Legislature(2007 - 2008)BARNES 124
03/15/2007 03:00 PM House OIL & GAS
| Audio | Topic |
|---|---|
| Start | |
| HB177 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 177 | TELECONFERENCED | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
March 15, 2007
3:04 p.m.
MEMBERS PRESENT
Representative Vic Kohring, Chair
Representative Kurt Olson, Vice Chair
Representative Nancy Dahlstrom
Representative Jay Ramras
Representative Ralph Samuels
Representative Mike Doogan
Representative Scott Kawasaki
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Senator Charlie Huggins
Representative David Guttenberg
COMMITTEE CALENDAR
HOUSE BILL NO. 177
"An Act relating to the Alaska Gasline Inducement Act;
establishing the Alaska Gasline Inducement Act matching
contribution fund; providing for an Alaska Gasline Inducement
Act coordinator; making conforming amendments; and providing for
an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 177
SHORT TITLE: NATURAL GAS PIPELINE PROJECT
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
03/05/07 (H) READ THE FIRST TIME - REFERRALS
03/05/07 (H) O&G, RES, FIN
03/06/07 (H) O&G AT 3:00 PM BARNES 124
03/06/07 (H) -- MEETING CANCELED --
03/08/07 (H) O&G AT 3:00 PM BARNES 124
03/08/07 (H) -- MEETING CANCELED --
03/13/07 (H) O&G AT 3:30 PM HOUSE FINANCE 519
03/13/07 (H) Heard & Held
03/13/07 (H) MINUTE(O&G)
03/15/07 (H) O&G AT 3:00 PM BARNES 124
WITNESS REGISTER
PATRICK GALVIN, Commissioner
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: On behalf of the governor, presented HB
177.
KEVIN BANKS, Acting Director
Division of Oil and Gas
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Presented portions of HB 177.
MARCIA DAVIS, Deputy Commissioner
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Presented portions of HB 177.
LARRY OSTROVSKY, Chief Assistant Attorney General
Statewide Section Supervisor
Oil, Gas & Mining Section
Department of Law (DOL)
Anchorage, Alaska
POSITION STATEMENT: Explained possible legal issues associated
with HB 177.
ACTION NARRATIVE
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 3:04:58 PM. Present at the call to
order were Representatives Kohring, Doogan, Kawasaki, Olson,
Dahlstrom, Samuels, and Ramras. Representative Guttenberg and
Senator Charlie Huggins were also in attendance.
HB 177-NATURAL GAS PIPELINE PROJECT
3:05:17 PM
CHAIR KOHRING announced that the only order of business would be
HOUSE BILL NO. 177, "An Act relating to the Alaska Gasline
Inducement Act; establishing the Alaska Gasline Inducement Act
matching contribution fund; providing for an Alaska Gasline
Inducement Act coordinator; making conforming amendments; and
providing for an effective date."
3:06:50 PM
PATRICK GALVIN, Commissioner, Department of Revenue (DOR), gave
an overview of today's planned testimony, noting that some of
the planned testimony was in response to questions raised by
committee members.
3:08:36 PM
KEVIN BANKS, Acting Director, Division of Oil and Gas,
Department of Natural Resources (DNR), referred to a PowerPoint
presentation and explained the concept of "in-state use" as
contained in the Alaska Gasline Inducement Act (AGIA). He
stated that AGIA requires that there be five off-take points,
distance sensitive rates, and expansion provisions, and referred
to slide 4 titled "In-State Use." The act requires an applicant
to describe where the off-take points will be and to explain how
distance sensitive rates will be established in the state. He
noted that off-take points could also be in-take points at some
point, which he thinks should be addressed in gas pipeline
proposals the state receives. He opined that the important
point is not where off-take points will be located, but how
tariffs will be calculated and how expansion of off-take points
will be developed in the future.
3:13:19 PM
MR. BANKS referred to slide 5 titled "Hypothetical: Gas Off-take
in Fairbanks," and stated that the assumption is that the tariff
from the North Slope to the Canadian border is about 72 cents.
He went on to explain that mileage-based rates would suggest a
tariff of 46 to 47 cents to Fairbanks. He referred to slide
five titled "Fairbanks Gas Prices if capacity acquired at
initial or subsequent Open Season," to explain what a Fairbanks
utility may pay for gas. Assuming a $5.50 Alberta, Canada gas
price, one would subtract a tariff of $2.14 to move gas all the
way to Alberta. The netback value would then be $3.36. A
producer that wished to ship gas to Fairbanks through the gas
line would have to pay the gas treatment plant (GTP) fee of 49
cents and Fairbanks's tariff of 47 cents, which would bring the
price of gas at Fairbanks up to $4.32. He said that without
distance sensitive rates and a Fairbanks off-take destination,
the price of gas delivered to Fairbanks would be $4.62. He said
this is because the border tariff would be 72 cents all the way
to the border.
3:16:30 PM
REPRESENTATIVE RAMRAS asked whether the Alberta gas price means
the Henry Hub price and referenced the need to use consistent
terminology for clarity.
MR. BANKS explained that the Alberta gas price is the Alberta
Energy Company Ltd., (AEC), hub price and that there is a
vigorously traded liquid market in Alberta. He opined that a
North Slope producer selling gas to a Fairbanks utility would
want to achieve the same netback the producer would receive by
selling to the AEC hub. Under the example presented, if a
producer is selling to the AEC hub for $5,50, the netback would
be $3.36. The alternative would be to ship the gas to
Fairbanks. However, to achieve the same netback price of $3.36,
the producer will have to charge $4.32 for gas in Fairbanks to
cover the costs of shipping and processing using the distance
based tariff.
REPRESENTATIVE RAMRAS told the committee that currently
Fairbanks Natural Gas charges $16.80 per thousand cubic feet
(Mcf), while the Henry Hub price is close to $ 7.00. He
observed that it appears under these calculations that the
energy cost for gas in Fairbanks will be cut by almost two-
thirds. He asked whether AGIA requires that producers be price
sensitive as well as distance sensitive. He also asked about
any possibility that the pricing may not meet constitutional
requirements of maximum use of natural resources.
MR. BANKS said that the aforementioned hypothetical assumes the
producer that will sell gas the Fairbanks utility at the same
price they would have received had they sold the gas in Alberta.
He noted that AGIA does not address issues regarding the state's
decisions regarding royalty in kind (RIK).
REPRESENTATIVE SAMUELS asked whether, even if tariffs could be
reduced for local use, the price of gas will remain the market
price.
MR. BANKS replied that the state has to achieve some parity in
the price when it switches from for royalty in value (RIV) to
RIK. He noted that commercial producers could make arrangements
to sell gas at prices higher or lower than those contained in
the state's presentation.
REPRESENTATIVE SAMUELS asked if the rate charged to the consumer
would be set by the utility and the Regulatory Commission of
Alaska (RCA).
COMMISSIONER GALVIN explained that other mechanisms in state
law, primarily the RCA, work to protect the consumer in the
determination of utility services costs.
3:24:15 PM
REPRESENTATIVE DOOGAN asked if distance sensitive rates are a
common feature in gas pipelines.
MR. BANKS answered yes. He referenced slide 7, titled
"Fairbanks Gas Prices if no capacity available through
expansion," to explain what happens when there is narrow
capacity.
REPRESENTATIVE RAMRAS set forth the possibility that it may
difficult for communities to switch from primarily using fuel
for energy to primarily using gas because of the time it takes
to replace boilers. With that in mind, he set forth his desire
that a mechanism be proposed to assist communities in switching
to gas use.
MR. GALVIN opined that during the initial open season, it is
unlikely that many communities will be ready to use gas.
However, he predicted that the market will expand as the gas
pipeline expands. He noted that communities will benefit from
the expandability of the gas pipeline, not necessarily just from
the five in-state off-take points, which may not be in the line
when it is initially built. However, the pipeline builder must
commit to make arrangements for future off-take points when
needed, he explained.
REPRESENTATIVE RAMRAS noted that Fairbanks is perhaps only 5
percent developed for gas, with the potential for much more
development in its ability to use gas.
3:30:13 PM
MR. BANKS opined that off-take points are part of the issue, but
the main point is the desire for a distance-based tariff to the
off-take point, wherever it may be. Further, if there is
failure to take advantage of the open season and there is no
expansion ability built into the pipeline, there is a risk of
having to pay an AEC price in Fairbanks because of "stranded
capacity beyond Fairbanks to the marketplace", which would
result in one having to pay the full tariff price.
REPRESENTATIVE GUTTENBERG asked about the mechanism in AGIA for
determining the correct size and structure of take-off points.
COMMISSIONER GALVIN agreed that there are significant issues to
be considered to prepare the state of in-state gas use. He said
he does not expect the initial proposals to detail the volume of
off-take points. When the open season occurs, the location and
volume of gas in-take and off-take points will be established
for the initial design of the project. He opined that as a
practical matter, not all areas of the state will be ready to
receive gas at the time of the open season. However the
expansion opportunities provide the ultimate solution by
allowing communities to receive gas when ready, he indicated.
He noted that there needs to be discussion regarding readiness
for open season, but stated that "we need to get AGIA going" for
that discussion to occur.
3:34:23 PM
CHAIR KOHRING expressed his desire that the gas pipeline include
appropriate off-take points for various areas of the state.
MR. BANKS stated AGIA will establish within the tariff
calculations that various pipeline segments will have different
rates for delivery of gas to off-take points. He opined that
there would be sufficient numbers of in-take and off-take points
along the line to allow for expansion. He reiterated that
recipients of gas would know they would be paying a distance
sensitive tariff.
3:36:08 PM
COMMISSIONER GALVIN said that AGIA contains two significant
evaluation criteria: value to the state and likelihood of
success. Consideration of these criteria involves use of data
and modeling to determine likely benefits to the state and the
likelihood of success. Various sub-factors that are part of
this evaluation include timing, cost overrun mitigation,
favorable tariffs, initial capacity and expansion, and state
match after open season. He noted that there are many factors
to consider in the area of tariffs as producer proposals may
vary. He set forth the possibility that a producer could
propose something with a greater debt to equity ratio than 70 to
30 percent to provide a more favorable tariff. Producers may
ask for a commitment for greater return on the equity that could
also provide greater value to the state through a lower tariff.
He went on to say that initial gas flow and expansion
opportunities would be evaluated. The state will provide "one
to one, 50 percent of the cost to get to open season," but
beyond that producers will make their proposals for cost
sharing, which the state will evaluate in determining the value
of the proposal. A review of the likelihood of success includes
many factors such as the feasibility of the work plan and
budget, financial strength, technical expertise and track
record, he said.
3:40:13 PM
REPRESENTATIVE DOOGAN asked whether the take-off points are
considered in the initial evaluation of proposals.
COMMISSIONER GALVIN explained that there are certain items a
proposal must contain in order to be considered. For example, a
producer must have at least 70 percent debt, or their proposal
will not be considered. He said that the five off-take points
are not listed in the initial evaluation criteria because a
proposal for more than five does not convey a quantifiable
increased value in terms of comparing one application to
another. The "must haves" are minimums qualifications for a
proposal to be considered. Proposals that meet the minimum
qualifications are evaluated against each other. He noted that
additions beyond the "must have" list move into and are
considered in the evaluation criteria.
REPRESENTATIVE DOOGAN clarified that if an application does not
contain even one of the "must have" points, it is not
considered. If the application has all 16 points, it is
evaluated in accordance with the 7 criteria in the legislation.
COMMISSIONER GALVIN said he agreed with the aforementioned
comment.
REPRESENTATIVE SAMUELS asked how about the process of weighing
the different application components.
COMMISSIONER GALVIN explained that much consideration had gone
into the evaluation criteria, including consideration of whether
to assign points to various criteria and how objective or
subjective evaluation should be. He opined that there are risks
to either option. He said one concern was that requiring
extreme specificity could result in a proposal meeting the
criteria, but not actually providing the best benefit to the
state. Additionally, one of the risks associated with keeping
the timeline going is that there may be a judicial challenge to
the license selection. He set forth that it may be more likely
a court will enjoin the project if the court feels it could
substitute its judgment for that of the agency. He explained
that discretionary agency decisions usually receive more
deference when a court reviews them. He opined that the risk of
the project being delayed by litigation is less if the decision
makers have more discretion and subjectivity in the agency
evaluation process. He stated that there needs to be clarity in
what the state is looking for in a gas pipeline project, and he
believes that the criteria provided in AGIA provides that
clarity. Ultimately, the decision makers will consider which
project is in the best interest of the state. He opined that
state agencies, such as DNR, have substantial experience with
weighing various factors to determine the state's best interest
in complex resource decisions. He said the decision would be
explained to the public and ultimately be subject to legislative
review.
3:48:54 PM
COMMISSIONER GALVIN explained in response to a question that
inclusion of a weighted point system for the evaluation of the
seven initial criteria could result in an application scoring
the highest, yet not really being the best proposal for the
state.
REPRESENTATIVE DOOGAN asked whether weighted criteria would be
preferable to determine the state's best interest.
COMMISSION GALVIN responded that a weighted criteria method for
evaluation could be preferable if such a method was sure to
result in the best project for the state. However, because of
the complexity of the project and the probable variety of
proposals that will be received, the decision makers need
flexibility to carefully weigh and consider the risks of each
project, he said.
REPRESENTATIVE RAMRAS noted that one criteria is to make the
applications public. He opined that tariff-holders were likely
to gain significant revenues. He said he was interested in
seeing the alignment of different groups with the pipeline
project. He further stated a desire to explore the possibility
of a scoring mechanism that would consider inclusion of in-state
agencies or organizations' investment in the equity portion of
the pipeline. He noted some larger organizations, such as the
Alaska Permanent Fund Corporation, the Alaska Retirement
Management Board (ARMB), or Native corporations could possibly
participate in ownership of the pipeline, and noted that great
financial benefits that could result from such participation.
3:56:28 PM
COMMISSIONER GALVIN explained that item six of the initial
criteria requires an applicant to demonstrate its familiarity
with the tasks that are required to build a pipeline, such as
obtainment of necessary permits from Canada. Additionally, the
applicant will have to describe its work plan in the
application.
REPRESENTATIVE SAMUELS asked about possible delays that could be
caused by legal challenges and expressed some concern regarding
the application evaluation process.
COMMISSIONER GALVIN replied that there is a risk to assigning a
point value to each component because of the difficulties in
coming up with a number that would differentiate one proposal
from another. He agreed that consideration of many issues would
be part of the evaluation process. He set forth that one reason
for providing a legislative opportunity to disapprove is to
provide further analysis of the commissioners' decision. He
went on to opine that there may not be an easy way to build a
foolproof evaluation process into AGIA. He agreed with an
observation that the Commissioners of DNR and DOR would in
essence make a best interest finding based on the evaluation
criteria and comparison of proposals to each other.
4:01:13 PM
REPRESENTATIVE SAMUELS raised the issue of business ethics and
how such a subjective term is judged. He also noted that there
may be considerable legislative debate on this issue.
COMMISSIONER GALVIN noted there were possible difficulties with
the definition of the term "best interest finding," but
explained that such an approach would allow the state to
consider factors that are not in the application, such as the
possibility that an applicant has a negative business history in
another country.
REPRESENTATIVE OLSON asked whether the administration has begun
dialog with First Nations' representatives.
COMMISSIONER GALVIN replied that some groups have spoken to the
state about concerns regarding the pipeline route, but noted
there is not a proposed route as yet. There are concerns about
the pipeline route, tanker placement and other issues and those
concerns would be particular to the project, which is why there
is some flexibility in the evaluation process, he explained.
REPRESENTATIVE GUTTENBERG referred the need for a public record
of the evaluation process.
COMMISSIONER GALVIN stated that the bill contains the criteria
to be considered by the commissioners and opined that the best
way to withstand judicial review is to have a substantive
finding that weighs the issues identified by the legislature.
REPRESENTATIVE DOOGAN expressed concern over going forward with
undifferentiated criteria and questioned whether there is a need
for more participation at the decision making level to lessen
subjectivity in the making of the final decision.
MR. GALVIN responded that part of the reason for the suggested
procedure was timing and predicted that a board process would
take longer to come to a decision.
REPRESENTATIVE DAHLSTROM suggested that perhaps one more
commissioner be added to the decision-making team.
COMMISSIONER GALVIN stated he understands the nature of trust
required to approve the proposed decision-making process. He
reiterated that timing is of concern as DOR would like a
decision made in a timely fashion.
REPRESENTATIVE SAMUELS noted that the decision may be made by a
different governor and different commissioners depending on the
timing of proposals received under AGIA.
COMMISSIONER GALVIN referenced other decision-making guidelines
in Alaska law and noted that in other areas, the legislature
gives the guidelines, but the executive branch makes the
decision. He suggested it would be more unusual to tie the
decision-making process down to more quantifiable point process.
He suggested that the model presented here exists in Alaska law
and has the added safety valve of legislative approval of the
decision.
4:16:01 PM
COMMISSIONER GALVIN stated that increased predictability for the
producers is a key component of AGIA.
MR. BANKS relayed that AGIA is designed to avoid royalty payment
adjustments by creating a clear, easily used royalty formula.
He referenced prior lengthy litigation regarding royalty oil and
noted that DOR seeks to establish fiscal certainty and avoid
litigation. He opined that the state can offer real value to
the producers by providing clear royalty value definitions in
the leases. He went on to say that several aspects of the past
DL-1 leases have been adjudicated. In 1980 there was a
settlement termed the "field cost settlement" which determined
what costs the state would allow for deductions based on GTP
costs. At the time, the state anticipated gas production and
wanted to be prepared, he explained. In the early 1990s, there
was a settlement between the state and producers on the question
of royalty oil valuation. In each of those settlements,
formulas were established to clarify lease provisions he
described as "most confusing" to the lessees. He explained that
the DL-1 lease defines five different values, two of which are
not relevant as they concern posted prices. The other three
provisions cover: what the lessee actually receives for oil or
gas sold; what others receive in the same field, and what the
market value for oil or gas is as determined by market factors.
The lease requires the lessee to pay the highest of these three
factors, he explained.
4:20:34 PM
MR. BANKS pointed out that a lessee will know what it receives
for oil or gas sold, but will not necessarily know what other
lessees receive. In the third option, there may be a question
about what mechanism the state will use to determine market
value. With the prior mechanism, the lessee does not know at
the time of payment whether it has paid the correct royalty
value, he opined. Because of this uncertainty, AGIA proposes to
calculate royalty value based on market value where the gas is
sold. He indicated one possible indices the state may use to
determine market value for gas is the AEC hub price because that
price represents a widely traded, publicized gas price. He
noted that the indices used to determine gas price will likely
be based on the format for the final project. He noted that the
DL-1 leases also allow the state to take its royalty share in
value on a three month notice to the lessee. He said that the
three month provision allows the state to plan ahead and know
how much oil to take in-kind for customer's future needs.
4:24:58 PM
REPRESENTATIVE RAMRAS noted that the commodity market for oil is
broad and queried whether there is the same kind of elasticity
in the spot market for gas. He cautioned that perhaps the
market for gas is less flexible than that for oil
MR. BANKS suggested that the issue is whether the state will be
in the position to modify its request as to the amount of gas
volume it wishes to take in kind so as to participate in the
spot market. He indicated that in the Lower 48, there is a fair
amount of daily trading activity to meet demands based on
factors such as weather. He said that a long term gas contract
may be for under a year. However, Alaska will likely be
concerned with providing gas to its local communities, and would
more than likely participate in longer term contracts with
buyers. He suggested that the impact of the decision of whether
to take royalty-in-kind will occur at the time the commitment is
made. For example, the pipeline may be sized to move a certain
quantity of gas to the Alberta hub or to Valdez. If the state
then decides later to enter a contract with an in-state utility
to take some of that royalty gas, it could leave the lessee with
stranded capacity. He explained that AGIA proposes to give
reasonable terms when the state switches from RIV to RIK. This
will be accomplished by giving lessees sufficient notice to
adjust their own capacity and to make commercial arrangements
for the lessee to absorb some of the costs they may incur due to
stranded capacity.
REPRESENTATIVE SAMUELS suggested it is not practical to have a
90 days' provision due to the risk of varying capacity.
COMMISSIONER GALVIN said that because of the gas contracts with
lessees, they are at a commercial risk position because the
state has the right to take RIK, but does not have to use it.
He characterized this provision as "real value" because the
lessees would be concerned about having stranded capacity or
having to displace their gas. He opined that this is a valuable
incentive.
REPRESENTATIVE SAMUELS offered his belief that this provision
will discourage producers from participating in open season
since there is the risk of the state will change its position to
the detriment of the lessees.
COMMISSIONER GALVIN replied that this is a significant issue for
lessees, which is why it is appropriate to include in the bill.
He said that inclusion of the provision would help overcome
concern and to provide a level of certainty. If a producer does
not participate in the initial open season, it is likely that
the producer will want to discuss possible changes with the
state. He explained it will be the prerogative of the state
whether to change it or not.
REPRESENTATIVE GUTTENBERG commented that economic factors built
in to the contract must be compensated.
COMMISSIONER GALVIN replied that the state currently has the
right to switch between RIK and RIV, and has had this provision
in its leases for 30 years. However, in the "gas world" these
provisions can be problematic because lessees have to take
positions in regard to contracts and sales contracts that could
be adversely affected if the state switches it position on its
royalty take. Therefore, there are reasons for lessees will
want restrictions on the state's ability to switch how it takes
its royalty share, and that is a proper bargaining point, he
indicated.
MR. BANKS answered a question by explaining that although Cook
Inlet gas contracts contain RIK provisions, the state has never
exercised its right to take the gas in-kind.
COMMISSIONER GALVIN said that the next issue is the production
tax aspect of AGIA. He noted there is concern over the
constitutionality of some provisions which limit the applicable
tax rate. He offered his belief that the drafters of AGIA
structured this as strongly as possible for constitutional
reasons. He explained that it is being offered as an incentive
for the gas community and opined that its value is based on its
likelihood of withstanding constitutional challenge. He noted
that this provision is a discrete part of AGIA, therefore it
would not cause harm to the bill if this provision is not
allowed.
MARCIA DAVIS, Deputy Commissioner, Department of Revenue, opined
that AGIA's production tax exemption provision is allowable
under the state constitution. She explained that it provides a
production tax exemption that is measured as the value of the
gas production tax obligation minus the gas production tax
obligation during the open season. She explained that the open
season is the benchmark year in which to set the economic value
of the expectation for the producer. It is only available for
gas shipped in the same capacity as acquired in the binding open
season because DOR views this as a contract. She explained that
in exchange for this economic benefit, the producer must commit
its gas in the first binding open season. Secondly, DOR is
requesting that producers agree not to protest the rolled in
tariff provisions that will be required of the successful
licensee. This benefit is limited to 10 years of gas flow
because 10 years is a reasonable time frame for return of
capital investment, she opined. It is also the same time period
as in the Alaska Industrial Incentive Act, and so has a history
as a reasonable time period.
4:42:24 PM
REPRESENTATIVE SAMUELS asked about discussions establishing a
tax rate and whether there was consideration that the tax rate
be retroactive.
COMMISSIONER GALVIN emphasized DOR desires to provide a
structure with the strongest legal arguments for
constitutionality. He explained this is being provided as a
contractual relationship, not as a limitation on the
legislature's ability to change the tax rate. Since a
contractual arrangement requires an exchange, he opined that it
made sense to have the tax rate that applies at the time the
open season commitment is made be the tax rate that applies for
those 10 years.
REPRESENTATIVE DOOGAN asked how the oil companies would assign
value to this provision.
MS. DAVIS explained that oil companies have significant business
experience in many places besides Alaska, and are used to
weighing various levels of risk factors and legal issues. She
opined this is not a very complex legal issue, but one that is
based on a determination of the intent of the framers of the
Alaska Constitution. This determination will ultimately be for
the Alaska Supreme court she said, but opined that guiding legal
principles favor the constitutionality of this provision. She
explained that oil companies are competent at considering many
factors when deciding whether to enter a contract with the
state.
COMMISSIONER GALVIN predicted oil companies would independently
consider and value this provision's worth to them.
REPRESENTATIVE DOOGAN expressed concern that this provision is
designed to be a main incentive, yet is possibly
unconstitutional. He asked if there has been discussion on
other, possibly less problematic, incentive provisions.
COMMISSIONER GALVIN replied that oil companies want to lock in
the fiscal terms for some period of time. He explained that DOR
has structured the provision as strongly as possible to
withstand a legal challenge and to provide the best mechanism
absent a constitutional amendment.
REPRESENTATIVE SAMUELS asked about the additional risk to oil
companies of not knowing the future tax rate.
COMMISSIONER GALVIN explained that this issue has been
considered. He opined that the state cannot control the
companies' perception of the risks of investing in Alaska. He
went on to say that each company evaluates the risk differently.
He noted he does not consider it "too late" if the risks are not
fully known at the time the proposals are due because the risk
is not the "driving factor" at that particular moment. He set
forth that the provision is intended to result in the gas
commitment. The risk DOR is addressing is the tax rate at the
time of open season and the tax rate at the time the gas begins
to flow, he said.
4:55:02 PM
REPRESENTATIVE SAMUELS posed the possibility that there are
greater rewards for acceptance of greater risk and whether DOR
considered this issue in this way.
MS. DAVIS explained that oil companies will look for alignment
and opined that the companies have confidence that the
legislature will be not increase taxes at the time of open
season.
REPRESENTATIVE SAMUELS asked about the possibility that oil
companies will have the leverage at the time of open season.
MS. DAVIS replied that the state cannot change the fact that
leverage exists when the state wants a certain behavior and the
companies are in the position to provide it. She said the state
cannot effect when the companies act, but said that other
provisions of AGIA address elements of certainty in the state's
favor. She explained that AGIA resolves commercial issues
outside of the state's control, such as pricing and design
capacity, in such a way as to make it problematic for a producer
to attempt to leverage the state at a late stage.
LARRY OSTROVSKY, Chief Assistant Attorney General, Statewide
Section Supervisor, Oil, Gas & Mining Section, Department of Law
(DOL) informed the committee that the question of whether the
state can offer fiscal stability is a matter of opinion. He
said the DOL's position is that a fiscal stability provision has
a better chance of surviving a legal challenge if it is narrowly
focused, limited in time, and consistent with past practices.
He said he believes that providing production tax stability in
AGIA will survive constitutional challenge under the Alaska
State Constitution, Article 9, Section 1 which provides:
The power of taxation shall never be surrendered.
This power shall not be suspended or contracted away,
except as provided in this article.
He explained that the language of many state constitutions, and
as originally proposed to the Alaska Constitutional Convention
by the Public Advisory Service, ends at the comma. There was
some debate on this point during the Alaska Constitutional
Convention because the Public Advisory Service informed the
convention that states had on occasion suspended or contracted
away their taxing powers. He opined that there would be no
question that there would be an absolute prohibition on the
legislature's authority to provide tax certainty if Article 9,
section 1 ended after the word "away." However, the Alaska
Constitutional Convention delegates rejected that approach,
leaving the meaning of the phrase "except as provided in this
article" to be determined. He opined that "just about everyone"
who has considered this issue agrees that there is only one
section in Article 9 of the Alaska Constitution that is
applicable here and that is section 4 which reads in part:
The real and personal property of the State or its
political subdivisions shall be exempt from taxation
... [P]roperty used exclusively for non-profit
religious, charitable, cemetery, or educational
purposes, ... shall be exempt for taxation. Other
exemptions of like or different kind may be granted by
general law. All valid existing exemptions shall be
retained until otherwise provided by law.
MR. OSTROVSKY told the committee DOL believes that the phrases
in Article 9, sections 1 and 4, provide the legislature with the
ability to suspend or contract away, to some degree, taxing
authority. He offered that rules of statutory construction
support this conclusion. One rule of statutory construction
provides that every word, sentence, or provision in a statute
has some force or effect. He opined that if there was an
absolute prohibition on the legislature's ability to suspend
taxation authority, one would not expect the clause "except as
provided in this article" to be in the Alaska State
Constitution, Article 9, section 1.
5:05:00 PM
Additionally, rules of statutory construction provide that
statutes be construed so that effect is given to all provisions
and no parts are left inoperative, superfluous, void, or
insignificant. He opined that this requires there be some
meaning given to the last phrase of Article 9, section 1. He
stated it is reasonable to find that meaning in Article 9,
section 4 which allows exemptions to be granted "by general
law." He offered that AGIA is a general law because the
exemption is available to anyone who participates in the first
open season. A related question is whether there are any limits
on this power to suspend or contract the power of taxation. He
said that in the past, legislation has been passed which
authorized tax credits for a 10-year period in what were to be
considered contracts between the state and taxpayers. He noted
that contracts are generally protected by the Constitution of
the United States, although he indicated there is no direct case
law on this point. He opined that AGIA is crafted to be limited
to a narrowly described tax exemption that follows the
legislative model.
5:08:37 PM
MR. OSTROVSKY referred to some discussion on this last year and
stated that nobody knows for certain where the state can cross
the law of fiscal certainty. However, he opined that certain
facts are more likely to withstand a constitutional challenge --
AGIA's provisions are limited to one tax for a 10-year period,
which he indicated is identical to past state statutes that
"were tied to Article 9." In contrast, the Stranded Gas
Development Act (SGDA) contained sweeping provisions that
covered all state taxes for up to 45 years. He opined that
AGIA's provisions are much more likely to withstand
constitutional scrutiny.
REPRESENTATIVE DOOGAN asked how long a legal challenge will
take.
MR. OSTROVSKY responded that AGIA contains a provision that
requires constitutional challenges to it be brought within 90
days. He offered his belief that a challenge would present only
a legal issue which he hoped could be resolved expeditiously,
but noted that nobody knows an exact time period.
REPRESENTATIVE RAMRAS relayed the possibility that uncertainty
is damaging to development and indicated that he likes AGIA, but
he needs "for this AGIA project to be tightened up." He offered
that the production tax exemption, even though severable from
the rest of AGIA, creates an element of uncertainty.
5:18:10 PM
COMMISSIONER GALVIN discussed how much gas is needed to make
project work. He explained that AGIA is open to a wide variety
of projects and offers to the interested parties the opportunity
to relay what the appropriate project size will be. He opined
that the size of the project will become more apparent as the
project moves forward. He reminded the committee that Prudhoe
Bay is the primary source for proven North Slope gas reserves.
He noted that recently an Alaska Oil and Gas Conservation
Commission (AOGCC) staff report concluded that the AOGCC cannot
at this time recommend a specific gas off-take rate. He went on
to say that the report warned that an "early, high-rate gas
sale" could result in a loss of a substantial volume of
hydrocarbons. However, the report went on to say that "even
greater volumes may be at risk if gas sales are indefinitely
delayed," he said. He offered that the AOGCC is tasked to
prevent physical waste and is authorized to allow gas off-take
as long as it results in the maximum amount of hydrocarbon
recovery. He reminded the committee that AOGCC does not
consider the economic value of various approaches, but instead
considers "how much physically" will be removed. He noted that
the issue of how much gas can be taken off, and at what rate, is
currently an open question that he hopes will be resolved by
open season.
5:22:07 PM
COMMISSIONER GALVIN reminded the committee that the Point
Thompson leases terminations are currently being litigated. He
opined that the is likely to prevail in that litigation, but
that it will likely take three years to reach the Alaska Supreme
Court. If the state prevails, the Point Thompson reserves will
be available for the gas pipeline project. In addition, there
is some ongoing exploration in other areas of the North Slope
which may uncover some additional gas reserves.
5:26:20 PM
COMMISSIONER GALVIN summarized that AGIA provides increased
predictability and incentives for the producers, referring to
slide 17. He opined it would provide jobs and gas for Alaskans.
He went on to opine that development of the North Slope gas
basin is key to Alaska's long-term future economic success. He
stressed that the gas pipeline project needs to "get moving," so
as to provide gas revenue before oil revenues drop drastically,
which will reduce Alaska's leverage. He opined that AGIA is
designed to eliminate uncertainties so as to positively change
the commercial perception of the project.
[HB 177 was held in committee.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at
5:31:52 PM.
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