02/06/2003 03:17 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 6, 2003
3:17 p.m.
MEMBERS PRESENT
Representative Vic Kohring, Chair
Representative Mike Chenault, Vice Chair
Representative Hugh Fate
Representative Lesil McGuire
Representative Norman Rokeberg
Representative Harry Crawford
Representative Beth Kerttula
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE BILL NO. 69
"An Act relating to regulation of shallow natural gas leasing
and closely related energy projects; and providing for an
effective date."
- MOVED HB 69 OUT OF COMMITTEE
HOUSE BILL NO. 16
"An Act amending the standards applicable to determining
whether, for purposes of the Alaska Stranded Gas Development
Act, a proposed new investment constitutes a qualified project,
and repealing the deadline for applications relating to the
development of contracts for payments in lieu of taxes and for
royalty adjustments that may be submitted for consideration
under that Act; and providing for an effective date."
- HEARD AND HELD
PREVIOUS ACTION
BILL: HB 69
SHORT TITLE:REGULATION OF SHALLOW NATURAL GAS
SPONSOR(S): REPRESENTATIVE(S)KOHRING
Jrn-Date Jrn-Page Action
01/29/03 0086 (H) READ THE FIRST TIME -
REFERRALS
01/29/03 0086 (H) O&G, RES
01/31/03 0108 (H) COSPONSOR(S): HEINZE
02/05/03 0135 (H) COSPONSOR(S): MORGAN
02/06/03 (H) O&G AT 3:15 PM CAPITOL 124
BILL: HB 16
SHORT TITLE:STRANDED GAS DEVELOPMENT ACT AMENDMENTS
SPONSOR(S): REPRESENTATIVE(S)FATE
Jrn-Date Jrn-Page Action
01/21/03 0035 (H) PREFILE RELEASED (1/10/03)
01/21/03 0035 (H) READ THE FIRST TIME -
REFERRALS
01/21/03 0035 (H) O&G, RES, FIN
01/21/03 0035 (H) REFERRED TO OIL & GAS
02/06/03 (H) O&G AT 3:15 PM CAPITOL 124
WITNESS REGISTER
JACK EKSTROM, Director
Government Affairs
Evergreen Resources, Inc.
Denver, Colorado
POSITION STATEMENT: Answered questions on HB 69.
MARK S. SEXTON, President and Chief Executive Officer (CEO)
Evergreen Resources, Inc.
Denver, Colorado
POSITION STATEMENT: Testified in support of HB 69 and answered
questions.
JOHN TANIGAWA, Alaska Projects Manager
Evergreen Resources Alaska
Wasilla, Alaska
POSITION STATEMENT: Answered questions on HB 69.
CAMILLE OECHSLI TAYLOR, Chair
Alaska Oil and Gas Conservation Commission
Anchorage, Alaska
POSITION STATEMENT: Answered questions pertaining to HB 69.
ROGER MARKS, Petroleum Economist
Economic Research Section
Tax Division
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: During hearing on HB 16, provided an
extensive history of the Alaska Stranded Gas Development Act;
said the department generally supports the bill, but that the
administration may submit some amendments about which he didn't
have specific knowledge.
JOE MARUSHACK, Vice President
Alaska North Slope Gas Commercialization
ConocoPhillips Alaska
Anchorage, Alaska
POSITION STATEMENT: Urged passage of HB 16; cautioned that any
amendments or modifications may unintentionally result in
delays; said Version H appears to do what his company needs,
which is to remove the date and allow a natural gas pipeline,
but expressed concern that Section 2 appears somewhat contrary
to commercial negotiations.
KEN KONRAD, Senior Vice President
BP Exploration (Alaska) Inc.
Anchorage, Alaska
POSITION STATEMENT: Testified on HB 16; highlighted the need
for the state to work with industry to develop a fiscal
framework for gas which provides confidence that the rules of
the game won't change later; said reauthorizing the Alaska
Stranded Gas Development Act is a good idea and that if the bill
advances, it should retain its focus and simplicity.
MARK MYERS, Director
Division of Oil & Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Answered questions on HB 16, Version H.
ACTION NARRATIVE
TAPE 03-3, SIDE A
Number 0001
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 3:17 p.m. Representatives Kohring,
Chenault, Fate, and McGuire were present at the call to order.
Representatives Rokeberg, Crawford, and Kerttula arrived as the
meeting was in progress.
HB 69-REGULATION OF SHALLOW NATURAL GAS
CHAIR KOHRING announced the first order of business, HOUSE BILL
NO. 69, "An Act relating to regulation of shallow natural gas
leasing and closely related energy projects; and providing for
an effective date."
Number 0111
CHAIR KOHRING, sponsor of HB 69, informed members that HB 69 is
intended to help the shallow natural gas industry in
streamlining regulations and making it easier for companies to
obtain permits more expeditiously. Typically, it takes about
one to two years to be issued a permit to drill for natural gas,
he reported; the bill is intended to streamline it to 30 to 60
days, thus reducing paperwork and costs.
CHAIR KOHRING said the bill separates two kinds of permitting
that currently are under one umbrella. Now, operators drilling
shallow gas wells are subject to the same rules and regulations
as for big operators that drill for the "deep oil wells" on the
North Slope, for example. Offering his belief that there is no
clear comparison between the two, he said the bill separates
them by giving the Alaska Oil and Gas Conservation Commission
(AOGCC) and other agencies the ability to grant variances and
bypass some drilling regulations that aren't applicable to
[those drilling for shallow gas].
CHAIR KOHRING offered his belief that the legislation will help
to greatly expand the shallow natural gas industry. Mentioning
that there are several interested companies in the state, he
said Evergreen Resources, Inc., is "very aggressively
operating"; he thanked representatives from that company for
being on teleconference or present to testify. Citing the coal
bed methane potential in many villages throughout Alaska, he
said he'd been told that as many as 35 villages could benefit
from this; because of the ability to drill wells more
expeditiously and tap into those potential gas resources, the
net effect would be a much cheaper fuel source than diesel,
taking pressure off the power cost equalization program.
CHAIR KOHRING described this as good economic-development bill
that encourages more growth in this particular industry and
streamlines the process. He pointed out that this particular
type of gas drilling is low-impact environmentally, using so-
called air drilling that reduces toxic wastes because the wells
are drilled at very shallow depths and don't require the use of
toxic materials such as drilling mud.
Number 0494
REPRESENTATIVE FATE referred to [paragraph (1), beginning on
page 1, line 14], which read in part: "(1) the professional
staff member or the commission may approve the variance if". He
asked whether this mandates that it has to be a staff member, or
whether the language implies that "the commissioner can ...
authorize anybody from his staff to do it." He said it is a
technical question of procedure.
CHAIR KOHRING offered his belief that the [AOGCC] commissioner
would make that final decision, although staff could provide
advice and do research. He added that it wouldn't be a decision
by one [AOGCC] member, but a decision by a quorum of the three-
member [commission], which therefore would require at least two
members. Noting that someone in the audience [although not from
AOGCC] was nodding, he surmised that he'd answered correctly.
REPRESENTATIVE FATE requested clarification. He expressed
concern that in the future, if there were some conflict or
misunderstanding, there could be a question raised if the
commissioner [had relegated it to a staff member]. He said it's
a small thing but could loom large later on.
CHAIR KOHRING requested that a representative from Evergreen
Resources, Inc., provide an answer, but suggested the likely
need to make the change because it clearly says "the
professional staff member or the commission".
Number 0713
REPRESENTATIVE FATE moved to adopt the foregoing as Amendment 1.
REPRESENTATIVE ROKEBERG asked what commissioner [Representative
Fate] was discussing.
CHAIR KOHRING clarified that it is the [Alaska] Oil and Gas
Conservation Commission. He pointed out that line 14 references
"the commission" rather than a commissioner. He recommended
that Amendment 1 do the following:
Page 1, line 14:
Delete "the professional staff member"
Thus it would say [if "or" were removed as well] "the commission
may approve the variance".
REPRESENTATIVE FATE concurred with having that be Amendment 1.
Number 0775
REPRESENTATIVE ROKEBERG objected for discussion purposes. He
asked whether the intention is to have the whole commission vote
on something, or whether it is a "sign-off or approval."
CHAIR KOHRING offered his understanding that the commission
would have to sign off on it, but reiterated his understanding
that a quorum of two members, at minimum, of the three-member
commission would have to sign off on a variance.
REPRESENTATIVE ROKEBERG withdrew his objection.
Number 0835
CHAIR KOHRING, hearing no further objection, announced that
Amendment 1 was adopted.
Number 0848
REPRESENTATIVE KERTTULA referred to page 2, line 4, subparagraph
(B) [which also says "the professional staff member or the
commission"]. She requested testimony on whether a similar
amendment was needed there.
Number 0960
JACK EKSTROM, Director, Government Affairs, Evergreen Resources,
Inc., came forward at the invitation of Chair Kohring. He told
the committee that AOGCC's practice typically is to "informally
approve this without taking a formal vote," but will hold a
formal vote if there is conflict. He offered his belief that
[the language on page 2, line 4] should be changed to say "the
commission". He added, "How exactly they do it is generally
worked out among themselves, but I don't think, in this case,
you'd want to designate a staff member ... as a substitute for
the commission."
REPRESENTATIVE KERTTULA pointed out [language with regard to the
professional staff of the commission designated by the
commission] on page 1, lines 9-10. Mentioning consistency, she
asked whether the idea envisioned was to allow the professional
[staff] member to do the work, which the commission would
approve or not approve. She said she wasn't sure whether the
language was correct, and asked to have that clarified on the
record along with a recommendation.
CHAIR KOHRING suggested hearing from Evergreen Resources, Inc.,
before taking further action on amending the bill.
Number 1156
MARK S. SEXTON, President and Chief Executive Officer (CEO),
Evergreen Resources, Inc., testified in support of HB 69. He
informed members that his company owns Evergreen Resources
Alaska as a wholly owned subsidiary. He told members:
Evergreen is a Denver, Colorado-based independent
energy company. We are principally focused on
developing and expanding nonconventional natural gas
properties throughout North America. We are
recognized as an industry leader in drilling,
completion, and production of ... unconventional
natural gas wells such as coal bed methane.
In the Raton basin, Evergreen operates 950 coal bed
methane wells, which typically produce around 300,000
to 350,000 cubic feet of gas per well per day at their
peak. The company has actually more than 1.25
trillion cubic feet of proven natural gas reserves in
the Raton basin of southern Colorado, essentially all
coal bed methane, and we've developed all of this just
in the last eight years. ...
Evergreen is a public company traded on the New York
Stock Exchange under the symbol "EVG." A typical
Evergreen well will produce for about 25 to 30 years,
making these some of the most long-lived wells in
industry.
Number 1223
MR. SEXTON noted that the company's Alaskan operations are
focusing on the shallow gas resources, particularly coal bed
methane extraction. He said Alaska's coal bed methane resource
is almost mind boggling - an estimated approximately 1,000
trillion cubic feet of natural gas, enough to supply all of the
United States' natural gas demands for eight years at the
present rate of consumption, "if you could get that gas out, of
course." He added, "There are additional substantial,
unconventional tight gas sand resources that would also benefit
from the subject legislation that we are discussing as well."
MR. SEXTON reported that in 2001 the company acquired a 100-
percent working interest in the Pioneer Unit, about a 70,000-
acre leasehold near Wasilla, and two months ago completed its
first phase of operations: two pilot drilling pods of four
wells each, for eight wells total, each in a span of less than
two days. Suggesting this may be a record for the number of
wells drilled in Alaska in a certain amount of time, he also
noted that the company's water-disposal well was recently
permitted by the AOGCC. "And we anticipate completing and
testing our wells in the spring of this year," he added.
Number 1273
MR. SEXTON reported, however, that permitting and leasing have
been a challenge, including unique state and local requirements.
In Colorado, for example, permitting requires about 15 pages of
documents and usually no more than about 30 days. In Alaska
that period is extended significantly, not because of
regulators, he said, but because of regulations. He remarked
that AOGCC has been most helpful and cooperative, and has gone
the extra mile, including visiting the company's operations in
Colorado and gaining a great depth of understanding of [the
company's] methodology and coal bed methane practices in
general; he thanked them for the assistance and the positive
relationships. He offered a similar observation regarding the
[Department] of Natural Resources, which he said has been
cooperative and helpful and has provided constructive and
instructive assistance.
Number 1404
MR. SEXTON explained that the core issue - and the reason for
the company's vigorous support of HB 69 - is that the permitting
regime in Alaska is designed for deep, high-pressure, typically
offshore operations, not the shallow, low-pressure resource that
his company seeks to develop. He said regulations designed for
highly directional, high-pressure wells drilled from offshore
platforms and drill sites on the North Slope make no sense for
these "modified water wells." He likened it to regulating a
pickup truck with rules designed to regulate an 18-wheeler. He
further said:
I believe this technology and resource hold tremendous
promise for Alaska, both in terms of its potential
and, ... I believe, our ability to extract it. Once
established, it can provide an inexpensive and safe
method of powering rural Native villages, as well as
serving the larger Anchorage and Mat-Su Valley
communities. This would obviate the need ... for
transporting expensive fuels by hazardous means to
Alaska's remote citizens, and would also do quite a
bit to help the declines in the Cook Inlet that we've
all been seeing over the last few years, which is
natural, since these fields have been online for 30,
40 years or more.
Number 1494
MR. SEXTON concluded by offering his view that HB 69 would
ensure that the AOGCC and its professional staff have the
authority and discretion necessary "to regulate projects like
ours" in an appropriate manner that is suited specifically to
the nature and characteristics of shallow natural gas
development projects, and yet still maintains "the protections
for human and wildlife safety and the environmental concerns
that are important to all of us."
Number 1534
CHAIR KOHRING noted that one well drilled by the company is down
the street from where he lives. He expressed excitement about
the potential this kind of drilling represents, and said he
would like to see other companies do likewise.
REPRESENTATIVE ROKEBERG asked whether anyone from AOGCC was
available to testify.
CHAIR KOHRING said no, although Mark Myers [director of the
Division of Oil & Gas] was available to answer questions. He
said two [AOGCC] commissioners had hoped to be available but
were making a presentation before [the House Finance Committee].
Number 1621
REPRESENTATIVE ROKEBERG returned to the issue of amending the
bill. He referred to the legal opinion [dated January 29, 2003]
from Jack Chenoweth, Assistant Revisor of Statutes [in committee
packets], which he said indicated that the original bill, before
that day's amendment, allows a grant of authority by the
commission to professional staff. He questioned whether the
committee was doing the right thing [by amending the bill].
REPRESENTATIVE FATE indicated that if [allowing the staff to
act, which Amendment 1 deleted] is what [AOGCC] would like, the
amendment should be reconsidered. He concurred with the need to
hear from AOGCC.
REPRESENTATIVE ROKEBERG suggested that nothing prohibits the
commission from granting authority to the staff, even with the
deletion [in Amendment 1]. He deferred to Representative
Kerttula, noting her legal background.
Number 1734
REPRESENTATIVE KERTTULA explained that normally variances are
done by delegation to staff, because it is a de minimis thing.
Noting that if the references to staff are removed from the
bill, the committee could say it doesn't want to foreclose the
commission's ability to do this, she proposed the need to clear
up exactly what is intended.
REPRESENTATIVE ROKEBERG suggested it would be helpful to find
out exactly how [AOGCC operates] and what the commission prefers
so that the language doesn't go counter to the commission's
current methods of operation or legal requirements.
CHAIR KOHRING noted that lawyers had worked with various folks
including Mr. Chenoweth in crafting this legislation, and that
there may be a valid reason to have [staff included].
Number 1826
REPRESENTATIVE ROKEBERG indicated to Mr. Sexton that his biggest
concern is whether HB 69 will be helpful enough to the company,
rather than taking a more detailed look at the regulatory
regime; he inquired about that. Emphasizing that Alaska's
regulatory design is based on larger, more traditional, deep-
hole operations, Representative Rokeberg noted that he was a
sponsor of the original legislation and is very sensitive to the
company's ability to operate.
MR. SEXTON thanked Representative Rokeberg for that far-sighted
question. He responded:
We're really not trying to change, wholesale, the
regulatory environment in Alaska. I think the
regulators do a good job, but I think they have been
hamstrung because of regulations that were designed
for a very different type of drilling, ... and for
good reason. And I believe that by giving the
regulatory agencies the discretion they need, ... and
not simply have to follow cookbook and textbook rules
that were written in a very different environment,
with a very different mindset, we believe that we can
work with the regulators if they have the discretion,
because we think they do understand the differences.
Number 1951
MR. SEXTON continued:
I guess our answer is, we'd like to try it this way.
We'd like to try working with the regulators, show
what a good job we can do, and if for some reason it's
not enough, I will be reminded that you made this
comment, and I will wish that ... I had listened more
carefully to your words. But ... at this time the
spirit of this is that we can all get along and work
together as long as we give the regulators the
discretion ... to apply what makes sense to this
particular type of project.
One example I could give you is, ... when we went back
into a water-disposal well, we had to use equipment
and had to obtain equipment that I haven't seen ... in
20 years, since I ... served on platforms offshore
operated by Amoco, and I saw equipment that I have
never seen ... in the Raton basin in Colorado, but we
had to use it: blowout-prevention stacks and those
huge, 10,000-pound-rated manifold of pipes and valves
that was, quite honestly, unnecessary, but those were
what the regulations specifically required, and the
regulators were not able to apply their discretion.
So, ... I guess our answer is, we'd like to try and
work with ... the regulators, as long as they have
that discretion, and if it is not enough, I'll say,
"Mea culpa," and we'll be back asking for something
additional.
Number 2039
REPRESENTATIVE ROKEBERG thanked Mr. Sexton for the candid
answer; he indicated the legislature would watch the situation.
REPRESENTATIVE KERTTULA thanked Mr. Sexton and his staff for
getting to know members personally and providing information up
front. Noting that she'd talked to [Evergreen Resources']
Alaskan staff that afternoon, she offered her understanding that
what triggers this request for a variance is an undue delay.
She asked what Mr. Sexton considers an undue delay, and how long
these kinds of projects normally last in Colorado.
MR. SEXTON replied that Colorado certainly isn't without its own
extensive regulatory rules and practices, but that a well can be
permitted within a 90-day process, even given all potential
objections; that certainly cannot happen in the current
environment in Alaska. For example, when John Tanigawa prepared
permits to drill eight wells [in Alaska], it took enough
paperwork to drill eighty wells in Colorado, and the wells were
drilled six months later than planned. Mr. Sexton said the
company's attitude was to show willingness to work within the
rules, but remarked:
We're here to tell you candidly that we can't get our
job done with the existing structure. We simply
cannot gear up and drill what we would like to be able
to drill; we would probably be able to drill 10 or 20
wells a year, but if you would like to see us slowly
build that level to 40 wells, 60 wells, 80 wells, 100
wells - as we have done in the Raton basin in
Colorado, [where] ... we're up to 160 wells planned
this year - we could never attempt to do that in
Alaska under the existing regulatory environment.
Number 2228
REPRESENTATIVE KERTTULA remarked that other variances with which
she is familiar are from "the other resource agencies," and
usually are for small and insignificant projects. She noted
that [under the bill], to her reading, there wouldn't be any
size restriction because a single field could be very large in
acreage. She asked: Will there be any public notice given, or
conceivably could there be a very large project that has no
public notice?
MR. SEXTON responded:
Well, that's an interesting question in that, I
believe, we have already given public notice. If
there is anyone in the state that John Tanigawa hasn't
met, it would be surprise to me. But ... I think
everyone is aware of what we're trying to do. ... I
think one of the things we're particularly proud of is
that you can drive through the middle of our field ...
in southern Colorado - an area with quite a bit of
topography and hills - and not see the field. You
don't even realize you're in the middle of it. That
would be even easier to accomplish ... in Alaska, ...
given the terrain and the topography, and it being
fairly flat, and our ability to use trees ... and
natural cover, which ... we intend to do.
As far as the public notice, we are required to notify
landowners when we drill, and we expect to continue to
notify landowners.
Number 2308
REPRESENTATIVE KERTTULA surmised that a requirement of
notification to landowners wouldn't be wiped out by this
[legislation]. She said her fundamental concern is to ensure
that there is some notice.
MR. SEXTON deferred to Mr. Tanigawa for more specific comments.
REPRESENTATIVE KERTTULA explained her concern, that the mineral
subsurface is still owned by the state and technically the state
- not the person whose property it could be on - is making the
deal. She asked whether that is correct.
Number 2353
JOHN TANIGAWA, Alaska Projects Manager, Evergreen Resources
Alaska, concurred. He pointed out that the Department of
Natural Resources (DNR) has several public-notice provisions for
anything that impacts the landowner. [This legislation] refers
to something specific such as an exception for something
engineering-based. The desire is to be able to accomplish such
exceptions relatively easily. Mr. Tanigawa also pointed out
that the domain of these exceptions is in the purview of the
AOGCC, which is basically how oil and gas wells are operated.
REPRESENTATIVE ROKEBERG said he shares Representative Kerttula's
concerns with regard to proper notification of the public. He
related his belief that this legislation doesn't change any
notice provisions. He asked if there is notification when
establishing a unit in which to operate.
MR. TANIGAWA answered in the affirmative.
REPRESENTATIVE ROKEBERG pointed out that generally the primary
notice provisions would take place during the unitization
hearing, which would alert all landowners to the activity. That
would be followed by notification that the pad would be
established and [drilling would be done].
MR. TANIGAWA affirmed that.
Number 2445
CHAIR KOHRING noted the arrival of Dan Seamount and Cammy Taylor
from the Alaska Oil and Gas Conservation Commission (AOGCC).
Chair Kohring pointed out that passage of this bill provides
AOGCC with a tool that allows them to better work with the
industry and speed the process of issuing permits. He directed
attention to page 1, line 14, and asked Mr. Seamount and Ms.
Taylor if it's appropriate to strike the language referring to
giving authority to "professional staff" to make decisions on
granting variances. He asked whether decisions regarding
granting variances should be left to the [AOGCC] commission
members only.
REPRESENTATIVE ROKEBERG pointed out that [similar] language also
occurs on page 2, line 4, and page 2, lines 8-9.
The committee took an at-ease from 3:58 p.m. to 4:01 p.m.
Number 2568
CAMILLE OECHSLI TAYLOR, Chair, Alaska Oil and Gas Conservation
Commission, explained that currently AOGCC has a regulatory
scheme in which an operator on short notice [may] receive oral
approval from the commission. In practice, that has been one of
two petroleum engineers who share on-call duties for operations
that are ongoing, after hours, and during the weekend.
Furthermore, the regulation requires the operator to submit the
formal paperwork for commission approval by the following day.
MS. TAYLOR said the commission has a tremendously professional
and competent technical staff. Currently, when there is an
ongoing situation, the [professionals] have kept the
commissioners abreast of what is going on. She explained, "It
allows for the opportunity for someone who is out there
conducting an operation that, but for time, would cost a lot of
money for someone waiting for office hours to open and for all
three commissioners to be together." Therefore, she said she
reads the bill as allowing the designation to be by the
commissioners and that the commissioners would have the
decision-making authority.
CHAIR KOHRING asked if the language "designated" on page 1, line
10, should carry through the entire legislation.
REPRESENTATIVE FATE said he would like that.
Number 2707
REPRESENTATIVE ROKEBERG moved that the committee rescind its
action in adopting Amendment 1. There being no objection, it
was so ordered.
CHAIR KOHRING asked if the committee wanted to insert the
language "designated" [page 1, line 14, page 2, line 4, and page
2, lines 8 and 9] so that any professional staff member would be
allowed to make a decision on variances if so designated by the
commission.
REPRESENTATIVE ROKEBERG responded that he thought it would be
redundant and unnecessary. He then noted that the committee's
intention is that they all be designated.
CHAIR KOHRING inquired as to the will of the committee. He then
announced his understanding that the committee wished to leave
the bill as it is.
Number 2802
REPRESENTATIVE FATE stated that he was fine with it as long as
the record reflects [the intent], and so that it "doesn't come
back and haunt us" that some professional staff makes a wrong
decision and then the public says the job wasn't done properly.
Representative Fate added, "Just so the record is clear that you
[AOGCC] have the authority to commission any professional staff
to make those decisions, I'm happy with it."
REPRESENTATIVE ROKEBERG inquired as to AOGCC's procedure when
those [professionals] are designated.
MS. TAYLOR answered that it has been relatively informal.
Therefore, having something that specifies the process is
important.
REPRESENTATIVE ROKEBERG pointed out that this section requires
that AOGCC designate, presumably, a member of staff. Therefore,
a more formal action is implied.
CHAIR KOHRING said that was related to his question regarding
whether that would carry forward throughout the bill.
Number 2889
REPRESENTATIVE KERTTULA inquired as to the public notice that
will be required when variances are granted, and what will be in
place for these fields.
MS. TAYLOR responded that generally AOGCC's practice is to
provide for the exception for technical issues right in the
language of the regulation. The original legislation - the
conservation Act - requires AOGCC to issue permits promptly if
they comply with all of the regulations. Therefore, the goal of
AOGCC has been to clearly articulate the requirements so that
operators understand what is required and it is fairly smooth
for the approval process. The regulation itself actually
articulates the standard for obtaining a variance, and the
language of the regulation basically parallels that in this
legislation, which says that "there is an equally effective
means of accomplishing the same or demonstration that the risk
it would have required that particular standard for doesn't
exist."
MS. TAYLOR noted that the regulations contain a few areas in
which that provision wasn't included, because at the time of
drafting there may not have been a need for it due to the
technology available. She pointed out that a generic regulation
addresses drilling and well-control exceptions for new
technology. [Not on tape, but taken from the Gavel to Gavel
recording on the Internet, was that the exception didn't go so
far as to capture Mr. Tanigawa's example of gas-detection
equipment, for instance. Ms. Taylor said some of that can be
fixed with this same standard. She added, "I'm not sure if this
was intended to apply as an exception where other parties' -
other owners' - interests might be impacted. That was not the
way we read it." She asked that the committee explain it if
that weren't the case, and mentioned that an exception relating
to an external boundary might need it, however.]
TAPE 03-3, SIDE B
Number 2980
REPRESENTATIVE KERTTULA surmised, then, that there has already
been a public notice and the landowner already knows that this
activity is ongoing; therefore, this is an exemption for a
variance for something technical that really isn't going to
impact the overall operation. She said all she wanted to know
was that those who are being effected have some notice early on.
MS. TAYLOR related her understanding that the types of variances
being discussed [in HB 69] are technical conservation issues and
waivers from general statewide standards - not for those
regulations impacting other owners, which would require notice.
Number 2897
REPRESENTATIVE ROKEBERG asked if this legislation goes far
enough in overcoming the problems that have developed vis-à-vis
the administrative regulations for shallow gas operations versus
more typical commercial drilling operations. He asked if the
bill provides enough tools for AOGCC to make those distinctions.
MS. TAYLOR mentioned that [AOGCC] just learned of this
legislation at the end of last week and hasn't had time to
address some other issues. However, AOGCC holds the position
with respect to all oil and gas drilling in the state that the
commission's regulations should be directly tied to the risk
that it's trying to manage, she related. There shouldn't be a
requirement that doesn't directly relate to what AOGCC is trying
to accomplish. Therefore, the approach in [HB 69] mirrors what
AOGCC generally attempts to do. However, she acknowledged that
AOGCC's regulations have historically been aimed at conventional
oil and gas drilling. "To the extent that we're aware of the
problems that have been raised or pointed out to us, we think
that this accomplishes that," she added.
Number 2822
REPRESENTATIVE FATE suggested putting the staff issue to rest.
He turned attention to AS 31.05.023(a), "The commission shall
employ such staff as it considers necessary to carry out its
responsibilities" and decisions as may be delegated. He said
that takes care of it.
CHAIR KOHRING closed the public hearing.
Number 2767
REPRESENTATIVE FATE moved to report HB 69 out of committee with
individual recommendations and the accompanying zero fiscal
note(s). There being no objection, HB 69 was reported from the
House Special Committee on Oil and Gas.
HB 16-STRANDED GAS DEVELOPMENT ACT AMENDMENTS
CHAIR KOHRING announced that the final order of business would
be HOUSE BILL NO. 16, "An Act amending the standards applicable
to determining whether, for purposes of the Alaska Stranded Gas
Development Act, a proposed new investment constitutes a
qualified project, and repealing the deadline for applications
relating to the development of contracts for payments in lieu of
taxes and for royalty adjustments that may be submitted for
consideration under that Act; and providing for an effective
date."
Number 2728
REPRESENTATIVE McGUIRE moved to adopt Version 23-LS0101\H,
Chenoweth, 2/6/03, as the work draft. There being no objection,
Version H was before the committee.
Number 2711
REPRESENTATIVE FATE, sponsor of HB 16, explained that the bill
is a reauthorization of the Alaska Stranded Gas Development Act
{"the Act") with amendments. The purpose of the Act is to allow
negotiations between producers and the State of Alaska. The
legislation proposes new language for what is a qualified
project. It allows all forms of natural gas through the
pipeline, including gas-to-liquids (GTLs), liquefied natural gas
(LNG), and natural gas; the Act, by contrast, allowed just LNG,
to his recollection. It isn't route-specific, he noted, since a
lot of bills and resolutions from the previous legislature dealt
with that subject. Most important, he said, it repeals the
deadline for application. He told members that even though the
previous version allowed for other investors, the bill specifies
that Alaskan businesses or corporations can "go into this
pipeline with equity up to 10 percent" [of the estimated cost of
constructing a qualified project], and it allows generically for
the market to be either domestic or foreign.
Number 2580
REPRESENTATIVE ROKEBERG recalled working on the Alaska Stranded
Gas Development Act several years ago in the House Special
Committee on Oil and Gas, and that one bone of contention was
what type of product it would cover and the prohibition of GTLs
by the Act. Alluding to Section 2 of Version H, he asked
Representative Fate about his intention on contract development
with regard to Alaska-based businesses, as well as the rationale
behind having equity not exceed 10 percent.
REPRESENTATIVE FATE responded that the provision for Alaskan
business interests is to encourage Alaskan businesses with the
capability and which can become qualified to enter into this.
Nothing would prevent a corporation that can qualify from
participating, he said, whether it is a Native corporation, a
combination of Native corporations, or a combination of Alaska-
based banks. With regard to the 10 percent, he said it is not
just a negotiating tool, but is simply because he surmises that
the producers don't want to exclude anyone but don't want to
dilute their ownership to the extent that it becomes
unprofitable and inhibits construction of a pipeline.
Number 2445
REPRESENTATIVE ROKEBERG acknowledged the need to hear from
witnesses, but said he interpreted that [limit of 10 percent] as
restricting the pipe size and companies' ability to participate.
He offered his understanding that nothing in the [Act] restricts
any Alaska-based company from participating; therefore, the
[new] language is redundant and just says such a company
couldn't have more than 10 percent of the equity. He asked
whether that was Representative Fate's intention.
REPRESENTATIVE FATE answered, "It was the intent to encourage,
... so that there's not too big of ... participation you might
see by somebody of the Alaskan -- unless, of course, they can --
you're right: maybe they can come in with more than 10 percent.
Maybe they can take all the risk."
REPRESENTATIVE ROKEBERG asked whether, then, [BP Exploration
(Alaska) Inc.], an Alaska-based company, could only invest 10
percent.
REPRESENTATIVE FATE agreed with Representative Rokeberg's
observation about redundancy, but said he wanted to make it
clear that Alaskan businesses can invest in this if they
qualify.
Number 2355
CHAIR KOHRING pointed out that part of the Act, AS 43.82.110,
stipulates the conditions under any group can be considered a
candidate for potential ownership in the gas pipeline. He said
he, too, wondered about adding that 10 percent provision.
REPRESENTATIVE FATE again acknowledged the redundancy and said
the provision is to encourage Alaskans to participate.
Number 2299
CHAIR KOHRING referred to the fact that [the existing language
of the Act set forth in Section 2 of Version H] says the
commissioner may develop a contract that includes [various
terms, including the new terms of paragraph (5) that discuss
Alaska-based corporations or businesses and the 10 percent
provision]. He expressed concern that it seems to give the
commissioner authority to make those decisions when the owners
of the pipeline may not concur with the commissioner's decision.
REPRESENTATIVE FATE responded that at one time he'd planned to
take it out, but had decided to leave it in, because it might be
a stimulus to help propel the pipeline forward, and because it
gives a clear point to start from for negotiating with regard to
either an Alaska-based business or even the financiers of the
pipeline. "And we've labored long and hard with the staff and
other people from the industry to discuss this," he remarked.
He concluded, "We'll wait and see at the end of the day ... what
we will do with that 10 percent."
Number 2203
REPRESENTATIVE KERTTULA noted that the original Act was to
encourage development of North Slope gas and to add a timeline
for development. With Version H, however, it appears to be "all
gas, anywhere at any time." She questioned whether that
broadness is intended, with no expiration date and no sidebars
on where [the gas] goes or where it's from.
REPRESENTATIVE FATE agreed that it is broad and leaves the route
and types of natural gas open-ended, which he said is intended
to stimulate development of the gas pipeline in a more rapid
fashion.
Number 2028
REPRESENTATIVE KERTTULA questioned the incentive if there is no
expiration date. She expressed concern about when this would
have to occur and what the incentive really would be. She
observed that the royalty [may be included in the contract in
the Act, Section 2 of Version H] and suggested that may be the
only incentive.
Number 2008
REPRESENTATIVE ROKEBERG referred to subparagraph (C) on page 2
[Section 1 of Version H], noting that it mentions "any other
technology", which Representative Fate had said may apply to
GTLs. Representative Rokeberg recalled the argument in 1998
[when the Act was passed] that it should be restricted because
it is a disincentive to build a gas line. He said the bill
really opens up that debate, which may be the proper one to have
again because of technological changes and other considerations.
He requested testimony from witnesses about that.
Number 1928
REPRESENTATIVE CRAWFORD referred to Representative Kerttula's
question and said it seems [Version H] is worded so that it
could apply to even a very small project, rather than relating
to just a gas pipeline from the North Slope. He asked whether
that is the intent.
[Representative Fate responded by saying the intent is "to
latitude 64 North." He later corrected his statement because
the original version of HB 16, not Version H, referred to "the
area of the state lying north of 64 degrees North latitude".]
Number 1809
ROGER MARKS, Petroleum Economist, Economic Research Section, Tax
Division, Department of Revenue, noted that he'd worked on the
Act in 1998 and therefore had some familiarity with its history,
intent, and mechanics. He pointed out that the department had
provided a three-page overview [in addition to the analysis] as
part of its fiscal note [for HB 16].
REPRESENTATIVE ROKEBERG observed that [the fiscal note] is about
half a million dollars.
Number 1693
REPRESENTATIVE KERTTULA asked Mr. Marks whether the department
had looked at possible loss to the state in terms of royalties.
She also asked that he discuss the original intent of the Act.
MR. MARKS, who was participating via teleconference, said he
hadn't heard the first question and so began addressing the
history. He explained that in 1997 the legislature passed
HB 250, which established a North Slope gas commercialization
team in the administration to research and recommend changes to
the state law to encourage commercialization of North Slope gas;
under HB 250, the administration was supposed to issue a report
to the governor by February of 1998. That team did the research
and concluded that the North Slope gas commercialization project
faced considerable risks. Because of the size of the project
needed to make the gas commercial, there were big cost risks and
gas-price risks to the sponsors.
MR. MARKS told members that, in addition, "we" concluded that
the state's fiscal system actually exacerbated those risks
because of three general characteristics. The first was
uncertainty: a very high-cost project with marginal economics
could be feasible under a certain fiscal system and built under
that system, but that system could be changed by statute, which
would suddenly make the project not feasible after it was built.
MR. MARKS explained the second risk, the so-called regressive
tax system for production tax and royalties. When profits are
high, [the state] gets a small share of the profits; when
profits are low, it gets a large share. That exacerbates the
low-price risk to sponsors, he said, because making large
payments to the state when prices are low could increase the
possibility of losing money or not recovering their investment.
MR. MARKS discussed the third risk. The property tax is payable
once construction starts, which could be years before revenue is
generated. On a "time value of money" [basis], it lowers the
sponsors' rate of return and increases the probability that they
won't be able to recover their investment.
Number 1452
MR. MARKS told members that after the team issued its report to
the governor, it worked with the major Prudhoe Bay producers to
develop legislation to deal with those risks. The result was
HB 393, which ultimately became the Alaska Stranded Gas
Development Act, AS 43.82. In general, the law provided a
mechanism for converting the state's fiscal system from a
statutory basis to a contractual basis, which provides for
greater fiscal certainty. The fiscal system would be negotiated
between the administration and the project sponsors; possibly as
part of the terms of the negotiation, a less regressive fiscal
system could be put in place. Mr. Marks noted another problem
with a regressive system: at high prices, the state probably
gets less money than it could.
Number 1362
MR. MARKS discussed the general mechanics of the process. A
sponsor would submit a project plan and application to the
administration; if acceptable under the terms of the Act, the
administration would then begin negotiating the fiscal terms
with the sponsor. Noting that under the Act all tax provisions
in the current statutes would be on the table, Mr. Marks
explained that because the royalty represents the state's
ownership interests, it was the judgment of the administration
that the state should keep the one-eighth - which is 12.5
percent - royalty rate for Prudhoe Bay gas, but that some
royalty provisions could be negotiated, namely, the timing for
taking royalty-in-kind (RIK) or royalty-in-value (RIV)] gas and
the provisions for establishing the valuation method for the
royalty.
MR. MARKS explained that once a contract was negotiated,
preliminary findings would be submitted to the governor; if the
governor chose to proceed, those findings would be given to the
legislature and the public for a 30-day review period. After
that, the commissioner of revenue would modify the contractual
terms as appropriate, and if acceptable to the sponsor; a final
contract would be submitted to the governor; the governor would
transmit the contract to the legislature with the request for
authorization to execute the contract; and the legislature would
vote on it.
MR. MARKS addressed other provisions. Calling the property tax
the bread and butter for municipalities, he explained that
municipalities were concerned about their interests' not being
represented in a negotiation. As part of the Act, therefore, a
municipal advisory group was set up to participate in developing
the contract terms. In addition, there are provisions in the
Act for making gas available to communities; for local hire; and
for dealing with confidential information provided by the
sponsors.
Number 1208
MR. MARKS also pointed out that there was a question of the
constitutionality of the Act as a whole, and whether this
switching to a contract [basis] by one legislature is binding a
future legislature. Noting that Article IX [Section 1] of the
state constitution says that the power of taxation shall never
be surrendered, suspended, or contracted away, Mr. Marks
reported that it was the Department of Law's judgment that [the
Act] was constitutional because it was simply putting fiscal
terms into a contractual form. Certainly, he said, a future
legislature would be able to add tax terms after the contract
was in place, but the contract itself would be "a solemn pledge
or a moral commitment by the state that once it agrees to this
contract, it would not change it." Likening it to "a message to
the future from one legislature to another," Mr. Marks said it
was the administration's position that it wasn't airtight but
was "a strong moral message."
Number 1101
MR. MARKS informed the committee that the Department of Revenue
generally supports HB 16. He added that possibly the
administration would submit some amendments, although he wasn't
aware of what they would be.
Number 1070
MR. MARKS, in response to a question from Representative
Rokeberg, said he'd only had [Version H] for about one-half hour
and hadn't had time to study it.
REPRESENTATIVE ROKEBERG referred to [Section 1], the proposed
amendments to AS 43.82.100 under the heading "Qualified
project." He asked whether the new language in subparagraphs
(A), (B), and (C) would affect the department's fiscal note.
MR. MARKS said he didn't believe so.
Number 1023
REPRESENTATIVE KERTTULA offered her understanding that part of
the intent with the Act was to "try to get the gas going." She
asked Mr. Marks whether the lack of an expiration date [in the
bill] could actually result in some discouragement, and whether
he'd ever looked at the economic picture in terms of whether
having an expiration date would provide motivation.
MR. MARKS said [the department] hadn't looked at that question.
Number 0955
REPRESENTATIVE KERTTULA referred to the regressive nature of the
tax. She asked Mr. Marks whether [the department] has looked at
shifting that tax so that when the return is high, the tax is
high, and when the return is low, the state would "shift
around."
MR. MARKS said that is exactly what was envisioned to be shifted
to. He added, "That's what we call a progressive system, ...
which, again, reduces the risk of low prices to the sponsors and
gives the state the opportunity to make more money when prices
are high."
Number 0917
REPRESENTATIVE KERTTULA asked whether that is what it is
envisioned that the commissioner would negotiate for in the
contract.
MR. MARKS noted that eight principles to strive for in the Act
are listed in existing AS 43.82.210(b). Calling it a blend, he
said some of those "sort of counter each other," but that one
principle - which is one direction negotiation would take - is
that all things being equal, a progressive system is better than
a regressive one.
Number 0793
JOE MARUSHACK, Vice President, Alaska North Slope Gas
Commercialization, ConocoPhillips Alaska, testified that his
company is working hard to commercialize Alaska North Slope
(ANS) gas through development of a gas pipeline from Alaska
through Canada to the Lower 48. Urging passage of HB 16, he
said it is needed so that ConocoPhillips Alaska and others may
initiate formal discussions with the state, leading to a fiscal
agreement on commercialization for ANS gas.
MR. MARUSHACK reported that ConocoPhillips Alaska has pursued a
clear strategy to commercialize ANS gas for more than a year and
a half, including federal enabling legislation to provide a more
timely and certain U.S. permitting and regulatory framework;
federal fiscal legislation that would mitigate the risk of
unexpectedly low gas prices; and state fiscal legislation like
HB 16 that provides a mechanism for his company, the state, and
others to address issues regarding how the gas will be valued,
how it will be taxed, how local impacts will be addressed, and
how development costs will be treated.
MR. MARUSHACK said that since at least 1973, Alaskans and
companies they work for have labored to overcome significant
challenges in bringing Alaskan gas to the market. He cited
challenges of the natural environment such as terrain, climate,
elevation changes, and seasonal construction limits; technical
challenges that have required use of new materials and equipment
specifically constructed for this project; and the nature of
this commodity, with price uncertainty and volatility being at
odds with the huge investment and long-term fiscal commitments
required. On the other hand, he said, Alaskans have a huge
opportunity for additional jobs in construction and operation of
the pipeline, and the state treasury has the prospect of a
significant new revenue stream, funds for additional services.
Suggesting the state's communities have an opportunity to share
in the creation of new wealth, he told members:
The project can become a reality, and the time to move
forward together is now. Passage of HB 16 is the
first step that the Alaskan government could take
towards addressing necessary legislation to move the
gas pipeline project forward. However, I ask caution
regarding any new amendments or modifications that may
have unintended consequences and cause further delays.
We need a clean bill that opens up the stranded gas
Act process, not one that adds challenges. In
closing, ConocoPhillips asks that you pass this
legislation.
MR. MARUSHACK requested clarification as to whether the
committee was addressing HB 16 or [Version H], but said he was
prepared to discuss either.
CHAIR KOHRING clarified that before the committee was Version H.
Number 0531
REPRESENTATIVE CHENAULT asked Mr. Marushack for his thoughts on
Version H and whether it helps or hinders the project.
MR. MARUSHACK answered that he hadn't studied it in great
detail, having received it a few minutes before the hearing, but
that it appears to generally work - and provide what his company
needs it for - by removing the [application deadline] date and
opening up the Act so it addresses a natural gas pipeline.
However, he expressed concern that Section 2 may be somewhat
contrary to commercial negotiations. He said it seems the state
shouldn't dictate who the parties holding an equity interest in
a commercial contract would be. The (indisc.) and the Act
already contemplate that any company can participate if it
brings value to the table. He added:
Any party that brings value to the table is a party
that the companies can probably work with and
negotiate with. I also wouldn't see that it makes
sense ... for anybody who can create value to be
limited to 1 percent, 10 percent, 50 percent. But
those are commercial negotiations. ... We've had some
discussions with certain individuals like this, and we
always give the same message: If there's true value
there, we'll probably going to be able to ... bring
that to the table. If there's really not true value
there, we hate to see activities that would make the
negotiations - and have unintended consequences -
delay this project ... even further.
Number 0381
REPRESENTATIVE McGUIRE asked whether there is any harm in
keeping [Section 2] in there, though.
MR. MARUSHACK acknowledged that his interpretation may be wrong,
but said it appears that individuals may be looking for a
commercial advantage through the legislative process. "And we
don't think that's helpful at all," he remarked. He indicated,
however, that if it lowers the cost and creates a more viable
project, then it creates incremental value and is "a negotiation
that generally leads to success."
Number 0325
REPRESENTATIVE ROKEBERG asked whether ConocoPhillips is an
Alaska-based company.
MR. MARUSHACK answered that Phillips Petroleum Company [which
merged with Conoco Inc. in 2002] was a Delaware corporation with
"branches, if you will," in various areas including Alaska.
"Whether that constitutes an Alaskan company per se, I don't
know for sure," he added. "I consider myself to be an Alaskan,
but hopefully ... I would not have my ownership interest limited
one way or another if I wanted to do this project."
REPRESENTATIVE ROKEBERG remarked that one corporate predecessor
of ConocoPhillips was ARCO Alaska, Inc., which at least should
have had an Alaskan business license. Deeming Mr. Marushack to
be an expert on it, Representative Rokeberg then asked whether
he believes it would be helpful or necessary for the bill to
include a provision "allowed by special Act of Congress allowing
the Alaska railroad to issue IDB [Industrial Development
Bonds]," which he suggested may be applicable to this project.
MR. MARUSHACK answered that for the bonding potential which he
believed Representative Rokeberg was talking about, if it went
through an Internal Revenue Service (IRS) test and truly passed
all the requirements so that people lending money to the project
could see that it actually would have a tax-exempt-bond basis,
then it absolutely would provide incremental value. To the
extent that the strength of the federal government is behind the
financing - which he said he understands that the bonds may be
able to do - the interest rate could be reduced; that would
reduce the tariff, raise the wellhead value, and increase
royalties. Mr. Marushack pointed out that he couldn't say
whether that particular mechanism would pass an IRS test, and
emphasized the need to get an IRS ruling that would allow the
people lending money to this [project] to have enough assurance
that they would lend under those sorts of terms.
Number 0050
REPRESENTATIVE ROKEBERG indicated there possibly could be 200
basis points as a reduced interest rate. He suggested that a
IRS ruling may provide further protection, particularly if
related specifically to the project by including it in the Act.
TAPE 03-4, SIDE A
Number 0001
MR. MARUSHACK related [his company's] analysis that it would be
perhaps more like 100 basis points. Regardless, he said, if the
interest rate really were reduced, it would create incremental
value. He also offered the belief that financing doesn't make a
bad project good; rather, it is used to make a good project
better and actually get it off the ground. "So we would look at
this ... on an unfinanced basis to begin with, assuming you had
full equity interest in this, and then, if that passed all the
tests, so you ... thought you could actually sell that to the
financial community, then you'd do that and hopefully make a
more economic project at that point in time," he concluded.
REPRESENTATIVE ROKEBERG suggested that this is known to be a
good project, but just needs to pencil out.
Number 0121
REPRESENTATIVE FATE asked, if there were a "mix and match" of
financial ratings on this project, how the investment bankers
would look at it.
MR. MARUSHACK replied:
This happens all the time, and it depends on ... how
you want to structure this - whether it's project
financed, whether it's financed by the absolute
balance sheet of the companies. I don't think we're
at a point yet where we know the answer to that, ...
and we don't even know who would own this pipeline
yet.
Currently, ... or at least last year, we were working
with BP and ExxonMobil Corporation, ConocoPhillips;
those companies have very strong balance sheets and
could get relatively good financing rates. But how
that would all blend together, I think, is one of the
things that needs to be worked out, which is actually
something that I think needs to happen in HB 16.
I believe that one of the real advantages to ... your
bill is that it's going to allow people from the state
and people from the producers to sit around ... the
table for a long period of time and talk about issues
just like this: What does financing do to this
project? Can you get financing? What if the state
needs something that is in conflict with what the
financial people think they need to see?
There's a myriad of issues, which is why I think this
bill is important to get passed right now, because I
don't actually see us getting through this real
quickly. I hope we do, but I think it's going to be
very complicated and take a lot of work from the state
and the producers, and a lot of sharing of
information, probably bringing in experts. It's just
a very complicated project. There's nothing like it
on earth.
Number 0276
REPRESENTATIVE CRAWFORD asked, since this bill apparently opens
it up to any project at any time, whether Mr. Marushack sees
that as keeping it a clean bill or whether it adds hurdles.
MR. MARUSHACK replied:
Clearly, ConocoPhillips is focused on a Lower 48
pipeline. We've put a lot of time and effort into
that. And if this bill passes, we are going to come
forward and ask to qualify, and want to negotiate on a
Lower 48 pipeline using ANS gas ... as the product for
that. But I have no problem with opening this up to
other opportunities .... For instance, ... I'm not
sure this works for Evergreen [Resources], but I hope
Evergreen is tremendously successful, and if there's
other opportunities out there, I think that's a good
thing.
I don't know if this is where you're heading or not:
there's clearly a problem we face in Washington [D.C.]
with the concept of competing projects - a lot of
confusion about ... what does Alaska really want, do
they really want a Lower 48 pipeline, do they want
something else. And ... my message is always, "I
think this is about the only project that works right
now, and we should absolutely focus on that." But ...
I'm not recommending that we limit utilization of this
to a Lower 48 pipeline right now. I don't think
that's necessary.
Number 0452
KEN KONRAD, Senior Vice President, BP Exploration (Alaska) Inc.,
noting that he is the company's vice president for gas, offered
the following testimony:
Significant time, effort, and money has been dedicated
to develop a viable gas pipeline project to
commercialize Alaska's enormous gas resource. Through
2002 and continuing into this year, BP has undertaken
further technology-and-design optimization work on the
project in an effort to reduce the cost of this $20-
billion project. We're working closely with state,
federal, and Canadian agency staff around advanced
materials and design, and are inviting them to witness
key tests BP will be undertaking this year to validate
much of the work we've done. Results to date are very
encouraging. However, technical work alone will not
be sufficient to make an Alaska gas pipeline a
reality.
Before a project can advance to the next stage, three
key government actions are needed: a clear and
predictable regulatory process with the Canadian
government and First Nations, a clear and predictable
state fiscal framework around gas in Alaska, and the
passage of important U.S. federal legislation. While
success is needed on all three fronts, the one thing
Alaska itself can do to advance an Alaska gas pipeline
is to sit down and work with industry to develop a
fiscal framework for gas that provides confidence that
the rules of the game won't change later. Achieving
this mutually agreed framework will also send a
powerful signal to Washington, D.C., that Alaska is
indeed ready to see ... a gas pipeline project
advance.
Number 0602
MR. KONRAD continued:
We're very encouraged that our new governor has
already spoken to his desire to advance the
development of a predictable fiscal framework for gas,
and are similarly encouraged that the new legislature
appears ready to support advancing this important
agenda. ... Reauthorizing the stranded gas Act via
House Bill 16 is a good idea. We supported the
original stranded gas Act when it was debated and
continue to do so. House Bill 16 can provide a
framework that supports negotiation toward a clear and
predictable fiscal regime in Alaska, and as such, will
help support forward progress on gas
commercialization.
But we don't necessarily need to wait on passage of
this bill to begin engaging on the topic. Dialog with
a small, experienced, informed, and empowered
negotiating team made up of representatives of the
state and the producers can commence anytime. Under
any circumstance, any agreements worked with the state
will require legislative review and approval.
We do believe that if HB 16 advances, it's important
that the bill retains its focus and simplicity as it
moves through the legislative process. Otherwise,
there's potential failure in the event the bill
becomes overburdened with extraneous provisions.
Number 0717
MR. KONRAD informed members that he'd just received Version H
one-half hour earlier and hadn't had a chance to review it. He
said it appears to be "reasonably clean," although he said he'd
want to look at the ownership provision more closely to make
sure it doesn't inadvertently restrict his company's ability to
retain an interest in the project.
MR. KONRAD reiterated that the one thing the state can do to
help move a gas line forward is to take tangible steps towards
achieving fiscal certainty. "That, combined with U.S. federal
legislation and continued regulatory progress in Canada, will
allow Alaska to realize the extraordinary opportunities for
jobs, revenue, and economic stability, as the gas pipeline can
offer for decades and decades to come," he told members. He
concluded by saying that "BP stands ready to work productively
with the state towards a clear and predictable fiscal regime."
Number 0809
REPRESENTATIVE ROKEBERG inquired about the political situation
with regard to "the First Nations issue" in Canada as well as
the current position in Ottawa on granting permits and going
forward on this project.
MR. KONRAD replied that [his company] continues to have a number
of "fairly productive" conversations with both the First Nations
people and the Canadian regulators, who "have tabled a concept
that we believe can work ... to come up with ... a simple,
single regulatory process." He said there is still a little
ways to go in terms of actually formalizing that. Mr. Konrad
told members that he believes things are encouraging, although
clearly the big focus right now in Canada is ensuring tangible
progress on the Mackenzie Valley project. He expressed support
for that, offering his belief that the two projects are
complementary and will sequence naturally, and said the North
American market can "certainly use all the gas it can get." He
added, "Every indication is that they will be supportive of our
project once we get some of these other key government actions
in place."
Number 0931
REPRESENTATIVE ROKEBERG asked whether the [Canadian] federal
government is actually "in the way" and whether his company is
actually able to negotiate with them now.
MR. KONRAD answered that he doesn't think they're standing in
the way at all. He said a number of ideas have been tabled, but
in general there is concurrence. He added, "However, like
everyone else, they have finite resources; they're focused right
now on the Mackenzie Valley project. But we certainly have
expectations ... that during this year we'll have had tangible
... and complete progress in the regulatory arena."
REPRESENTATIVE ROKEBERG offered his understanding that many
sellers of gas in the [Lower 48] fear that when this "bubble of
gas" from the Mackenzie River area and Alaska hits the market it
will cause the market to be depressed, and that therefore those
sellers are lobbying in Washington [D.C.] against incentives to
build a line. He asked whether that is one of the biggest
problems [the producers] are dealing with.
MR. KONRAD responded that, clearly, a number of parties are
saying a number of things, and that it is far from simple. He
said that in Canada, however, "things feel ... pretty good," and
that the group there is almost ready to file permits; that
project simply is ahead of the Alaskan project. He indicated
his company continues to tell people in Canada, Washington
[D.C.], and Alaska that clearly in the 2010-plus timeframe the
market will be able to easily accommodate these volumes of gas.
A question on a national policy issue is whether the preference
is to have gas from Alaska, import LNG, or burn oil in power-
generation plants. He said it isn't a matter of too much gas
coming into the market.
Number 1127
REPRESENTATIVE KERTTULA asked Mr. Myers to describe what
Version H possibly could apply to, particularly with regard to
any other technology or area.
Number 1170
MARK MYERS, Director, Division of Oil & Gas, Department of
Natural Resources, answered:
I believe it would qualify for, certainly, any gas-to-
liquids projects, basically any statewide project that
could produce the volume qualifications of 500 bcf
over the 20-year period. It could potentially apply,
... I believe, to natural gas liquids shipped down,
say, ... a conventional oil pipeline like we do now on
the Slope. So, basically, it would be slopewide and
certainly would apply to LNG as well as conventional
gas. It is conceivable in some basins, like the
Nenana basin, there may be sufficiency of gas,
assuming there was a way to export it beyond the
Fairbanks market, to apply - and possibly for coal bed
methane, [although] that would be a large quantity of
coal bed methane gas to produce ... over a 20-year
period. So, certainly, it's broad and flexible.
Number 1232
REPRESENTATIVE KERTTULA asked if there is a real need for
incentives for all possible projects, no matter when or where.
MR. MARKS offered the judgment that given the size of all these
projects, they are risky. Fiscal uncertainty adds to the other
financial risks, he said, and these projects are marginal or "on
the line" now, so any risk reduction is good and will help these
projects.
REPRESENTATIVE KERTTULA asked, "How far down would you reduce
that risk?"
MR. MARKS answered that he believes fiscal [uncertainty] is a
risk that can be reduced, and that he wouldn't characterize it
as "going down" because the state wouldn't necessarily come out
behind as a result of simply nailing down its fiscal system. He
continued:
In addition, this Act provides the opportunities to
improve the fiscal system so that, indeed, under
certain conditions, especially those of high prices,
the state can ... come out much, much better than what
it would do ... under the current fiscal system. So I
don't believe the state ... is giving up anything by
going into this process and, indeed, could ... come
out far, far better than what it is now.
Number 1373
REPRESENTATIVE KERTTULA expressed a "lawyer's comment or
concern" about opening this up. She asked how difficult it
would be to rewrite the statute so that instead of relying on a
contract, the provision Mr. Marks was talking about - in terms
of making it a progressive rather than regressive tax scheme -
would be put in statute; that way, all parties would know what
they are getting.
MR. MARKS answered that the statutes could certainly be changed
to make a more progressive system, which would reduce the risks
associated with a regressive or "front-end-loaded" tax system.
However, the issue of fiscal uncertainty would remain. In
further response, he explained that the state could establish a
statutory fiscal regime and yet a sponsor would question whether
to spend $20 billion without knowing what the tax rate would be,
which may make the project uneconomical. Once the project is
built, one can't "unbuild it," he pointed out, and so just
having it be subject to changes in the [state's] fiscal system
adds to the uncertainty and fiscal risk.
Number 1483
CHAIR KOHRING announced that HB 16 would be held over at the
request of the sponsor, as well as to deal with questions about
Section 2 of Version H and to have discussions with other
groups. He expressed support for the concept of the bill and an
intent to move it forward soon. [HB 16 was held over.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at
5:16 p.m.
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