Legislature(2003 - 2004)
04/24/2003 03:16 PM House O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
April 24, 2003
3:16 p.m.
MEMBERS PRESENT
Representative Vic Kohring, Chair
Representative Hugh Fate
Representative Jim Holm
Representative Lesil McGuire
Representative Harry Crawford
Representative Beth Kerttula
MEMBERS ABSENT
Representative Norman Rokeberg
COMMITTEE CALENDAR
HOUSE BILL NO. 277
"An Act relating to the powers of the Regulatory Commission of
Alaska in regard to intrastate pipeline transportation services
and pipeline facilities, to the rate of interest for funds to be
paid by pipeline shippers or carriers at the end of a suspension
of tariff filing, and to the prospective application of
increased standards on regulated pipeline utilities; allowing
the commission to accept rates set in conformity with a
settlement agreement between the state and one or more pipeline
carriers and to enforce the terms of a settlement agreement in
regard to intrastate rates; and providing for an effective
date."
- HEARD AND HELD
SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 198
"An Act providing for a reduction of royalty on certain oil
produced from Cook Inlet submerged land."
- MOVED CSSSHB 198(O&G) OUT OF COMMITTEE
HOUSE BILL NO. 267
"An Act relating to the Alaska Railroad; authorizing the Alaska
Railroad Corporation to provide financing for the acquisition,
construction, improvement, maintenance, equipping, or operation
of facilities for the transportation of natural gas resources
within and outside the state by others; authorizing the Alaska
Railroad Corporation to issue bonds to finance those facilities;
and providing for an effective date."
- MOVED HB 267 OUT OF COMMITTEE
HOUSE BILL NO. 246
"An Act relating to the limitation on upland acreage that a
person may take or hold under oil and gas leases; and providing
for an effective date."
- SCHEDULED BUT NOT HEARD
PREVIOUS ACTION
BILL: HB 277
SHORT TITLE:PIPELINE UTILITIES REGULATION
SPONSOR(S): REPRESENTATIVE(S)DAHLSTROM
Jrn-Date Jrn-Page Action
04/17/03 1026 (H) READ THE FIRST TIME -
REFERRALS
04/17/03 1026 (H) O&G, L&C
04/22/03 (H) O&G AT 3:15 PM CAPITOL 124
04/22/03 (H) -- Meeting Canceled --
04/23/03 1081 (H) COSPONSOR(S): KOHRING
04/24/03 1108 (H) RES REFERRAL ADDED AFTER O&G
04/24/03 (H) O&G AT 3:15 PM CAPITOL 124
BILL: HB 198
SHORT TITLE:ROYALTY REDUCTION ON CERTAIN OIL
SPONSOR(S): REPRESENTATIVE(S)KOHRING
Jrn-Date Jrn-Page Action
03/17/03 0560 (H) READ THE FIRST TIME -
REFERRALS
03/17/03 0560 (H) O&G, RES, FIN
03/26/03 0654 (H) COSPONSOR(S): CHENAULT
04/03/03 (H) O&G AT 3:15 PM CAPITOL 124
04/03/03 (H) -- Meeting Canceled --
04/10/03 (H) O&G AT 3:15 PM CAPITOL 124
04/10/03 (H) -- Meeting Canceled --
04/24/03 1093 (H) SPONSOR SUBSTITUTE INTRODUCED
04/24/03 1093 (H) READ THE FIRST TIME -
REFERRALS
04/24/03 1093 (H) O&G, RES, FIN
04/24/03 1111 (H) COSPONSOR(S): WOLF
04/24/03 (H) O&G AT 3:15 PM CAPITOL 124
BILL: HB 267
SHORT TITLE:AK RAILROAD BONDS FOR NAT.GAS TRANSPORT
SPONSOR(S): REPRESENTATIVE(S)KOHRING
Jrn-Date Jrn-Page Action
04/15/03 0985 (H) READ THE FIRST TIME -
REFERRALS
04/15/03 0985 (H) O&G, RES, FIN
04/16/03 1018 (H) COSPONSOR(S): CRAWFORD
04/24/03 (H) O&G AT 3:15 PM CAPITOL 124
WITNESS REGISTER
REPRESENTATIVE NANCY DAHLSTROM
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified as sponsor of HB 277.
GARY CARLSON, Senior Vice President
Forest Oil Corporation
Anchorage, Alaska
POSITION STATEMENT: Testified in support of SSHB 198 as a
requestor of the legislation.
MARK MYERS, Director
Division of Oil & Gas
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Testified on SSHB 198, calling it a very
good, direct incentive; explained DNR's fiscal note for the
original bill version; proposed technical amendments that were
adopted.
PAUL FUHS, Lobbyist
for Yukon Pacific Corporation (YPC)
Anchorage, Alaska
POSITION STATEMENT: Testified that HB 267 is an important tool,
but asked that members be aware of the potential for a pipeline
to Valdez; answered questions.
WENDY KING, Director of External Strategies
ConocoPhillips
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 267, stating
support for having as many tools as possible.
ROGER MARKS, Petroleum Economist
Economic Research Section
Tax Division
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: During hearing on HB 267, said the
department would support this as a way of moving the project
forward; answered questions.
TOMAS H. BOUTIN, Deputy Commissioner
Office of the Commissioner
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Answered questions pertaining to HB 267.
WENDY LINDSKOOG, Director of External Affairs
Alaska Railroad Corporation (ARRC)
Department of Community & Economic Development
Anchorage, Alaska
POSITION STATEMENT: During hearing on HB 267, testified that
ARRC supports use of its tax-exempt bonding authority for a gas
pipeline and believes it fits within ARRC's mission to support
economic development for the state.
BILL O'LEARY, Vice President, Finance
Alaska Railroad Corporation
Anchorage, Alaska
POSITION STATEMENT: Answering questions on HB 267, discussed
the timeline for issuance of the bonds and ARRC's fiscal note.
ACTION NARRATIVE
TAPE 03-18, SIDE A
Number 0001
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 3:16 p.m. Representatives Kohring,
Holm, and Fate were present at the call to order.
Representatives Kerttula, Crawford, and McGuire arrived as the
meeting was in progress.
CHAIR KOHRING announced that Representative Holm had agreed to
serve in the [unofficial] capacity of vice chair if someone were
needed to chair the committee in his absence.
HB 277-PIPELINE UTILITIES REGULATION
Number 0109
CHAIR KOHRING announced that the first order of business would
be HOUSE BILL NO. 277, "An Act relating to the powers of the
Regulatory Commission of Alaska in regard to intrastate pipeline
transportation services and pipeline facilities, to the rate of
interest for funds to be paid by pipeline shippers or carriers
at the end of a suspension of tariff filing, and to the
prospective application of increased standards on regulated
pipeline utilities; allowing the commission to accept rates set
in conformity with a settlement agreement between the state and
one or more pipeline carriers and to enforce the terms of a
settlement agreement in regard to intrastate rates; and
providing for an effective date."
CHAIR KOHRING explained that the legislation would be presented
by the sponsor and held over. He asked members to look at
testimony provided in writing.
Number 0196
REPRESENTATIVE NANCY DAHLSTROM, Alaska State Legislature,
sponsor of HB 277, explained that the bill addresses concerns
related to pipeline utility regulation. She said the
legislative branch is given sole authority [with the exception
of the people, through initiatives] to write law, whereas the
executive branch and state boards and commissions are authorized
to act in accordance with those laws. In that context, she
indicated HB 277 addresses issues brought forward by some who
are involved in exploration, development, and delivery of oil
and gas [who have concerns about the regulatory authority over
that process].
REPRESENTATIVE DAHLSTROM said the goal of HB 277 is to clarify
what jurisdiction the Regulatory Commission of Alaska (RCA) has
over interstate and intrastate rates. The legislation
addresses RCA's jurisdiction over state right-of-way leases;
strives to clarify RCA's authority over dismantlement, removal,
and restoration (DR&R); proposes that the RCA support rate
methodologies agreed to in settlement agreements with the state;
and addresses changes to the applicable interest rate charged
under RCA orders so that it conforms with the interest rate
applied in "other, similar matters." Characterizing it as a
starting point, she indicated she would work with committee
members, the administration, and members of the oil and gas
industry to come up with a good piece of legislation that she
would present at the next hearing.
Number 0379
CHAIR KOHRING apologized to those hoping to testify and informed
listeners that testimony would be taken at the next hearing
after some issues were worked out. [HB 277 was held over.]
HB 198-ROYALTY REDUCTION ON CERTAIN OIL
Number 0463
CHAIR KOHRING announced that the next order of business would be
SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 198, "An Act providing for
a reduction of royalty on certain oil produced from Cook Inlet
submerged land."
CHAIR KOHRING, sponsor of SSHB 198, explained that he'd been
approached by people who own and operate facilities in Cook
Inlet, where most platforms were constructed in the 1960s.
Production is declining significantly; two facilities out of
thirteen have been mothballed, and others may be shut down
because they aren't economically feasible. He told members that
the intent is to help those platforms specifically. This bill
provides a royalty break on those platforms if their production
drops below 1,200 barrels a day. It lowers the state's royalty
share, now 12.5 percent, down to as low as 5 percent, on a
sliding-scale basis. If production were 750 barrels a day or
less, for example, it would be 5 percent, and it would rise
approximately 1 percent for every additional 100 barrels, up to
the 12.5 percent.
CHAIR KOHRING offered the expectation that with this provision,
production on those platforms would be extended up to an
additional 14 months. He called upon Mr. Carlson of Forest Oil
Corporation, who he indicated had requested the legislation.
Number 0789
GARY CARLSON, Senior Vice President, Forest Oil Corporation,
noted that his corporation has been a major investor in Cook
Inlet for five years. He told members his testimony would focus
on the maintenance of critical and scarce infrastructure
associated with mature oil fields in Cook Inlet. He said:
Platforms, associated pipelines, and related onshore
facilities represent irreplaceable infrastructure
which may facilitate the exploration, discovery, and
development ... of as-yet undiscovered reserves if
their useful lives can be extended. Any delay in
abandoning or ... decommissioning of this
infrastructure will provide opportunities to the
industry to develop smaller-scale oil and gas
prospects that won't stand the economics if new
infrastructure needed to be developed.
As the mature fields approach [the] end of their
economic life, the operators need to get creative and
manage costs carefully, which [includes] changes in
the way they operate and the need for cooperation with
their vendors and contractors to share in these
efforts. I believe that it is ... appropriate for the
state to step in as a partner also. This bill
provides a way for the state to do its part.
Keeping the current Cook Inlet oil fields on line a
few more years will maintain good jobs, provide local
taxes and the possibility of new development that
could easily exceed the anticipated future shortfall
in state revenues resulting from any reduction of the
state's royalty. I want to commend the chair and
Representatives Rokeberg and Chenault for their
leadership on this bill, and to the administration for
supporting their efforts.
Number 0902
REPRESENTATIVE HOLM asked whether Mr. Carlson maintains that in
order to use the resource to its final depletion, it is in the
state's best interest to lower the royalty [so companies like
his can continue to pump oil economically]. He also mentioned
current versus future technology that may allow extraction more
economically and thus provide better value for the resource.
MR. CARLSON replied:
I think the key to keeping interest by the operators
in maintaining this infrastructure and continuing to
operate it would be to fully understand what their
costs are going to be. And some of those costs are
associated with personnel and logistics, but some of
them are actually ... the money that's pulled off the
top and given to the state as a result of ... the
state's ownership.
MR. CARLSON suggested that extending the life of these platforms
may help develop other possible projects; if additional work or
discoveries occur from the platforms, their lives can be
extended and there will be a higher recovery. He suggested the
formula devised by the state in the bill protects the state's
interests; if for some reason the rates from these depleting
platforms were to increase, the royalty would return to 12.5
percent. He pointed out that Forest Oil Corporation isn't
currently an operator of any of these facilities, but is active
in Cook Inlet and very concerned about losing infrastructure
that may be available to bring new discoveries to another
platform, instead of having to build platforms to accept further
production.
Number 1095
REPRESENTATIVE HOLM said he isn't knowledgeable enough about
this area to know where the law of diminishing return comes into
play. As a legislator, he offered his belief that it is his
fiduciary responsibility to try to protect the state's resources
and extract the highest value possible, keeping in mind the
desire to retain the producers as partners in order to extract
them expeditiously. He pointed out that the fiscal note
intimates that the State of Alaska will lose $2.5 million in
proposed royalty payments over the next five or six years, and
questioned the urgency of this action.
Number 1171
MR. CARLSON responded that he believes maintaining that
infrastructure and keeping the fields producing - for what could
be one to three years, depending on what can be done to maintain
the rate - could easily offset the fiscal note estimate. If
there were a discovery that only could be developed by using
some of that infrastructure, he suggested the return to the
state would be many times that amount.
Number 1318
CHAIR KOHRING conveyed his belief that encouraging the continued
production of these facilities creates potential for the state
to generate even more money in the future because these existing
facilities represent millions of dollars' worth of critical
infrastructure from which further exploration can be done in the
future. Even though there is no guarantee, there is that
potential to use these facilities to engage in directional
drilling and find additional oil reservoirs.
MR. CARLSON concurred. With regard to urgency, he said one
platform has been shut in, and another is scheduled for that
soon; therefore, he feels there is a sense of urgency to do
something before it's too late.
CHAIR KOHRING asked Mr. Myers, in addition to his testimony on
behalf of the division, to address Representative Holm's
concerns and whether the amount lost will be gained in other
ways.
Number 1356
MARK MYERS, Director, Division of Oil & Gas, Department of
Natural Resources (DNR), advised members that a key goal for
"incentivizing" oil and gas ought to be looking at incentives
that are efficient and effective, and that hopefully are direct
and measurable. He offered his belief that SSHB 198 meets those
criteria. He explained that the Cook Inlet platforms have been
producing for a long time; the state has a lot of good data, a
good understanding of the reserve base, and a good understanding
of the productions costs. In that light, he said, when the
thresholds for royalty reduction were chosen, [DNR] worked
carefully with data from Union Oil Company of California
(Unocal) and Forest Oil Corporation, as well as internal data
including DNR data and Department of Revenue (DOR) data that
could be shared.
MR. MYERS said this was modeled accurately, using long-term
production trends. Two different trends were found with regard
to when the economic limit for particular platforms is reached.
Thus there are two clusters of platforms. The first has
platforms where the wells produce lots of water that must be
separated out and that use significant water flood. They have
more expensive operating costs and, therefore, an economic
threshold of production such that operating costs exceed the
value of the oil production; more barrels [of oil] are needed to
justify their operating costs. The second has platforms that
have a limited amount of water and water handling, and little
water injection; those have cheaper costs.
MR. MYERS told members the bill therefore was designed by
looking at those factors and at clustered fields.
Appropriately, it lists individual fields, but it's truly based
on economic clusters of data, not just targeting those
particular fields. He said it was easier to name the fields,
but those fields represent certain characteristics of production
and inherent reservoir characteristics.
Number 1491
MR. MYERS remarked that this is a case when it can be argued
that royalty reduction is a very appropriate mechanism to extend
field life. He went on to say royalty reduction is generally
asymmetrical and explained, "Because your production is
declining from the field, the period of time in which you ...
actively affect the economics of the field and bring it up on
line - when you're only talking about a 7.5 percent differential
in the amount of production - is limited." He also pointed out
that if the desire is to use this as an incentive to keep
production going longer and possibly to get additional
investment in the platforms, the relief should be given slightly
before it is absolutely, critically needed. He added, "Plus,
then, you're projecting on certain oil prices to project the
economic threshold."
Number 1532
MR. MYERS continued:
We used a pretty middle-of-the-road calculation for
netback oil price and then ran a bunch of scenarios
... on the platform, and came up with this cluster of
data. So we feel pretty good that our fiscal [note]
accurately reflects the loss in royalty, which, again,
we think is relatively small. ... The first year, it's
about $220,000, going up to nearly $600,000 in 2007.
Those are relatively small numbers compared to the
value of that infrastructure.
One of our concerns is, once you start pulling out
multiple platforms out of the inlet, there's a synergy
between the platforms. There's piping that goes
between the platforms. There's common use of onshore
facilities. All those additional costs of rerouting
those pipes for existing platforms ... would cause
additional costs, as well as a lesser throughput to
those existing production facilities on shore would
raise the cost. ... There's an interlinked
interdependency of facilities in the inlet, and we
want to make sure as much of that [as possible] keeps
producing as long as it can.
Number 1585
MR. MYERS expressed optimism about the exploration potential and
said:
We know of multiple prospects that exist off these
existing platforms, and sometimes a current operator
isn't desirable of expending the money to do the
exploration, but a new operator might. So we're
buying time ... in case there's sale or trade [of] the
platforms, et cetera - other opportunities.
So while we lose some direct revenue, it's very
quantifiable. It's relatively minimal on the scale of
the potential benefit of that infrastructure, and
we're hoping that the upside does exist. In the
meantime, you have preserved jobs and you have
preserved that oil going to the refineries ... on the
Kenai [Peninsula], which are important to the state's
economy.
Number 1622
REPRESENTATIVE McGUIRE asked how 5 percent was arrived at.
MR. MYERS answered that there's an historical precedent for
using 5 percent, which the state uses for discovery royalty.
It's in existing statute for six fields in Cook Inlet that
weren't producing. It also leaves enough direct economic
benefit to the state. If it's set much lower or at zero, then
the fiscal note becomes bigger. He offered his belief that
5 percent royalty isn't a substantial burden on the project.
"We might extend it a few months more by going lower, but this
is a good number," he added.
MR. MYERS also pointed out that if these numbers don't work, an
applicant [can seek] royalty reduction under the current royalty
reduction statute; that can go down to 3 percent and is based on
need, using technical data. He also mentioned royalty reduction
under HB 28 if that bill passes. He added that this [5 percent
in SSHB 198] is a "pretty good, standard threshold, we feel,
that we still are getting direct revenue from the platforms as
well as we're affecting the economics."
Number 1726
REPRESENTATIVE CRAWFORD asked what happens to platforms after
they get shut in. For example, can they be reconditioned and
shipped elsewhere?
MR. MYERS answered that it is uncharted territory as to what the
state would do. Initially, production would be suspended; there
are a few platforms where that has happened. He further
explained:
Initially, that would just be plugging back the wells,
cleaning the surfaces, keeping, usually, a manned
presence or in some cases unmanned, if they go to a
total cleaning and monitoring system. And then
there's a period of time. At some period of time
where there really isn't any additional economic
potential, then the wells will be cemented in via
AOGCC [Alaska Oil and Gas Conservation Commission]
requirements, permanently abandoned, and the facility
will have to be abandoned. ...
That process of what is done with the facility is
truly going to be a public process, with multiple
agencies looking at it and, I assume, with stakeholder
influence from ... all sorts of other outside,
nongovernmental organizations. The "highest and best
use" question, I think, will really be put there: Do
you want to keep the facility there? ... Can it be
reused? There are certainly options to cut the legs
off of the platforms if you bring in a (indisc.), move
it over to another facility. ... So there's potential
to use them. There's potential for various
dismantlement and [removal], actually ... moving them
out of the inlet, et cetera.
So, to the extent of the final abandonment
requirements for a platform, we haven't gone there
yet. It is something the state will have to face in
the future. And certainly DNR will play a role in
that, but other agencies will as well. The federal
Coast Guard navigation issues will occur, et cetera.
You can get a long list ... of potential actions that
would have to be taking place.
Number 1830
MR. MYERS continued:
We're studying the issue. We sent some folks to a
conference in California - where they're looking at
abandoning some offshore platforms - the MMS [Minerals
Management Service] sponsored. So we have models to
go by from the federal [government] and ... folks in
the Gulf of Mexico and offshore California. So we're
looking [at] that, but we have not yet totally
integrated what needs to be done.
Number 1852
MR. MYERS, in response to Representative Kerttula, indicated
the fields listed in the bill are the older, existing platforms,
rather than newer fields like Redoubt Shoals. He added that
there is one onshore field, West McArthur [River] field, and
said, "It's onshore facilities but offshore fields." He said
although all the fields are named, the bill isn't designed to be
name-specific, but is an easier, simpler way to look at the
actual characteristics and economic criteria. "Again, we found
the data clustered nicely around two types of platforms," he
added. "And when you use a general bill like this, unless you
wanted to [have] specific royalty reduction for each platform,
you had to use ... an amount." He concluded by saying that the
names are there because it targets certain characteristics, and
that it is inclusive of all those platforms in Cook Inlet that
have those characteristics.
Number 1938
REPRESENTATIVE FATE asked what the average daily production was
at midlife for these fields.
MR. MYERS said he didn't know, but estimated perhaps 15,000 to
20,000 barrels a day; he suggested Mr. Carlson might have those
figures. At the peak, Cook Inlet production was an order of
magnitude larger than it is now, he said. "So we're really down
near the end, ... and Redoubt Shoals, of course, is a great
success, and that's going to help bring us up," he added.
Mr. Myers said there is some other exploration going on; the
hope is that it will lead to new production to substantially
revive the inlet. Except for that, however, these platforms and
reservoirs are largely expended. He pointed out that one
challenge for companies is that they'll spend the money to drill
a directional well; if successful, they may increase production,
but it's marginal. "If this tips the scale, we'll all benefit,"
he concluded.
Number 2025
REPRESENTATIVE FATE referred to [AS 31.05] and recalled looking
at royalty reduction specific to Cook Inlet a year ago, with the
idea of perhaps broadening it statewide, for example, and making
it self-limiting with a sunset date. He asked whether this
current bill "will stimulate the kind of exploration for more
oil in that area, which will take advantage of this royalty
reduction, above and beyond what we thought it would."
MR. MYERS responded:
We have multiple programs, but I think the program
we're referring to is the discovery royalty program,
which gives 5 percent royalties to new discoveries.
This program, I guess, is more certain, because you
have all the production data. So this extends the
life of infrastructure; that greatly improves the
economics of future exploration. So I think this is
actually ... one of our more positive moves that's
clearly a direct, effective incentive, and will, ...
if explorers are out there, ... give them more
opportunity and more time. This buys us time with
existing infrastructure, ... because once some of this
infrastructure goes away, it's not going to be
replaceable ... unless they find very large
accumulations, which increases exploration risk
because they need to find very large fields, then, to
build ... the infrastructure in the inlet.
Generally, in the inlet, to put a new platform, people
typically need probably around ... 30 or 40 million
barrels of recoverable reserves. So you need a pretty
substantial discovery for the inlet, though certainly
the prospects are there to find more of those. But
when you chance-risk it, it's nice if that number goes
down a little bit because there's an existing platform
for development. ... If you could use an existing
platform, you might save a lot of money on the
development, in which case, then, your limit for
exploration size might shrink down by 5 or 10 million
barrels, leaving you to drill a lot more different
types of prospects, or lowering your risks.
Number 2134
MR. MYERS emphasized the synergies. He said one of Cook Inlet's
real advantages is the existing infrastructure, which probably
results in a much higher netback per barrel than on the North
Slope. He added:
We want to keep that advantage there with this
existing infrastructure. And, again, that will get
more people drilling. We've seen a lot of good
"independent action," as you've seen, particularly on
the gas side, with independents in the inlet. There
may be some swapping of platforms or selling of
platforms, we hope, in the future with folks that
might be a little more aggressive on exploration, say.
MR. MYERS concluded by saying this is truly a very good, direct
incentive because "we can quantify the amount, and we can see
the direct effects of it."
Number 2174
CHAIR KOHRING expressed appreciation to Mr. Myers for his work
on the legislation and for working with the owners of the
platforms on this.
Number 2197
MR. MYERS informed the committee of the following [technical
changes] needed in the bill. On page 2, line 2, he said the
phrase "field or" should be removed because it is specific to
those platforms. On page 3, line 7, "XTO.B" should read
"XTO.C". On page 3, subparagraph (E) is talking about a field
in this one case; therefore, "platform" should be deleted on
line 26 and replaced with "field", and the words "or platform"
should be removed on line 29.
Number 2272
REPRESENTATIVE HOLM moved to adopt the foregoing as a
[conceptual] amendment. There being no objection, it was so
ordered.
Number 2287
REPRESENTATIVE FATE moved to report [SSHB 198, as amended] out
of committee with individual recommendations and the
accompanying fiscal note(s). There being no objection,
CSSSHB 198(O&G) was reported from the House Special Committee on
Oil and Gas.
The committee took an at-ease from 3:50 p.m. to 3:51 p.m.
HB 267-AK RAILROAD BONDS FOR NAT.GAS TRANSPORT
Number 2339
CHAIR KOHRING announced that the final order of business would
be HOUSE BILL NO. 267, "An Act relating to the Alaska Railroad;
authorizing the Alaska Railroad Corporation to provide financing
for the acquisition, construction, improvement, maintenance,
equipping, or operation of facilities for the transportation of
natural gas resources within and outside the state by others;
authorizing the Alaska Railroad Corporation to issue bonds to
finance those facilities; and providing for an effective date."
CHAIR KOHRING, sponsor of HB 267, pointed out the work of others
on this legislation and described himself as a facilitator.
Explaining that the bill provides a tool for potential
constructors of the gas pipeline and is intended to provide a
financing option, he thanked Representative Fate for work on
other legislation pertaining to stranded gas. He noted that the
Alaska Railroad Corporation (ARRC) has bonding capability and a
very good bond rating, and thus can access capital at cheap
rates. This bill asks ARRC to issue bonds in order to make
money available for potential constructors of a natural gas
pipeline, who would work out a contractual arrangement. The
bill provides for up to $17 billion in bonds, whereas Chair
Kohring said he's been told constructing a pipeline would take
as much as $20 billion. He characterized this as an important
piece of the package to make the gas pipeline a reality.
Number 2506
PAUL FUHS, Lobbyist for Yukon Pacific Corporation (YPC), began
by listing his experience with bonding issues and entities. He
told members this important tool has always been seen as
"nonrecourse bonding": if ARRC issues these bonds, it would be
conduit financing, with no recourse of any lender "to the state
general obligation bonding - the permanent fund, the railroad,
or any of the other assets." He said this "peculiar piece of
tax law" came across as the railroad was transferred to the
state, and is included in the federal railroad transfer Act.
MR. FUHS emphasized YPC's desire that the committee be aware of
the potential for a pipeline to Valdez. He noted that the
Canadian pipeline project is dependent on federal subsidies that
may or may not be received, for instance.
Number 2583
MR. FUHS drew attention to documents he'd provided [a letter
from Representative Harris to Ward Whitmore of YPC dated
December 24, 2002; a letter in response; and a six-page document
entitled "Yukon Pacific Corporation: Trans-Alaska Gas System"].
He suggested these contain the most detailed information
provided by any project sponsor in terms of numbers, including
capital costs of about $12 million and delivered prices of
liquefied natural gas (LNG) at $3.50 in Asia and $3.25 on the
U.S. West Coast, and gas delivered in Alaska at $2.50, leaving a
wellhead value to the producers of about $1.00, which he
suggested is in the range talked about. As to whether there is
a market, he said California has expressed interest and that LNG
will be a critical part of that state's energy mix.
MR. FUHS also alluded to an e-mail in packets with regard to
discussions with Mr. Kim, vice president of Korea Gas
Corporation (KOGAS), to whom this information was presented.
Mr. Fuhs noted that Representative Fate was at that meeting as
well and also had heard that when the price of $3.50 was
mentioned to [Mr. Kim], he pulled a piece of paper from his
pocket and said the lowest price they'd been offered was $4.00,
with the highest being $5.17 for the gas that they were looking
for. Regardless of generic comments that this project isn't
economical, Mr. Fuhs said, these numbers show a viable project
that doesn't even need subsidies.
MR. FUHS also drew attention to [letters between John Urbina of
George K. Baum & Company ("George K. Baum") and Representative
Harris]. He noted that Representative Harris had asked that
company - which has sold about $2 billion worth of bonds in
Alaska in the last 10 years - to look at the numbers provided by
YPC to see whether George K. Baum believes the bonds could be
sold and what impact the ARRC bonds would have.
Number 2704
MR. FUHS pointed out that [page 2 of Mr. Urbina's letter] says,
based on the information supplied by YPC, that the project can
be financed in the bond market if the ARRC vehicle is available.
Mr. Fuhs called this a pretty strong statement from a bonding
company on the importance of the railroad bonds. Highlighting
"Chart A," an attachment to Mr. Urbina's letter, Mr. Fuhs noted
that it shows almost a 2 percent difference in the rate of
return if ARRC bonds are used, with a projected return to the
State of Alaska of $500 million to $1 billion a year. He
characterized this as the only project seen so far that comes
close to meeting the governor's goal of addressing the state's
budget deficit through resource development.
Number 2758
REPRESENTATIVE HOLM asked whether there are any U.S.-built
tanker hulls available today that could haul LNG between U.S.
ports.
MR. FUHS said no. He added that the world's LNG tankers are 100
percent utilized at this time and are on contract. Thus tankers
will have to be built. If they go into the U.S. [from Alaska],
they'll have to comply with the federal Jones Act. For Baja
California, additionally, he said it would be U.S. tankers. The
most interesting development in LNG is offshore platforms; the
first is being applied for 130 miles offshore in the Gulf of
Mexico, with the gasification facilities being on the ship.
That helps to solve some of the siting problems. He said he
wasn't sure whether something 20 miles offshore would require
compliance with the Jones Act, but specified that vessels going
into a U.S. port would have to comply with the Jones Act.
Number 2843
WENDY KING, Director of External Strategies, ConocoPhillips,
informed members that she works in the "ANS [Alaska North Slope]
gas commercialization group." She told the committee:
ConocoPhillips supports House Bill 267, which could
provide, but would not require, an Alaska natural gas
pipeline to potentially utilize an Alaska Railroad
Corporation bond financing mechanism.
As mentioned before in previous testimony,
ConocoPhillips has a three-pronged strategy to make a
gas pipeline through Alaska and Canada a reality. The
first is two distinctly different pieces of federal
legislation. The first one is focusing on ...
streamlining the permitting process. And the second
is fiscal legislation which would provide insurance
against the risk of extreme price volatility. The
third item is state fiscal certainty and clarity,
which will be progressing with the recently passed
House Bill 16, which reauthorized the [Alaska]
Stranded Gas Development Act.
If ConocoPhillips is successful with securing these
three items, we plan to continue moving forward on
this project. Financing this potentially $20-billion
project will be a significant activity for any company
that pursues the Alaska pipeline project. And we
support having as many tools as possible to choose
from, when that time comes. While it's too early to
select specific financing [vehicles], if this vehicle
proves workable it might add a potentially valuable
option.
In conclusion, we support the passage of ... House
Bill 267 and appreciate the legislature for addressing
the financing options for the gas pipeline project.
Number 2922
CHAIR KOHRING emphasized the goal of providing a tool that
potentially can be used to finance construction of that gas
pipeline, and acknowledged that it won't automatically be used
by any company. He then asked Mr. Marks of the Department of
Revenue to address feasibility during his testimony.
Number 2951
ROGER MARKS, Petroleum Economist, Economic Research Section, Tax
Division, Department of Revenue, said [the department] has done
quite a bit of detailed modeling of this financing mechanism
just to see what kind of potential effect it could have on
project viability.
TAPE 03-18, SIDE B
Number 2973
MR. MARKS pointed out that the first step is making sure there
is a good project [economically], regardless of financing.
However, if this mechanism were available and project sponsors
decided to use it, he estimated the range of savings would be
from zero up to $4 billion in financing charges, depending on
the degree it was used because of the tax-free treatment. He
said the Department of Revenue would support HB 267 as a way of
moving this project forward.
Number 2915
REPRESENTATIVE KERTTULA referred to the analysis section of
ARRC's fiscal note and asked who bears the liability for the
bonds and who will hold them.
MR. MARKS answered that these "nonrecourse bonds" would be paid
directly from project revenues. The corporations financing the
project would be liable. He suggested that Mr. Boutin or
someone from ARRC could discuss this in detail.
Number 2842
TOMAS H. BOUTIN, Deputy Commissioner, Office of the
Commissioner, Department of Revenue, responded that as the
structure has been explained to him, ARRC would be the "nominal
issuer," a role state agencies or municipalities often have;
there wouldn't be implications for the state, including ARRC.
He said it isn't an uncommon structure in public financing.
REPRESENTATIVE KERTTULA related her understanding that although
ARRC would basically be passing it through, the corporations
themselves ultimately would be liable. She surmised that people
who'd be buying these bonds would know that.
MR. BOUTIN said typically there would be a feasibility
consultant with specific expertise in gas pipeline projects;
this would be an important component, and the credit-rating
agencies and so forth would use the consultant in addition to
doing their own "due diligence" to determine that the revenues
would be adequate to repay the bond debt.
REPRESENTATIVE KERTTULA asked whether bonds using ARRC as a
conduit could be sold for any purpose or just for a gas
pipeline.
MR. BOUTIN suggested Ms. Lindskoog of ARRC could answer better,
but said because of tax-code changes, primarily in the 1980s,
ARRC has a singular ability with regard to tax-exempt debt.
Number 2671
MR. MARKS pointed out that the federal legislation that
transferred the Alaska Railroad to the state says the intent was
to confer upon the railroad all the business opportunities
available to comparable railroads. There is a long record of
gas pipelines tied to railroads in the Lower 48, he noted, with
examples of railroads that have owned, operated, and financed
gas pipelines. He suggested this might apply some boundaries
with regard to what this mechanism could be used for.
Number 2646
REPRESENTATIVE KERTTULA asked about risk to the state.
MR. MARKS replied that he believes there is no risk or a very,
very low risk.
CHAIR KOHRING asked whether ARRC supports the bill.
Number 2596
WENDY LINDSKOOG, Director of External Affairs, Alaska Railroad
Corporation, Department of Community & Economic Development,
informed members that ARRC supports the use of its tax-exempt
bonding authority for a gas pipeline and believes it fits within
ARRC's mission to support economic development for the state.
She said this obviously is an important tool that could be used
to help lower the cost of the project. She deferred to Bill
O'Leary or Phyllis Johnson to answer further questions.
Number 2547
REPRESENTATIVE FATE asked what the process will be and when
bonds will be issued. He pointed out that even though this is a
pass-through, there is a lot of money involved.
Number 2441
BILL O'LEARY, Vice President, Finance; Alaska Railroad
Corporation, noted that he is ARRC's chief financial officer.
In answer to Representative Fate's question, he said it would be
solely dependent upon having someone such as the [current oil]
producers first agree that the project is viable, with a wish to
proceed. If the other steps including passage of this
legislation were in place, ARRC would lay out a timeline for the
particular bond issuance or issuances that would take place. He
said it is driven by the producers' coming forward and saying,
"Yes, we want to do this."
REPRESENTATIVE FATE asked whether [the producers' statement]
would be "Yes, we want to do this" or "Yes, we want to
participate in the financing of this," or both. He said it
seems a lot of groundwork must be laid before issuance of those
bonds. Although he said he didn't have a concern,
Representative Fate specified that he wanted to know whether
there is a timeline "that you are concerned about here."
MR. O'LEARY reiterated that the timeline is dependent upon the
producers' coming forward and saying they wish to use the
financing mechanism through ARRC. From that point, the game
plan would be figured out with respect to when the [bond]
issuances would take place. He said until that point is
reached, it is tough to lay out anything more than that.
Number 2342
MR. FUHS added:
It may be the producers. It may be a pipeline group.
It may be the state development authority. It may be
a combination of -- I think Korea Gas [Corporation]
said they would look at 5 to 10 percent equity
investment. So it could be any one of a number of
potential sponsors.
But the best information on this is contained in this
report by George K. Baum. And what they did is, they
modeled also the bonding for this. It's about an 80-
page report, and I can make it available to you. And
what they do is, they start from a possible project
sanction - when you have the go-ahead. And then
you've got a certain amount of final engineering that
has to be done, and other things, before you start
issuing those bonds.
Now, George K. Baum recommended three trains of bonds,
because you're not going to go borrow all the money at
once. You don't need it all at once. So you only
borrow as much as you need, because during your
construction period is your highest interest rate -
the interim financing during construction, just like a
house or building or anything else. So you want to
stretch that out as far as possible. And ... I can
share that [report] with you, and you can see that
[it's] about over a five-year period that you're
actually issuing those bonds, ... and they just
recommended that because it reduces the cost of the
project by doing it that way.
REPRESENTATIVE FATE requested that Mr. Fuhs supply the 80-page
document he'd just referenced.
MR. FUHS agreed, noting that this could be used as a model, even
though it was based on the project to Valdez.
Number 2261
REPRESENTATIVE CRAWFORD asked whether it would be good to take
advantage of the current low interest rates all at once, rather
than spacing this out over five years and having interest rates
perhaps climb.
MR. FUHS said no. He pointed out that once those loans are
taken out, payments must be made, regardless of whether that
money is actually being used, and that there will be five years
of building the project before any revenues come in. Referring
to last year's HB 423 with regard to the Alaska Housing Finance
Corporation, Mr. Fuhs said there might be the ability to
arbitrage these bonds and even generate some revenues for the
State of Alaska. Although more complicated, he said, it
potentially exists once a project is actually going forward.
Number 2194
REPRESENTATIVE CRAWFORD suggested those bonds might be virtually
free if current low interest rates were taken advantage of [and
if it were leveraged well].
MR. FUHS replied, "Yes, sir, but there's also some potential
risk for that." He added that for the George K. Baum model,
interest rates were about 5.6 percent, an extremely good
interest rate for a project of this type.
Number 2160
REPRESENTATIVE HOLM referred to ARRC's fiscal note and observed
that it shows a cost of $163 million for fiscal year 2006
(FY 06). He requested an explanation from Mr. O'Leary.
MR. O'LEARY responded:
The fiscal note in front of you does show, in 2006, a
$163-million expense funded through the bond proceeds.
And this is an estimate of the bond issuance costs -
what it would actually cost to issue these bonds.
And, of course, this is based on a number of
assumptions. ... It's important to realize that the
model for this fiscal note is based upon the work that
was done last year by the Department of Revenue and
Goldman Sachs when this issue sort of came to light
about a year or 15 months ago. So this fiscal note,
again, is based on that model and shows in 2006, ...
when the initial [issuance] would certainly be, that
[this] would be our best estimate of what the costs of
issuance would be.
Those costs would be funded through the bond proceeds
themselves. So to your question about impact to the
state, there would be ... certainly no general fund
impact.
Number 2061
CHAIR KOHRING asked whether there was further discussion and
thanked participants.
Number 2022
REPRESENTATIVE FATE moved to report HB 267 out of committee with
individual recommendations and the accompanying fiscal note.
There being no objection, HB 267 was reported from the House
Special Committee on Oil and Gas.
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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