much of that money will be
spent here in Alaska with Alaskan businesses. In
spite of the good faith efforts being made by the gas
producers, House Bill 190 was introduced in March and
many of us in the industry believe that this project
is moving along at a very rapid rate. With that in
mind, I believe that House Bill 190 is ill-conceived,
bad faith, and retaliatory effort to intimidate the
industry that provides a significant majority of the
state budget.
We cannot forget that the gas producers have an
obligation to their shareholders to perform a detailed
[and] thorough analysis of the pipeline route, project
timing, and, most importantly, the market. Such a
detailed analysis takes time, capital, resources, and
the expertise of many people. House Bill 190 could be
considered an attempt to compel the producers to
minimize or sidestep this obligation to their
shareholders.
I'd like to take a moment and ask you to consider the
outcome of this bill in a slightly different context.
It could easily be interpreted as a means to compel
the gas producers to construct a gas line to the Lower
48 regardless of the economic feasibility. If that
gas line is not profitable, Alaska's 12.5 percent
royalty share could be worth nothing. The concept of
taxing in-ground reserves is not a new one; it has
been tried for many years around the world, more often
than not without success. For example, starting in
the early 1900s Canada enacted a tax on in-ground gold
reserves. Interestingly enough, there are companies
that have mined continuously in Canada for over 100
years and not once did they ever report reserves in
excess of two years worth of production.
MR. JOHANSEN concluded with the following excerpt from Don
Quixote, which he said came to mind when he read HB 190. He
quoted the following:
At day break the two travelers find themselves on a
plain dotted with thirty or forty windmills. Don
Quixote is jubilent. "Look yonder, friend Sancho," he
cries. "Fortune has provided me with thirty or forty
giants to encounter. When they are dead, we may claim
the lawful spoils of our conquest." The naive squire
asks, "What giants?" But Don Quixote covered with his
shield, lance couched, has already spurred Rosinante
forward. He drives his weapon into the revolving sail
of the first windmill, but the motion breaks the lance
and roughly hurls the horse and rider a good distance
away. "Did I not tell you they were windmills," cried
Sancho rushing to his aid. Don Quixote replies, "I am
truly unlucky for the same cursed sorcerers who
carried away my books and study, have now deprived me
of victory by changing these giants into windmills."
Number 2709
CHAIR OGAN informed everyone that he has spent many hours in
committees reviewing ways to do incentives. He noted the Pedro
van Meurs report and the Stranded Gas Act, which is about to
expire. Chair Ogan remarked that one of the motivations for
hearing HB 190 is to see the reaction it would generate. He
expressed concern that the largest threat to the oil industry in
Alaska is the lack of this legislature's discipline in regards
to the budget. He estimated that this session, the legislature
is going to pass about $100-$125 million in new spending. He
expressed embarrassment in regard to where [the legislature] is
heading. Furthermore, the leaders of the fiscal planning caucus
are advocating for a $250 million income tax that may offset the
next two years of spending. However, there will still be a
$500-$600 million budget gap. He asked, "Where is the outrage?"
Therefore, he requested that the [oil industry] work on the
biggest threat to the industry, uncontrolled state spending.
Number 2558
REPRESENTATIVE JOULE agreed with Chair Ogan on some points.
However, he pointed out that for five years [the legislature]
has attempted to cut the budget. In those five years, it
illustrated that cutting the budget without reviewing ways to
generate revenues merely exacerbates the problem. Therefore,
cutting the budget to cut state spending doesn't get "us"
anywhere and thus there needs to be review of generating
revenues as well because the state is growing as is its needs.
CHAIR OGAN agreed.
Number 2478
TOM WILLIAMS, Alaska Tax Counsel, BP Exploration (Alaska), Inc.,
noted that the committee packet should contain his written
testimony that he will summarize. Mr. Williams informed the
committee that AS 43.58 used to be the state's reserves tax and
he is one of four people who worked on it. He also informed the
committee that he was the director of the Petroleum Revenue
Division in the Department of Revenue, which had the
responsibility of implementing that reserves tax. Therefore, he
expressed his desire to share his experiences from that because
there are some technical problems with HB 190.
MR. WILLIAMS pointed out that when he helped pen the legislation
that became the original reserves tax, it included an early
development incentive credit. He explained that the early
development incentive credit was a way for the reserves tax to
function as a pre-payment of future production taxes from
Prudhoe Bay. Therefore, every dollar paid in reserves tax would
provide a dollar of credit and thus when the field came into
production, the dollars could be cashed in. The only limitation
was that each month only half of the liability could be
eliminated and thus it took about a year-and-a-half for the
credits to be used up. Mr. Williams expressed concern that that
early development incentive credit may create the impression
that that reserves tax had or could have had an effect on the
timing of when the resources in Prudhoe Bay and the North Slope
were developed. Mr. Williams stated that it [the name] didn't
have a impact. The companies were doing much to try to get the
pipeline built and Prudhoe Bay on line. Mr. Williams said, "I
can guarantee that there was no development on the Slope that
was accelerated by an hour as a result of that credit."
MR. WILLIAMS pointed out that there is a major difference
between the enactment of the reserves tax then and now. Then it
was enacted because the state had spent $900 million, five years
of state budget, on the big lease sale in 1969 and it was still
going to be two years before the pipeline would be completed.
Therefore, the reserves tax allowed the state to stay in
business until the revenues and production from Prudhoe Bay
could begin. Today, the concern with the reserves tax seems to
lie with the desire to [achieve] the development that is
expected to accelerate the commercialization of the gas.
Number 2253
MR. WILLIAMS turned to the technical problems with HB 190. He
directed attention to page 4, lines 13-16, subsection (a), of
SSHB 190, which says that the "tax is levied each calendar year
on the full and true value of taxable property ...." However,
subsection (b) says, "The annual rate of levy is 2 cents per
1,000 cubic feet." Mr. Williams pointed out, "This reflects the
fact that the original version of the bill was either two cents
or whatever millage would produce a billion dollars a year,
whichever was higher. The percentage of value thing, the
millage, has disappeared in the sponsor substitute. So, all you
have left is the cents per mcf flat amount, but by keeping the
two things together you create ambiguity in the bill." He also
pointed out that throughout Section 4 there is reference to full
and true value, although it will have nothing to do with the
amount of the tax, which is only [based on] the amount of mcf.
Therefore, Mr. Williams recommended that section be rewritten
and eliminate all the language referring to value if this is to
simply be a volume-based reserve tax. He turned to the language
on page 4, line 16, which says "The annual rate of levy is 2
cents per 1,000 cubic feet." "But, it doesn't say of what," he
pointed out. Therefore, he suggested specifying what [is being
measured].
MR. WILLIAMS, as a former tax official, noted that there are
already two tax appeals processes on the book, one of which is
for the other property tax the state has. In 1996 an office of
tax appeals was created to handle all other state tax cases.
Therefore, he inquired as to why [SSHB 190] uses the general
administrative law provisions instead of using one of the
procedures that is already in place and works well for tax.
Number 2088
MR. WILLIAMS then made the following points on behalf of BP. He
said, "Contrary to the apparent premise that underlies this
bill, North Slope gas is not stranded because any producer wants
to keep it in the ground." The North Slope gas is stranded due
to its remote location and the fact that it can't be marketed at
its location. Furthermore, wherever the gas goes, it must be
deliverable at a price that is competitive with the available
alternatives. Mr. Williams pointed out that both HB 190 and
SSHB 190 do not address the competitiveness issue of North Slope
gas in any of the markets. The [bill] only punishes BP and the
other owners for the fact that commercialization hasn't
occurred. Mr. Williams informed the committee that the industry
has spent over a billion dollars in an attempt to find a way to
overcome the economic obstacles of North Slope
commercialization. "This year BP, alone, is in the process of
spending over $110 million trying to develop North Slope gas,"
he specified. He informed the committee that $86 million [will
be spent] on the gas-to-liquids (GTL) plant, which will be a way
to send the gas down the existing oil pipeline if it works.
Furthermore, BP is paying its third of the $75 million to move
forward on a gas pipeline to the Lower 48. The route is being
studied as well as ways in which to build and fabricate a
cheaper pipeline. Such improvements will also help LNG
(liquefied natural gas) because any LNG project has an 800-mile
tail that would cost billions. Therefore, progress is being
made in all three areas: LNG, GTL, and a pipeline to the Lower
48.
MR. WILLIAMS pointed out that the more cubic feet of gas there
is, the better the economics. Mr. Williams posed a situation in
which BP looks for gas, but the project is delayed by litigation
and the tax comes into place; all the reserves that were found
or may have been found would be taxable. Therefore, such a risk
could deter the type of exploration that would be crucial with
regard to whether the project [proceeds or not].
MR. WILLIAMS then highlighted [BP's concern] with
destabilization. He said, "It's not good to destabilize a
fiscal regime. It's an asset that Alaska has. It hasn't
changed the rules of the game for over 10 years and that's a big
plus, especially now while we're looking at gas
commercialization and the billions of dollars of new investment
that that will require."
Number 1830
MR. WILLIAMS pointed out that the provisions in Section 3 would
prevent DNR from further extensions of the lease unless the
lessee makes certain concessions about commercializing the gas.
However, this overlooks the fact that the leases are contracts
between the state, as the landlord, and the companies, as the
tenants. In that sense, it's the same as a building lease. The
terms and conditions of the contract establish the legal
obligations of each side to the other. Once [those legal
obligations] are set, they aren't changed. Although the law
under which the leases are issued can change, conditions for new
leases will have to be amended to reflect the legislature's
changes. However, [the legislature] can't impair the
obligations and rights that already exist under existing
contracts. He cited language from the Alaska Constitution and
the United States Constitution that specify that no law
impairing the obligations of contracts shall be passed. Mr.
Williams related his belief that the purpose of Section 3 is to
reach the current leases. Therefore, he suggested that there
will be a legal problem.
MR. WILLIAMS concluded by summarizing that the bill is
technically flawed in terms of how the tax would work.
Furthermore, it will punish the innocent for circumstances
beyond their control and will worsen or harm the economic
climate and reach farther than only the oil industry. Also,
there is the aforementioned constitutional issue. Therefore, BP
opposes this bill and urges the committee not to advance it.
Number 1747
CHAIR OGAN related his belief that it's imperative that the
producers and the working group have an announcement regarding
the route as well as an upcoming project. He acknowledged that
there has been discussion [of such] occurring in December or at
the latest, 60 days into session. He asked if such an
expectation is realistic.
MR. WILLIAMS remarked that such advice is taken seriously. He
said, "I think it's fair to say that we are doing our best and
we don't expect to waste our shareholders' money, but I can't
judge the outcome of the process until we've gone through the
process."
CHAIR OGAN expressed his curiosity as to whether there is any
timeline for liquidated damages with some of the contractors
that BP is working with.
MR. WILLIAMS replied, "We're doing the best we can. ... We
intend to produce results. The only thing is: We can't
guarantee it until we know what the results are."
CHAIR OGAN asked if there are timelines in the contracts.
MR. WILLIAMS answered that he didn't know.
CHAIR OGAN requested that someone provide that answer to him at
some point.
Number 1552
JOHN MINIER, President, NANA Colt Engineering, testified in
opposition to [SS]HB 190. Mr. Minier testified as follows:
NANA Colt Engineering is equally owned by NANA
Development Corporation and Colt Engineering. We're
one of many NANA's companies heavily involved in the
oil sector. We provide engineering services to
Phillips Alaska for engineering procurement and
construction management services for their Western
North Slope operations; and we do a considerable
amount of project engineering for BP. I personally
have lived in Alaska for over 25 years, and for the
past 20 years have been heavily involved in the
development of North Slope oil and gas reserves. I
strongly oppose House Bill 190. However, I do
appreciate and laud the legislature's efforts to
facilitate the commercialization of North Slope
natural gas. But forcing the producers to
commercialize the gas through a tax is not the way to
accomplish what the producers are already trying very
hard to do and spending hundreds of millions of
dollars to do it.
... why would we, the oil support industry, be in here
opposing a bill whose purpose is to facilitate the
development of North Slope natural gas when we'd seem
to be the obvious benefactors of this bill. Secondly,
if we really believe that the oil companies are doing
all that they can to market this gas and will continue
to do so and when they prove the economics, will
market the gas, why are we against the bill. It would
be, as you mentioned earlier, ... moot and there would
be no onerous taxes or lease implications. But we
think the answer to that is fairly simple. This bill
is flawed. It is a disincentive for the reasons
already mentioned. ... It could potentially reduce
the activity [of] the company. Secondly, it's
unnecessary .... Third, it changes the playing field
yet again. ... What it says to companies is "If
you're looking for a stable place to do business, look
elsewhere."
MR. MINIER stressed:
The owners have a long and proven track record of
trying to pursue every avenue to market their gas.
Early on they've looked at natural gas pipelines, ...
spike and super-spike options, ... LNG facilities, ...
gas pipeline ..., and projects such as gas-to-liquids
conversions. They have literally spent hundreds of
millions of dollars. Hence, the bill being
unnecessary. Recently, conceptual engineering
contracts were awarded to various contractors by the
North American Natural Gas Pipeline Group (NANGPG).
NANA Colt ... and our partners in the "AlasCan Group"
joint venture were awarded one of those contracts to
move the gas from the North Slope to the Lower 48.
This is yet another example of their aggressiveness
and their strong desire to market the North Slope gas.
So, in short, as business men and women, we're here to
request a better approach to incentivizing the North
Slope gas for the producers. As citizens, we demand
it because we think our friends and our partners, the
North Slope producers and owners of the gas, have
earned it and deserved it.
CHAIR OGAN congratulated the in-state industry for rising to the
challenge.
REPRESENTATIVE KOHRING expressed his concern about the dangerous
message this bill may send to the industry even if it isn't
forwarded from this committee.
Number 1238
MR. FINDLING informed the committee that he has provided the
committee written testimony [that is included in the committee
packet]. He noted that he joined the comments in opposition to
[SSHB 190]. Mr. Findling then turned to how the market impacts
gas development. As mentioned earlier, oil was developed by
pushing ahead. The reason for that was because it was known
that oil was a commodity and was fungible; it didn't depend upon
identifying a specific market. However, a gas market has to be
identified. In regard to Chair Ogan's desire to see an
announcement that this project is moving forward, Mr. Findling
expressed the need to consider whether such is prudent. He
explained that if one is under an "artificial gun" that an
entity has to develop a project, then the entity is in a "down
position" in comparison to the buyer of the gas. Alaska should
want to be in the strongest position, he thought, in order to
have the highest well-head and revenues. Mr. Findling said that
he didn't believe Alaska should place itself under an artificial
mandate that would be known to the market and thus place [the
state] at a disadvantage. Mr. Findling noted opposition to
[SSHB 190].
CHAIR OGAN pointed out that the natural gas pipeline discussion
has been going on since 1975, and therefore many Alaskans are
frustrated as gas in other markets is being developed. He
indicated his frustration upon hearing of the [development of
gas] in Timor. He related his belief that the only way gas will
go to the [Lower 48] is if it piggybacks on a Lower 48 project.
He reiterated, "I sincerely hope that there's an announcement in
time for this legislature to act appropriately because I think
its in all of our best interests to do that."
MR. FINDLING acknowledged what the legislature has done in terms
of partnership over the years. Mr. Findling recalled a meeting
with [Phillips Alaska's] Chairman of the Board, Jim Mulva (ph),
who, in comments relating to Alaska, expressed the need to get
[Alaska's] gas project moving fast. Mr. Findling said, "I never
get any impression that our company is, in any way, warehousing
gas or ... delaying gas development." In regard to the Timor
project, Mr. Findling didn't believe that the Timor project and
the Alaska project are mutually exclusive. "I think Timor is
going to a big market in the North American continent; that's
exactly the purpose of the Lower 48 gas pipeline project, ... to
deliver to that same market. I want to see both projects
happen. I want to see Alaskan gas commercialized," he stressed.
CHAIR OGAN noted that he recognized how important it is for
Phillips to look at gas.
Number 0826
BILL STAMPS, Manager, Business Development and External Affairs,
Peak Oilfield Service Company; President, Alaska Support
Industry Alliance, provided the committee with his written
testimony [that was included in the committee packet]. He noted
that he is speaking on behalf of both of the above-mentioned
groups. Mr. Stamps testified as follows:
Peak is an Alaskan-based general contractor with
offices in Anchorage, Prudhoe Bay, Nikiski, and
Valdez. We provide construction, fabrication,
facility and equipment maintenance, heavy hauling and
equipment support for the oil, gas, and chemical
industry. We currently employ approximately 1,100
people. All of our business is dependent on the oil
and gas industry.
The Alliance membership includes nearly 400 businesses
that contract directly with producer companies to
provide products and services in support of oil and
gas activity. Collectively, we employ about 30,000
people in Alaska and 25,000 are permanent residents.
The Alliance mission is to advocate safe and
environmentally sound oil and gas exploration,
[development] and production for the benefit of all
Alaskans. The Alaska Support Industry Alliance is
extremely disappointed and alarmed over the
introduction of House Bill 190 .... We believe this
bill is the most onerous of the session, with
provisions and messages that put our industry's health
and future in jeopardy.
Sponsors reference the HB 190 assessment as an
incentive. This takes a myopic view of a very global
and very competitive oil and gas industry. Alaska may
be rich in natural gas, but so are many, many other
areas of the world: areas with infrastructure already
in place; areas with less harsh environments; areas
that cost less to do business [in]; and areas that
welcome oil and gas developers with tax relief, not
additional tax burdens.
Alaska gets approximately 80 percent of its
unrestricted revenue from the oil and gas industry so
we clearly are a state dependent on natural resource
development. Yet with a bill such as this, the
legislature is conveying a message to developers and
potential developers around the world that Alaska has
no stable tax base. When developers are deciding
where to invest their money in resource development
they will see ... the tax structure in Alaska as a
moving target. A gas reserves tax only increases the
risks and reduces the benefits for gas owners. Let's
call HB 190 what it is. HB 190 is all about the "T-
word" - in fact, "tax" is noted in the bill about 40
times. This bill is a disincentive. It's also unfair
and irresponsible.
Is it even legal? Original North Slope oil and gas
leases were not sold with the promise, assumption, or
expectation that new taxes on undeveloped resources
would be levied as part of the lease agreement. If
that was the case, we can safely assume that far fewer
leases would have been sold. How can we justify
placing additional fiscal provisions on an already
agreed-upon contract between the state and the
leaseholders? At best, this brands Alaska with an
image of instability. We cannot afford that,
especially as the potential [for] commercializing gas
comes closer within our grasp.
Natural gas development will have a huge, positive
impact on the State of Alaska, all of its residents,
and closer to home, to Peak as a company and to our
employees and their families, as it will to other
members of the Alliance [and] their employees and
families. However, this development must be done when
the companies who will be investing in that
development believe the time is right and not when
members of the Alaska Legislature believe it is right.
A bill such as this sends a very negative message to
potential investors in Alaska resource development.
It also sends a very negative message to the voters in
Alaska who depend on having a healthy oil and gas
industry to continue to help provide a good
environment in which to live and prosper.
While potential gains with natural gas development are
profound, Alaskans also have a lot to lose if our
lawmakers handle matters poorly, creating a business
environment that is risky, not responsive. If Alaska
is to bank on our natural gas, we had better project
an image of stability. As business people we urge
government to leave the economics of business to
business people. We urge you to carry out your
constitutional duty to "encourage the development of
state resources by making them available for maximum
use consistent with the public interest."
CHAIR OGAN reiterated that the biggest threat to the industry is
the budget.
Number 0412
JIM PLAQUET testified via teleconference. He informed the
committee that he is a former business agent for the Operating
Engineers Local 302, and is currently a heavy equipment operator
member of Local 302. He noted that he worked in Prudhoe Bay
this past winter. Mr. Plaquet testified as follows:
This winter organized labor had many Prudhoe Bay
projects with BP Exploration and Phillips Alaska.
Prudhoe Bay projects this past winter employed over
500 plus Fairbanks workers that helped support their
families financially. Besides creating job
opportunities, supporting local businesses, and
bringing business to Fairbanks companies, it further
strengthened our community.
It took Alaskans working with the industry to build
the Trans-Alaskan Pipeline (TAPS) and bring Prudhoe
Bay oil to market. Many Alaskans worked very hard to
make the pipeline a reality. Future opportunities
such as gas commercialization can only happen if there
is a commitment from Alaskans and the industry to
achieve our goals by working together. We, as
Alaskans, should be looking for ways to make
development of our gas more economical, rather than
seeking ways to thwart future development. Alaska
should be open and ready for business and willing to
provide a regulatory and tax climate in which we can
compete in the global market.
I'm optimistic that as long as we make production of
oil and gas in Alaska economically attractive the
industry, like any for profit corporation, will
aggressively pursue development of new oil fields in
Alaska as well as commercialization of North Slope
gas. Economically, Alaska and its residents need this
continued investment from the oil industry. Working
together we have seen projects recently such as
Alpine, Tarn, Badami, Northstar, and, the most recent,
the Meltwater oilfield development. Thousands of
Alaskans have worked on these projects to support
their families. The industry has invested billions of
dollars in Alaska. Working as a partnership with
Alaskans, I think they'll invest billions more. House
Bill 190's proposed tax will not help in achieving our
common goal of commercializing North Slope gas.
Working together as a partnership we will achieve our
common goal and Alaskans will continue to have a
bright future.
REPRESENTATIVE DYSON inquired as to who contacted Mr. Plaquet
about testifying before the committee.
MR. PLAQUET replied, "No one. I came on my own." In further
response to Representative Dyson, he said that no one helped him
prepare his testimony.
Number 0045
HAROLD HEINZE testified via teleconference. He informed the
committee that he has held responsible positions within the oil
industry in Alaska as well as the state government. However, he
noted that he was appearing as a citizen today who has basically
attended every House Special Committee on Oil and Gas that has
occurred this session via teleconference. Although Mr. Heinze
shared the frustration of many Alaskans regarding the wait to
get gas to market, ...
TAPE 01-34, SIDE A
MR. HEINZE remarked that the committee seems to be struggling
with the choice between "carrot and stick." He identified [HB
190] as "the stick." Furthermore, he didn't believe the stage
had been set to use the "stick" now. Mr. Heinze voiced the need
for the committee to do a better job in providing the
information that it gathers. For example, at the beginning of
the hearing there was reference to a series of questions posed
to the oil companies and their responses, which is not readily
and easily available to the public in Anchorage or elsewhere.
If the desire is to have Alaskans support something like [HB
190], then they need the information. Mr. Heinze also expressed
the need for the committee to review what things are important
and under their control and would allow gas commercialization to
move forward. In particular, the Alaska Oil and Gas
Conservation Commission (AOGCC) has exclusive authority over the
field rules of Prudhoe Bay, which currently prohibit the sale of
gas from Prudhoe Bay. He noted that the [commission] has the
right to review those rules and hold hearings. However, since
there has been no such action, it would seem to excuse anyone
from not marketing the gas at this point. Furthermore, [AOGCC]
seems to have been somewhat lax in their timing. He noted his
surprise that when [AOGCC] appeared before the committee, there
was no further investigation of the timeline under which [the
commission] was conducting its business.
MR. HEINZE related his belief that [the legislature] has
neglected [the fact] that the governor signing the charter with
BP and Phillips provided a standing offer to sell gas by BP and
Phillips. "If that isn't a market test, to offer up 1.2 billion
cubic feet of gas, I don't know what is," he said. He expressed
his desire to have someone questioned in regard to why no one
has come forward for the 2.4 billion [cubic feet of gas] in a
fixed deal. Mr. Heinze said, "If there is an easy market for
this gas, I don't understand why someone hasn't come forward and
more importantly, I don't understand why this committee hasn't
explored that." Mr. Heinze concluded by saying that at this
time, it is premature [to consider HB 190].
CHAIR OGAN announced that he would ensure that the legislative
information offices [LIOs] would have the aforementioned written
responses. He also announced that he didn't intend to move HB
190 today.
Number 0474
JUDY BRADY, Executive Director, Alaska Oil and Gas Association
(AOGA), informed the committee that AOGA is an industry trade
association whose 16 members represent the majority of the
petroleum industry in Alaska. The 16 members of AOGA are as
follows: Alyeska Pipeline Service Company; Anadarko Petroleum
Corporation; BP Exploration (Alaska), Inc.; Chevron U.S.A.,
Inc.; Cook Inlet Region, Inc.; Cross Timbers Oil Company;
ExxonMobil Production Company; Forest Oil Company; Marathon Oil
Company; Petro Star, Inc.; Phillips Alaska, Inc.; Shell Western
E&P, Inc.; Tesoro Alaska Company; TotalFinaElf E&P USA; UNOCAL;
and William Alaska Petroleum, Inc. Ms. Brady provided the
following testimony:
I am here today to present AOGA's opposition to
Sponsor Substitute for House Bill 190. We strongly
oppose this bill as both poor economic policy and poor
public policy. We consider this legislation to be a
direct disincentive to the commercialization of North
Slope natural gas. And one of our big concerns is
that this bill, even the fact that it was introduced,
will also be the view of market analysts who track and
report local actions affecting gas commercialization
on a worldwide basis for the specific purpose of
informing potential lenders about project viability.
Number 0608
MS. BRADY continued:
HB 190 represents a radical departure from sound
economic policy by substituting "pain" for "gain" as
the reason to invest in the commercialization of North
Slope natural gas. The bill apparently presumes that
if shareholders and management are threatened, they'll
be more likely to invest, and invest sooner in the
commercialization of this gas. [The bill] seems to be
based on the premise that an ANS gas project has
already been found [to be] commercially viable and
that free market incentives have failed when it comes
to decisions to invest in the commercialization of
North Slope natural gas. This bill represents an odd
and disruptive counterpoint to the building
public/private momentum now underway as the result of
industry commitment to and investment in the
commercialization of the North Slope gas reserves. Of
greater concern from a competitive market perspective,
by signaling a significant move away from Alaska's
stable public tax policy, HB 190 actually threatens to
slow the momentum for commercialization of North Slope
gas.
... Since the '60s, the oil and gas industry and
others have spent about $1 billion on trying to
commercialize this gas. You've heard from the various
producers today, what kinds of money they're investing
to try to make this gas commercial. You know their
boards are interested, their stockholders are
interested, their management is interested. The whole
world, right now, is looking to see which gas projects
are actually going to make it because that's where the
lending institutions are going to put their money.
... Some people have said that this is an incentive to
speed up the development. It's not, it does add
additional expense and it does give this odd message
to the people who are looking to see where they're
going to put their money.
As proposed tax legislation, [HB 190] sends a signal
to the market that the State of Alaska's public policy
of stable taxation is eroding. Just as the market has
considered a stable tax policy to be critical to
attract investment to the ... new commercial oil
projects in the past ten years, so will the market
consider continued stable tax policy to be critical to
attract the additional billions of dollars in
financing necessary for new commercial gas projects.
You've heard about the concern of the other ...
resource groups with long lead times, we share those
concerns.
Since, in the final analysis, the deciding factors
will be commercial and market vitality which is most
improved by reducing costs and risks, both the
industry and the state must focus their efforts on
those factors that make Alaska's fiscal regime for gas
more competitive against those elsewhere in the world.
Number 0834
MS. BRADY concluded:
This present legislature and the legislatures for the
past ... 12 years have strongly conveyed the message
that Alaska is "open for business." Let's not change
that message now when we are in the middle of our best
opportunity in almost two decades, in a very
competitive market, to commercialize this gas. Let's
work together to do what's necessary to make it happen
and hope ... that this is finally it.
CHAIR OGAN turned to Ms. Brady's comment that [HB 190] signals a
shift [away] from a stable public tax policy. He asked if AOGA
is concerned with the legislature's change in course from budget
cutting to now adding dollars. He reiterated that such seems to
be more of a threat.
MS. BRADY answered, "I think every organization in the state has
been concerned with making sure Alaska has a fiscal policy."
She noted that she ran the fiscal summit for Governor Hickel for
the last seven or eight years and she was co-chair of the Long-
Range Fiscal Planning Commission five years ago. She pointed
out that the tools are there, the question is how to put them
together. Over the last five years, the legislature did its
part by cutting. Now, she sees everyone reevaluating and thus
she hoped another plan would result.
CHAIR OGAN expressed his hope that the [oil] industry would come
together en masse on that issue as it has on this issue.
Number 1040
LARRY HOULE, General Manager, Alaska Support Industry Alliance,
informed the committee that the Alaska Support Industry Alliance
is made up of 400 contractors, suppliers, and individuals that
provide products and services to the oil and gas industry. The
Alliance's membership represents over 25,000 people that work in
Alaska and live in Alaska year around. Mr. Houle provided the
following testimony:
None of the oil producing companies are members of the
Alliance. Instead, we are the 25,000 working men and
women that weld pipe, clean the rooms, [drill wells],
drive the machinery, day in and day out in Alaska's
oil patch.
I am here today to confirm the Alliance's opposition
to Sponsor Substitute [for] House Bill 190, a bill
that proposes to tax Alaska's proven gas reserves on
state leases that have already been purchased by
private companies. [House Bill] 190 represents a huge
disincentive; in fact, [it is] a deterrent to those
producer companies [that are today working to
commercialize North Slope natural gas].
MR. HOULE summarized:
In the Mat-Su Valley alone, the oil and gas industry
directly employs 353 people [representing] $36 million
in payroll. Indirectly, the oil and gas industry in
the Mat-Su Valley represents almost 16 percent of the
total [regional] payroll. In [the] Fairbanks North
Star Borough, the [industry directly] employs 565
people, [pays out] $40 million in annual payroll.
Also, almost 16 percent of the nonmilitary payroll in
the Fairbanks industry.
We believe that this legislature should be considering
true incentives and this bill is not a true incentive
... toward development of North Slope gas. Natural
resource legislation is good public policy when it
reduces costs and minimizes risks while protecting our
environment.
In quick summary, the short title [of SSHB 190] makes
reference to a Natural Gas Pipeline Incentive Act. We
do not read incentive into this substitute bill. In
fact, the word ... "tax" appears over 40 times in the
10-page document. We see the bill as punitive and
destabilizing, with the potential to erode any
competitive advantage [in the world markets that we
have gained in the last decade in Alaska]. We have
had a very certain and ... stable tax basis in this
state and we would like to see that continue.
Basically, our men and women in the oil patch are what
I call "meat and potatoes" constituents and those
constituents all live in your districts. And we ask
you to provide incentives for those people to remain
working and House Bill 190 does not do that.
CHAIR OGAN announced that the committee would recess and return
at 5:00 p.m. to continue hearing testimony. The committee
recessed at 10:00 a.m.
[There is no further recording on Tape 01-34, Side A or B.
Recording resumes on Tape 01-35, Side A, when the meeting
reconvenes.]
TAPE 01-35, SIDE A
CHAIR OGAN reconvened the House Special Committee on Oil and Gas
at 5:09 p.m. Those present upon reconvening were
Representatives Ogan, Dyson, and Fate. Representatives Kohring
and Chenault joined the meeting as it was in progress.
Number 0110
MARY SHIELDS, General Manager, Northwest Technical Services,
testified via teleconference. Ms. Shields provided the
following testimony:
Northwest Technical Services provides long- and short-
term contract and temporary employees in the State of
Alaska both within and outside the oil industry. In
fact, last night we held our 20th Anniversary
celebration. And we have been actively involved in
many work- and civic-related activities in Alaska for
all of these years.
Upon reading this proposed piece of legislation, I
became very concerned that the tax stability we have
fought so hard to achieve in Alaska could be seriously
eroded. How can we expect companies to invest in
projects when the risk, a gas reserves tax, outweighs
the probable benefit? I believe that this is a lose-
lose situation. It is certainly a disincentive for
any firm to move forward with new exploration until a
guaranteed method of transporting the gas to market is
operational, and it is not the way to keep Alaskans
working.
The companies involved in exploration and development
in Alaska have not shied away from high-risk projects.
If they had, the North Slope fields would have never
been developed; exploration would have stopped before
the discovery of Prudhoe Bay. Over the years
companies have spent millions of dollars in the search
to find a way to commercialize our gas resources and
are now in the process of spending $75 million or more
to determine whether there is a commercially viable
project which will bring the North Slope gas to the
marketplace.
Many of the arguments I could present have already
been laid before you this morning. Obviously, as an
Alaskan business person, I want the gas line project
to go forward as quickly as possible. Equally obvious
is the simple fact that no for-profit company,
particularly those answering to shareholders, would
slow down a process that would generate revenue for
the company. With that in mind and considering the
destabilizing effect this bill could have, I humbly
submit that this bill is fatally flawed and urge you
to defeat it in committee.
Number 0386
SALLY ANN CAREY, Secretary, [Alaska] Support Industry Alliance,
testified via teleconference. Ms. Carey read the following
testimony:
I appear before you today to offer my negative
thoughts on further consideration of HB 190. If the
State of Alaska is open for business, this bill
doesn't reinforce that message to the long-term
developers of our oil and gas fields. Nor does it
foster their intent or desire to expand the enormous
amount of funds they currently are spending and have
spent providing jobs for workers, buying Alaskan goods
from vendors, and of services. ... also it does not
send a message to other developers or businesses, who
we would like to have coming to Alaska to pursue
operations and businesses. If this [bill] is to
persist, let's not confine this Quixotic, punitive tax
to only the major oil industry (indisc.), but let's
talk about ... maybe harvested timber, ... the fish we
haven't caught yet, ... the tourists that might come,
.... This tax is not an incentive, this tax is quite
the opposite.
CHAIR OGAN remarked that a recurring theme [of the testimony]
seems to be that [SSHB 190] sends a negative message. Chair
Ogan reiterated his concerns regarding the budget and asked Ms.
Carey if she viewed that as an equal, if not greater problem.
MS. CAREY reminded everyone that the Alliance's goal is to cut
the budget.
Number 0629
JACK LAASCH, Member, Executive Board, Alaska Support Industry
Alliance, had his testimony read into the record by Bob
Carmichael. Mr. Laasch's testimony is as follows:
The Alliance represents those companies in Alaska that
depend on a healthy oil and gas industry to provide
employment for Alaskans and the sale of goods and
services within Alaska. I am writing this letter to
express my views on HB 190, which proposes to enact an
ad valorem tax on natural gas reserves on the North
Slope. I am opposed to HB 190 because it increases
the risks that producer companies already face in
developing Alaska's gas resources. It is important
that companies that are instrumental in building the
foundation of Alaska's economy be given every
opportunity to succeed.
Alaska's oil and gas support contractors and vendors
depend on a healthy industry to provide employment and
opportunities to generate revenues. These contractors
and vendors also have a significant investment in
Alaska. In the past, the major producers have been
willing to invest in Alaska's high-risk projects.
Successful development has resulted in many benefits
to the communities of Alaska through contributions to
charitable organizations and community enhancement
projects. In addition, Alaskan companies have been
contracted to provide manpower and equipment for
services such as construction, maintenance, drilling,
fabrication, module assembly, and many others. Since
the initial discovery of North Slope gas, many
hundreds of millions of dollars have been spent to
commercialize this gas. Recently, the producers have
committed to spend an additional $75 million on a
study to determine how to bring North Slope gas to
market. Many Alaskan companies will participate in
this study and the subsequent contracts leading to the
construction of a gas pipeline project.
I feel that the State of Alaska needs to present
itself as a good partner with the industry in striving
for a win-win situation on both sides. In doing so,
the state needs to create incentives for producers to
pursue commercialization of gas, and hence create
opportunities for Alaska's residents and the companies
doing business in Alaska. The gas reserve tax does
not create this incentive.
BOB CARMICHAEL, on his own behalf, testified via teleconference.
Mr. Carmichael noted that he has worked in Alaska's oil
industry. He said that [SSHB 190] is not the best solution for
the problem and thus he recommended that it not pass.
Number 0868
BOB STINSON, President, CONAM Construction Company; Vice
President, Alaska Support Industry Alliance, testified via
teleconference. [His written testimony is included in the
committee packet.] Mr. Stinson noted that he does not support
[SSHB 190] for many of the reasons already mentioned today. Mr.
Stinson provided the following testimony:
If this bill is an attempt to provide an incentive to
current producers of gas on the North Slope to
accelerate the Alaska gas pipeline project, I think it
is at least premature, and at most maybe you could
cancel the project. And I'll be more specific. If
there were a tax on gas reserves that are imposed by a
certain date if a pipeline didn't get built, why would
the current Alaskan producers spend the money to try
to find more gas in the interim to increase the
reserves? Why would new companies look to Alaska to
explore for oil and gas if they knew they might be
taxed for any newly discovered reserves without the
certainty of getting it to market? Increasing
reserves helps the overall economics of the project.
The more gas you have, the more money you make, and
the more the state makes.
I think the best way to ensure that a pipeline gets
built is to work with the producers and assist in
doing the things they need to do to make the project
work, not to work against them in an adversarial role.
What if ANWR opened? Would prospective leaseholders
there assume there might be the threat of similar
taxes, and decide not to invest in exploration and
production of oil and gas in a place that is already
one of the most expensive places in the world to
produce it? I think they might look elsewhere.
This issue is premature because the feasibility
process the producers are going through now has to be
done regardless of the implications of a gas reserves
tax. As an Alaskan pipeline contractor, who has
recently designed, built, and permitted a pipeline
project, I know how long it takes to go through the
process. For an 8-mile project, it took me 16 months
and $2 million to work through the permitting process.
The current group of Phillips, BP, and Exxon has
committed to doing it roughly in nine months for a
1,900-mile project, with the largest gas conditioning
plant in the world, compressor stations, a natural gas
liquids plant, and more pipelines from there to the
Lower 48. I ... think we need to be patient and work
with the producers through this process ....
CHAIR OGAN noted his agreement that the bill as written would be
a disincentive for additional exploration.
Number 1115
TOM MARSHALL (PH) testified via teleconference and informed the
committee that he is a retired petroleum geologist. He noted
that he has been connected with the oil and gas business for
over 50 years. Mr. Marshall (ph) read the following testimony
[that was sent to the committee via e-mail]:
I'm very much opposed to this bill. It will certainly
discourage gas exploration at a time when prudent
reserves on the North Slope are grossly insufficient
to supply either the highway pipeline or the Valdez
LNG schemes. Proponents of this bill say the gas
owners are warehousing North Slope gas, but never
mention that every day gas liquids worth $1.5 million
are recovered from the reinjected gas produced with
oil at Prudhoe Bay. And the natural gas base press
maintenance project has increased ultimate recovery 35
percent, yielding a $95 billion increase in the market
value of oil production. Gas in the ground at Prudhoe
Bay is far better for the state than money in the
bank. Nationwide, natural gas sold, during the first
quarter of 2001, averaged $6.45 mcf; that's two-and-a-
half times the average price of $2.46 in the first
quarter of the year 2000.
... I worked for an independent gas producer in
Wyoming in the early '50s when a reserve tax was
proposed by the livestock interests after a heavy,
late, spring snow that decimated the lamb and calf
crop. The proposed tax was dropped when the ranchers
realized that counting reserves was not at all like
counting sheep because there can be a wide difference
of opinion among qualified reservoir engineers and
geologists due to uncertain well control and
interpretation of gas in place and reservoir
continuity. The ranchers withdrew the bill after
deciding it could be a reservoir engineers job
security act.
CHAIR OGAN reiterated his intention to hold the bill after
determining that no one else wished to testify.
Number 1351
REPRESENTATIVE KOHRING thanked all those who testified today as
well as the industry for its investment in Alaska.
Representative Kohring expressed the need to take care when
working with the [oil and gas industry] in order to ensure that
they are encouraged to make further investments in exploration
and development. Perhaps, there could be incentive legislation
to encourage [exploration and development].
There was discussion regarding interim endeavors for the
committee.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 5:28
p.m.
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