02/04/2003 03:21 PM House O&G
| Audio | Topic |
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+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
February 4, 2003
3:21 p.m.
MEMBERS PRESENT
Representative Vic Kohring, Chair
Representative Mike Chenault, Vice Chair
Representative Hugh Fate
Representative Norman Rokeberg
Representative Harry Crawford
Representative Beth Kerttula
MEMBERS ABSENT
Representative Lesil McGuire
COMMITTEE CALENDAR
HOUSE BILL NO. 57
"An Act amending the manner of determining the royalty received
by the state on gas production as it relates to the manufacture
of certain value-added products."
- HEARD AND HELD
HOUSE BILL NO. 61
"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
OVERVIEW: DEPARTMENT OF NATURAL RESOURCES, DIVISION OF OIL &
GAS, BY DIRECTOR MARK MYERS
- OVERVIEW POSTPONED
PREVIOUS ACTION
BILL: HB 57
SHORT TITLE:ROYALTY GAS CONTRACTS
SPONSOR(S): REPRESENTATIVE(S)CHENAULT
Jrn-Date Jrn-Page Action
01/21/03 0047 (H) PREFILE RELEASED (1/17/03)
01/21/03 0047 (H) READ THE FIRST TIME -
REFERRALS
01/21/03 0047 (H) O&G, RES
01/21/03 0047 (H) REFERRED TO OIL & GAS
01/31/03 0107 (H) COSPONSOR(S): WHITAKER
02/04/03 (H) O&G AT 3:15 PM CAPITOL 124
WITNESS REGISTER
MIKE NUGENT, General Manager
Agrium Kenai Nitrogen Operations
Kenai, Alaska
POSITION STATEMENT: Testified on HB 57; provided the history of
his company and answered questions; related the desire to pay a
fair price for natural gas and have the price be predictable.
TADD OWENS, Executive Director
Resource Development Council for Alaska, Inc.
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 57; said it
strikes an appropriate balance between providing incentives for
manufacturers of value-added products and protecting the state's
interests.
LISA PARKER, Government & Community Relations Advisor
Agrium U.S.
Kenai, Alaska
POSITION STATEMENT: In answer to questions about DNR's fiscal
note for HB 57, pointed out that Agrium isn't privy to
negotiations between the producer and the state.
ACTION NARRATIVE
TAPE 03-2, SIDE A
Number 0001
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 3:21 p.m. Representatives Kohring,
Chenault, Fate, and Kerttula were present at the call to order;
Representatives Rokeberg and Crawford arrived soon thereafter.
HB 57-ROYALTY GAS CONTRACTS
[Contains brief discussion of HB 69 by Chair Kohring]
CHAIR KOHRING announced that the committee would hear HOUSE BILL
NO. 57, "An Act amending the manner of determining the royalty
received by the state on gas production as it relates to the
manufacture of certain value-added products."
Number 0173
REPRESENTATIVE CHENAULT, sponsor, explained that HB 57 proposes
to add "manufacturer" as a further entity that may claim the
benefit of the contract price as a basis for determining royalty
due to the state for gas production. It amends AS 38.05.180(aa)
by allowing the commissioner of [the Department of Natural
Resources (DNR)] to enter into an agreement to accept a gas
price established in a contract "between a lessee and/or
utility" as the price for the state's royalty share. He said
this amendment would apply a similar condition to manufacturers
of value-added products in Alaska, which to his belief will
allow manufacturers of value-added products in Alaska to know up
front what their costs are. The way royalty is valued and
arranged currently, by contrast, up to five years later [a
manufacturer] could be hit with a higher cost for royalty gas
than what is basically agreed on in a contract. He explained
that manufacturers are looking for certainty with regard to
price, in order to determine what their costs are.
Number 0359
REPRESENTATIVE KERTTULA paraphrased the analysis in the fiscal
note from the Division of Oil & Gas, which read in part:
Should only one manufacturer apply under AS
38.05.1880(aa), the state could lose an estimated
$36.6 million in royalties over a period of seven
years. However, proposed amendments in HB 57 are
worded more broadly than just one company.
Interpretation of "manufacturer" may be broadly
interpreted to apply to disposition of all royalty gas
subject to in-state processing (e.g. LNG). Therefore,
this $36.6 million could significantly understate the
total revenue impact of HB 57. Furthermore, a much
larger revenue impact could occur with a major sale of
North Slope royalty gas.
REPRESENTATIVE KERTTULA asked how the division came up with that
amount. She also expressed concern about the definition of
"manufacturer". She surmised that it isn't the sponsor's intent
to include LNG [liquefied natural gas], a gas pipeline, and so
forth, but that it is specifically for one manufacturer to be
able to apply.
REPRESENTATIVE CHENAULT clarified that it isn't necessarily for
one manufacturer, and that he thinks others possibly could
qualify. He added, "It is not the intent to apply this to a gas
pipeline or to an LNG facility. If ... they meet the criteria,
then that would open the door for the commissioner of Department
of Natural Resources to enter into an agreement. And ... that's
our interpretation of it."
Number 0481
REPRESENTATIVE KERTTULA said it sounds as though the
commissioner has some authority, but as the bill is written, the
commissioner "shall" do that. She asked whether there is a
possibility under this, if [a manufacturer] met the criteria of
"value-added," that a gas line or LNG would fit under this and,
therefore, the state would give up more royalties. She also
asked whether that is the intent.
REPRESENTATIVE CHENAULT replied that the intent is not to extend
it to a gas pipeline or "another LNG facility" unless it meets
the criteria stated in the legislation. Rather, the intent is
to allow manufacturers to know their costs up front for royalty
gas over time, in order to make decisions that affect their
businesses. He expressed interest in 1) keeping Alaskans
working, and 2) promoting in-state, value-added products for
Alaska's gas, to better promote Alaska's resources and for the
state to get "more bang for our royalties."
Number 0637
REPRESENTATIVE CHENAULT returned attention to the fiscal note,
saying it had been given to him that morning. He told members
that he didn't know how the department determined the $36
million and hadn't heard an explanation or seen the numbers on
which it is based. He speculated that perhaps the numbers were
derived from what utilities currently pay versus what the
industry pays on the average. He added that he doesn't believe
[HB 57] says a manufacturer will get the same price as a
utility; rather, it says that once the producer and a
manufacturer agree to a price, the commissioner would approve
that price relating to royalty.
CHAIR KOHRING offered his understanding that the commissioner
would have discretion to disapprove such an agreement. If
information suggested it would be a major financial loss to the
state, for example, [the commissioner] could certainly say no.
In response to Representative Kerttula, he asked whether anyone
was present or on teleconference from the division. He remarked
that he'd been given the fiscal note a short time beforehand and
would have expected someone from the division to defend the
analysis.
Number 0811
REPRESENTATIVE CRAWFORD offered his reading that the bill
doesn't seem to specifically rule out LNG or NGLs [natural gas
liquids]. He suggested a smart lawyer possibly could argue that
once gas is turned into NGLs it becomes a value-added product.
He proposed that the committee could establish an intent to
remove that ambiguity. Representative Crawford declared that he
wholeheartedly agrees with the bill, but wants to ensure that it
does "what we intend it to do."
REPRESENTATIVE CHENAULT asked whether the preference is to have
LNG manufactured in Alaska or have raw gas shipped Outside via
pipeline in order to have value-added processing done elsewhere.
He also asked, if that were the case, what "number would that
incorporate, to want to see value added in the state."
Number 0952
REPRESENTATIVE KERTTULA suggested it will boil down to how much
it costs [the state]. She noted the need to hear testimony from
the division about that, and from the other testifiers.
REPRESENTATIVE ROKEBERG said he shared Representative Kerttula's
concern. He agreed with the need to hear from the division, and
said he wanted to know more about what the bill does.
Number 1103
MIKE NUGENT, General Manager, Agrium Kenai Nitrogen Operations,
informed members that his company's Kenai operation uses natural
gas, which it upgrades along with water and nitrogen from the
air to make ammonia and urea - referred to as nitrogen products
- that are sold in the Pacific Rim. As the company looks to the
future and develops natural gas supplies from a variety of
producers in Cook Inlet, it will be highly valuable to know what
that future price is, in order to determine profitability. He
explained:
These would be arrangements that we would establish at
an arm's length with another producer, and ... having
knowledge of what the state's share is also valued at
would be very valuable in making decisions. Our ...
margins are fairly thin, just like any other
manufacturer.
Number 1265
MR. NUGENT, in response to Representative Rokeberg, offered the
following history. The facility was built in 1968, with a major
expansion in 1977. It was owned then by Unocal; because Unocal
also was the supplier and producer of the natural gas that fed
the facility, there was a "state royalty gas-valued formula"
that valued the state's portion of the natural gas supplied to
the plant and that was hooked to the value of the end products.
In fall 2000, the upgrade facility was sold to Agrium; thus
there were two different owners: the producer and supplier of
the gas, and the operator of the plant.
MR. NUGENT explained that at the time of sale, Unocal was
Agrium's sole gas supplier and Agrium was Unocal's sole large
industrial user of that gas. However, Unocal has been unable to
deliver the full amount of gas needed [by Agrium] in order to
operate at capacity. Therefore, [Agrium] is starting to develop
relationships with other gas producers and suppliers in order to
meet both short-term and long-term needs. The importance of
knowing the future costs of those gas supplies has become
apparent. Noting that the state is a 12.5-percent owner of most
of that gas, Mr. Nugent said the inability to predict gas prices
accurately adds risk to any arrangements between the company and
the producer. He highlighted some aspects of risk:
We're open to audit for long periods of time to where
we could have to pay more for the gas than we
originally intended. ... Recently, a contract
developed between ENSTAR [Natural Gas Company] and
Unocal to supply gas to ENSTAR starting in 2004. And
this is an example of what some of that future risk
might be: that gas contract values gas at the NYMEX
[New York Mercantile Exchange] value. And NYMEX value
of gas today is about $5.50, but we could not afford
to purchase gas for $5.50 ... and make a profit. So
that's an example ... of what some of the potential
risk might be to a facility like ours.
Number 1525
REPRESENTATIVE ROKEBERG referred to the foregoing example and
suggested [such a situation] could be problematic. He asked
whether such a contract would be adjusted for NYMEX value
periodically.
MR. NUGENT indicated that basically the contract has a "floor"
of $2.75 and is the NYMEX value of gas. He said he wasn't sure
whether it is adjusted monthly or annually.
REPRESENTATIVE ROKEBERG asked whether typically there is some
type of periodic adjustment for the NYMEX or fair market value.
MR. NUGENT said relationships like that would be very risky or
would make [Agrium] nervous. He pointed out that Cook Inlet gas
isn't hooked to any system in the Lower 48. Therefore, if Cook
Inlet gas were hooked by pipeline to the Lower 48, it wouldn't
trade at the NYMEX value but at the NYMEX value discounted for
the pipeline-system cost to get it to the Lower 48. Again
noting that the state is a 12.5-percent owner in that gas, he
said arrangements like that "by people other than us could have
a detrimental impact on our business." He added that [Agrium]
is interested in paying a "fair value" for the gas and having
that price be predictable.
Number 1704
TADD OWENS, Executive Director, Resource Development Council for
Alaska, Inc. (RDC), testified in support of HB 57. He informed
members that RDC is a private nonprofit trade association
representing individuals and companies from Alaska's oil and
gas, mining, timber, tourism, and fisheries industries; its
mission is to help grow Alaska's economy through responsible
development of the state's natural resources. He recalled that
in 2001 the legislature adopted a declaration of state economic
development policy, which in part asserts that it is state
policy to encourage value-added processing in Alaska. Offering
the belief that HB 57 advances this policy, he explained:
By establishing the contract price as the basis for
determining the state's royalty share on natural gas,
this legislation provides both producers and
manufacturers of value-added products with greater
certainty regarding their costs. Reducing the risk
associated with the state's royalty share indirectly
reduces the overall risk of gas exploration in Alaska.
Cost certainty and risk reduction are two important
factors in encouraging private-sector economic
development in the state. And it's important to note,
I think, that we believe the proposed legislation
provides the state - through the commissioner of DNR -
with the authority needed to reject any request that
would be detrimental to the State of Alaska's
interests. In other words, House Bill 57, in our
opinion, finds an appropriate balance between
providing incentives for manufacturers of value-added
products and protecting the interests of the state.
Number 1858
REPRESENTATIVE KOHRING asked whether anyone else wished to
testify; there was no response.
MR. NUGENT, in reply to Representative Rokeberg, agreed that the
legislation would only [apply to] the portion of the gas owned
by the state.
Number 1916
REPRESENTATIVE ROKEBERG asked whether Mr. Nugent knew the
current amount of RIK gas available in the Cook Inlet area, and
asked about the allocation now.
MR. NUGENT offered his understanding that the state owns 12.5
percent of any gas sold, whether to a utility or [Agrium], and
receives the revenues from that stream. He added that the
state's gas is not specifically targeted to [Agrium], a utility,
or any one special [entity].
REPRESENTATIVE ROKEBERG said he'd assumed the legislation
related to RIK gas. He asked whether, instead, it is just a
benchmark price for anybody who establishes a price, without
"reopeners" after the price is established.
MR. NUGENT clarified that this isn't gas the State of Alaska is
taking in kind. Rather, it is gas that the producer markets for
the state.
REPRESENTATIVE ROKEBERG explained that his concern is with
regard to the [$36-million] fiscal note from the Division of Oil
& Gas, which claims loss of state revenue. Although he offered
his view that [the division's estimate] may be off the mark, he
indicated the need to understand it better.
MR. NUGENT [who was testifying via teleconference and presumably
hadn't seen the fiscal note] said he didn't have any knowledge
of what is behind that number, either, because it would
basically require predicting a future value for the gas.
REPRESENTATIVE ROKEBERG indicated that if the price were lower
and there couldn't be a "reopener" for a price adjustment, there
would be a loss of anticipated future income. He said he was
disturbed by it.
MR. NUGENT said he'd have to see the detail as well.
REPRESENTATIVE ROKEBERG added that it scares the daylights out
of him.
Number 2057
REPRESENTATIVE KERTTULA concurred. Referring to the fiscal
note, she suggested that in order for the committee to make a
good decision, and to avoid possible unintended consequences
that could cost the state $36 million, the following must be
understood: 1) exactly how the royalty would be figured on this
gas, 2) what Agrium or like businesses pay in royalties right
now, and 3) what the reasonable likelihood is that [Agrium or
like businesses] would pay in the future under current law
versus what this new legislation would do.
Number 2141
REPRESENTATIVE KERTTULA requested that Mr. Nugent or Ms. Parker
testify about [the division's calculations on page 2 of the
fiscal note analysis, in the portion addressing 2000-2002,
rather than the projections for 2003-2009]. She observed that
on page 2 it says, "The cumulative impact would have been
approximately $8.2 million in nominal dollars." She asked Mr.
Nugent what he pays in royalty right now, as a starting point.
MR. NUGENT indicated that is a subject of discussion between
Unocal - Agrium's producer - and DNR. He added that [Agrium's]
"total gas bill to the facility" was $80 million; in 2002, it
was approximately $70 million. He reiterated that the state is
only a 12.5-percent owner.
Number 2214
REPRESENTATIVE KERTTULA asked whether 12.5 percent of [Agrium's]
$80 million would be the state's royalty share and, therefore,
it totaled $8 million over the last two years in royalties.
MR. NUGENT answered:
We paid our producer, in 2001, $80 million for the
gas. And that was in one year. Last year, it was
closer to $70 million because we didn't consume quite
as much gas. ... The royalty payment is a subject of
discussion for those two years right now between
Unocal and the state. But if it was 12.5 percent of
what we paid our producer, then it doesn't even come
close to ... $36 million.
REPRESENTATIVE KERTTULA acknowledged that Mr. Nugent didn't have
[the fiscal note]. She said [the calculation] was averaged over
a period of five years, to her belief. If it was 12.5 percent
of the amount he'd just stated, she suggested, it might be about
right.
Number 2273
MR. NUGENT added:
I guess another way to look at it, if I might: when
we were part of Unocal, what we paid Unocal in 2001
and 2002 basically followed the state royalty formula
that was in existence when Unocal owned the property.
So had that remained one entity, ... the royalty
payment would have been a clear 12.5 percent ... of
that amount.
Number 2310
REPRESENTATIVE ROKEBERG referred to Table 1 on page 2 of the
fiscal note. He pointed out that it indicates that if this bill
had been in effect, the total would have been $8.2 million [in
foregone royalties for 2000-2002]. For 2000, it shows a
contract value of $1.20 and a royalty value of $1.70, for a 50-
cent difference and $1.7 million [in foregone royalties]. For
2001, it shows a contract value of $1.38 and a royalty value of
$2.20. He asked Mr. Nugent whether those numbers meant anything
to him in terms of the contract value and the royalty value.
MR. NUGENT replied that $1.38 is "within a couple cents" and is
about what [Agrium] paid per thousand cubic feet both in 2001
and 2002. He said it is based on "the same formula that would
have set the state royalties value, had we still been a part of
Unocal, because it was based on the value ... of our end
product."
REPRESENTATIVE ROKEBERG again mentioned the figures [for 2001]:
a royalty value of $2.20 and [a contract value of] $1.38, for an
81-cent difference and $2.9 million in royalty foregone.
MR. NUGENT surmised that the $2.20 might be the current posted
value of Cook Inlet gas for utilities; he asked Ms. Parker to
help him out.
REPRESENTATIVE ROKEBERG pointed out that the footnote [page 2 of
the fiscal note] says the forecast [by the Division of Oil &
Gas] is for $2.50 per [thousand cubic feet (Mcf)] today, with
$3.12 for fiscal year (FY) 2009, which is a DOR [Department of
Revenue] present value (PV) calculation, to his belief.
Number 2464
LISA PARKER, Government & Community Relations Advisor, Agrium
U.S., suggested the need to ask DNR where those numbers came
from. She added that the State of Alaska, under "paragraph
(36)," is supposed to get the highest value it can for its
royalty share. She pointed out that Agrium is a consumer of the
product and isn't engaged in negotiations, or privy to them,
with regard to what price the producer pays to the state for the
state's royalty share of the gas. The company is only privy to
negotiations between it and the producer when buying gas.
REPRESENTATIVE ROKEBERG replied that this legislation endeavors
to remove that uncertainty. He offered his understanding that
[Agrium] is suggesting there should be a stable price for a
longer period of time; typically, however, there are "reopeners"
or adjustments for "market-value considerations" in the
negotiations between a producer and the state. He asked whether
he was on the right track.
MS. PARKER affirmed that and added, "But that's between the
producer and the State of Alaska. And we just want a mechanism
where the producer can ... request of the state that they
establish, as their royalty price, the price that they've
negotiated with us ... as a consumer."
Number 2598
REPRESENTATIVE ROKEBERG expressed concern about Mr. Nugent's
remarks regarding the arrangement between ENSTAR and Unocal, and
an inability to operate under $5.50. Noting that the "NYMEX
price for future contracts" was in the $5.70 range on the [news]
this morning - which he said is an extremely high price that may
be seasonal and war-related, for example - Representative
Rokeberg asked whether there is a certain price at which
Agrium's operations will be in jeopardy and no longer be able to
produce profitably. He said he didn't want to pry into Agrium's
business, but that Agrium was asking [the legislature] to make a
policy call here. He said he believes the public should be
aware that there are realistic limits to what [Agrium] can do to
operate profitably.
MR. NUGENT answered that it depends on the value of the
company's product at the time, which over the last several years
has been priced fairly low because of various economic
conditions in the world and drought in agricultural areas of
North America. In order for the company to survive during those
low-price cycles, he reported, its economic model generally says
it shouldn't pay more than $2.00 [per Mcf] for gas.
Number 2697
REPRESENTATIVE ROKEBERG asked whether Mr. Nugent believes the
export value of Alaska's gas may be overstated if Lower 48
measures of valuation are used, because those haven't been
discounted for the costs of transportation and conditioning
necessary for transport.
MR. NUGENT replied:
Yes. I guess I was trying to use that as an example
of one of the extreme cases that could take place that
we have no control over, and that was an arrangement
agreed to between ENSTAR and Unocal. And it doesn't
have a lot of logic on NYMEX value of gas because even
if our Cook Inlet system was hooked into the Lower 48,
it would be discounted backwards up the system to Cook
Inlet, and it would never have a value that equaled
NYMEX value. So ... the arrangement I've ... referred
to doesn't have clear logic to it, and I think that's
a good example of some of the uncertainty that we
don't want to expose ourselves to.
Number 2755
REPRESENTATIVE ROKEBERG asked: If Alaskan companies are making
these apparently arm's-length transactions and agreements to
reflect a higher value, isn't that somewhat driven by the fact
that there's a perceived shortage of natural gas in the Cook
Inlet basin? He said there is a general recognition of greater
supply there [than previously thought], although it is debatable
that more production is needed in Cook Inlet to help moderate
prices. He also asked, "Are they using these Lower 48 and
worldwide standards to kind of drive their negotiations?"
MR. NUGENT responded:
I think there's a "yes" answer to both of your
questions. The ... supply in Cook Inlet has
diminished over the years to where it ... now matches
the demand, and it's time for producers to go bring
new supplies to market. ... That contract between
Unocal and ENSTAR really is for a small percentage of
the production from Cook Inlet, but because of the
current royalty arrangement it can start to ratchet up
the value of gas in the entire region.
Number 2833
REPRESENTATIVE ROKEBERG asked whether [Agrium] ever conducts its
own exploration and production anywhere in the world, or if it
simply goes to the market for buying raw materials.
MR. NUGENT answered, "At the present time, we just go to the
market to buy our raw materials." He added that it has become a
critical issue, however, especially in Cook Inlet, and that the
company is exploring all possibilities to bring some long-term,
reliable natural gas supplies. "So at the present time we are
not a producer, but we don't intend to leave any stone unturned
in our search for natural gas," he concluded.
CHAIR KOHRING responded that [the company] might find a source
of natural gas in the near future if HB 69 passes, since it
hopefully will spur more development in the shallow gas fields,
for which he said there is phenomenal potential in the Kenai
Peninsula. He acknowledged that it is a side issue.
Number 2952
REPRESENTATIVE KERTTULA referred to item 5 in the footnote on
page 2 of the fiscal note, acknowledging that Mr. Nugent didn't
have a copy. Item 5 read:
Royalty value is indexed to the Alaska Department of
Revenue prevailing value for Cook Inlet Gas (DOR PV).
DOR PV is forecast by the Division of Oil and Gas to
increase from about $2.50 per Mcf today, to $3.12 in
FY 2009, based on the historic, long-term trend
observed over the period 1995-02.
REPRESENTATIVE KERTTULA expressed her understanding that the
royalty currently is based on value and the value to the state,
but that Mr. Nugent's concern is that the cost not go so high
that the company is forced out of business. She asked whether
that is the bottom line.
MR. NUGENT answered in the affirmative, suggesting it is very
important to the state as well, because [Agrium] adds value to
the natural resource before it leaves Alaska. He said if gas
becomes unaffordable to the company and it isn't in business
anymore - to take it to an extreme - that will be a big revenue
hit for the state too.
TAPE 03-2, SIDE B
REPRESENTATIVE KERTTULA questioned, if gas prices skyrocket, how
the state could correctly base its return.
Number 2933
REPRESENTATIVE ROKEBERG asked whether the company can find
producers at a price around $2.00 per Mcf.
MR. NUGENT said he thinks so, since there are producers
supplying gas to the company for less than that right now. He
added, "We're very encouraged with discussions we've had with a
number of potential producers in Cook Inlet, that they could
supply gas to us ... for that price." He pointed out another
value his company brings to natural gas producers in Cook Inlet.
The utility market there is seasonal, with high wintertime
demand and almost no demand in the summer. His company is an
industrial user that brings stead consumption to a gas producer
year-round, which is valuable to a producer.
Number 2868
CHAIR KOHRING announced that the bill would be held over in
order to hear from DNR about the fiscal note. He expressed
doubts about the amount and said he wanted to hear the
justification for such a high number.
Number 2835
REPRESENTATIVE ROKEBERG noted that both he and Representative
Kerttula had a concern about the definition of "manufacturer".
He asked Representative Chenault to review that to see what
possible negative impacts might exist. Suggesting that the
definition appears too broad, he asked whether Representative
Chenault had considered putting some "geographic sideboards
around a particular area" that would accomplish his goal, as
sponsor, without opening Pandora's box [with regard to Alaska
North Slope (ANS) gas].
REPRESENTATIVE CHENAULT said he'd look into it.
REPRESENTATIVE ROKEBERG suggested that if ANS gas goes through a
non-LNG pipeline "over the highway," there is an issue of
potential in-state petrochemical value-added manufacturing,
which could have an impact on the whole financing of a gas
pipeline. He cautioned against doing something that
inadvertently would even slightly impact that, and yet expressed
the desire to accommodate [Agrium] as a "fine member of the
Alaska business community and a job provider of high-paying,
non-Wal-Mart jobs."
Number 2720
CHAIR KOHRING suggested that there would be incredible economic
benefits [to HB 57], particularly to Kenai. He expressed
appreciation for [Agrium's] investment in the community, as
highlighted in a handout in committee packets: 700 jobs; $90
million in expenditures in the Kenai area that involve 118
different companies; production, including value-added products,
of $190 million annually; and that it is the third largest
private employer on the Kenai Peninsula. He said the goal of
this legislation is to help this company and future companies of
this nature to feel that they can operate profitably in Alaska,
resulting in a great stimulus to the economy. He suggested that
the committee needs to draw that line with regard to what is
being given up in terms of future state revenues versus
potential economic benefits. After receiving the explanation
for DNR's fiscal note, he said, the committee needs to decide
whether the gain is enough to offset any loss.
Number 2661
REPRESENTATIVE FATE asked Mr. Nugent whether he was free to tell
the committee what the company's needed return on investment is
relative to the percentage of netback, and what percentage
[Agrium] would pay to stabilize that gas price to the company.
He said he understood the calculations [in the fiscal note],
although he didn't know what figures had been used [as a basis].
He said it relates to how gas is priced, which is "at the
netback." He elaborated:
Have you figured out what percentage of the present
netback they're enjoying as a profit to the present
facility? Are you prepared to ... equate a certain
percentage to stabilize that ...? So, are you allowed
to compute what your new return on investment would
have to be if you stabilized that at a lower price
and, therefore, a lower netback to the producers ...
who eventually make the money?
Number 2571
REPRESENTATIVE FATE, in response to Mr. Nugent, further
clarified his question by posing a situation in which [a
producer] has a wellhead price of $3.50 per Mcf and sells it to
Agrium at $5.50 per Mcf; the netback is $2.00. If Agrium wants
to stabilize that price over the long term at $4.50 and "tap out
of it" 20 Mcf, that leaves the producer 80 Mcf at a lower price
than the $5.50; therefore, the netback to the producer is about
$360, whereas before it was $550. That is where the state would
realize its loss, he said. The only way the state wouldn't
realize a loss is if the price were stabilized at the $5.50. If
the price of gas went up then, which it may, the state again
would take a loss, he suggested, saying it is really based on 1)
the price of gas at the market, 2) the netback, and 3) how much
royalty gas is taken out, because it is taken out in kind,
"which is another argumentative issue in the gas industry."
CHAIR KOHRING asked Mr. Nugent whether that had provided
clarification to the point where he could answer.
MR. NUGENT replied:
I think somewhat. I think ... what's important to
understand, the situation we might be in, just say we
were paying $1.50 for state royalty gas now, for
discussion purposes; so the state isn't losing any
money in that situation. Then someone comes along and
... pays a much higher price - say, the $5.50. What
the current law would do, then, would ratchet up all
the state royalty gas we presently purchase to that
new value. And in that particular case, we couldn't
be able to afford that gas, so we wouldn't buy any of
it. ... We weren't paying the difference in the first
place between the $5.50 and the $1.50. So I think in
that extreme example, then, what ... the state would
... lose if we couldn't buy it anymore, they'd lose
the $1.50 we were paying in the first place, and they
wouldn't make any sale, then, to our facility at
$5.50.
Number 2372
REPRESENTATIVE ROKEBERG said he appreciated Representative
Fate's line of thinking, but that Mr. Nugent's point is
important: at some point [Agrium's] operation will be
unprofitable, and it will stop buying [gas] and shut down
operations. Looking at the big picture of taxation and
benefits, he said there is no question Agrium pays local and
borough taxes, as well as state corporate income tax,
presumably. In terms of total benefit, he suggested the need to
take into account not only potential foregone royalty payments
to the state, but also the potential loss of "other revenue
sources in a more broad manner." He proposed looking beyond the
fiscal note, therefore, for an economic analysis. He mentioned
impact to the community, employment levels, and federal [income
tax] as far as public benefits.
CHAIR KOHRING agreed with the need to weigh the economic
benefit. He added that he doesn't necessarily see this as a
loss to the state, just less revenue generated from sale of the
gas, countered by a gain in economic benefit; furthermore, local
governments will be improving their tax bases and so forth. He
said he does support the legislation.
Number 2230
CHAIR KOHRING asked whether there were further questions or
comments. Hearing none, he announced that HB 57 would be held
over in order to hear from [the Division of Oil & Gas] about the
fiscal note.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at
4:25 p.m.
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