Legislature(2007 - 2008)CAPITOL 106
03/23/2007 08:30 AM 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 | |
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
March 23, 2007
8:32 a.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
Representative Craig Johnson
Representative David Guttenberg
Representative Berta Gardner
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
03/15/07 (H) Heard & Held
03/15/07 (H) MINUTE(O&G)
03/19/07 (H) O&G AT 8:30 AM CAPITOL 106
03/19/07 (H) Heard & Held
03/19/07 (H) MINUTE(O&G)
03/20/07 (H) O&G AT 3:00 PM BARNES 124
03/20/07 (H) Heard & Held
03/20/07 (H) MINUTE(O&G)
03/21/07 (H) O&G AT 5:30 PM SENATE FINANCE 532
03/21/07 (H) Heard & Held
03/21/07 (H) MINUTE(O&G)
03/22/07 (H) O&G AT 3:00 PM BARNES 124
03/22/07 (H) Heard & Held
03/22/07 (H) MINUTE(O&G)
03/23/07 (H) O&G AT 8:30 AM CAPITOL 106
WITNESS REGISTER
MARTIN MASSEY, U.S. Joint Interest Manager
ExxonMobil Corporation
Houston, Texas
POSITION STATEMENT: Testified on ExxonMobil Corporation's
position on HB 177 and answered questions.
PATRICK GALVIN, Commissioner
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Addressed ExxonMobil Corporation's
presentation on HB 177 and answered.
TOM IRWIN, Commissioner
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Answered committee questions on resource
issues.
ACTION NARRATIVE
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 8:32:35 AM. Representatives Doogan,
Olson, Dahlstrom, Samuels, and Kohring were present at the call
to order. Representatives Ramras and Kawasaki arrived as the
meeting was in progress. Also present were Representatives
Johnson, Guttenberg, and Gardner.
HB 177-NATURAL GAS PIPELINE PROJECT
8:32:51 AM
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."
8:33:06 AM
MARTIN MASSEY, U.S. Joint Interest Manager, ExxonMobil
Corporation, explained that his position has responsibility for
the commercialization of gas resources for ExxonMobil in Alaska.
He reminded the committee that ExxonMobil has been a key player
in the development of Alaska's oil resources for over 50 years,
and holds the largest working interest in Prudhoe Bay. He went
on to say the gas pipeline project has the potential to produce
billions of dollars in revenue and to provide a stable and
secure source of gas for the state and North America for decades
to come. He opined that the project could add as much as 1
billion cubic feet a day to ExxonMobil's gas sales. He relayed
that his company is interested in continuing to work with the
state to move the Alaska gas pipeline project forward. He
offered his belief that this project is a "world scale"
undertaking with significant costs and risks. He relayed that
due to recent increases in construction costs, the 2001 cost
estimates of $20 billion for pipeline construction are too low.
Furthermore, natural gas prices remain highly volatile and are
now slightly less than those in 2001. Other key factors include
cost overruns, regulatory delays, construction conditions, and
state fiscal uncertainties. The large size of the project
effects costs and increases the complexity of the project. He
cautioned that size also amplifies the consequences of poor
execution.
8:36:30 AM
MR. MASSEY explained that large, commercially sound oil and gas
pipeline projects have traditionally been able to obtain
financing where there are strong sponsors, proven track records,
and financial strength sufficient to provide sponsor equity. He
opined that the key project commitments for the Alaska gas
pipeline project will take the form of long-term gas
transportation commitments. Firm transportation (FT)
commitments are binding obligations made by shippers to pay for
the cost of reserving a quantity of gas for a pipeline over a
specified period of time. In this case, the producers would be
the shippers. He relayed that FT commitments are usually made
during open season, and that according to Federal Energy
Regulatory Commission (FERC) order 2005 for the Alaska gas
pipeline, must be for at least 90 days. During that time, any
or all gas shippers can make binding commitments for a specific
volume of transportation capacity, he explained. He stated that
FT commitments are needed for financing and may be for billions
of dollars. The shipper is required to pay its commitment
regardless of whether the gas is actually shipped and regardless
of the gas market price. He opined that due to this system, the
development costs and associated overrun risks are ultimately
borne by the shipper. He stated it is ExxonMobil's view that
the parties taking the risk need to be able to manage the risk.
He offered his opinion that the producers as shippers cannot
make FT commitments during open season unless they are confident
the gas pipeline project can be built cost effectively and
operated on a commercially viable basis. He opined that due to
the large size of the project, only a limited number of
companies can demonstrate the capability and financial strength
necessary to effectively participate in and manage a project of
this size. He offered that the producers have experience and
history in meeting project objectives on a worldwide basis. He
noted that ExxonMobil has project experience worldwide and that
its development costs tend to 25 percent lower than the industry
average when calculated on a dollar per barrel basis. He said
that ExxonMobil has a record of completing large projects within
15 percent of the costs estimated at the time of project
funding. He opined that combining ExxonMobil's capability with
that of ConocoPhillips Alaska, Inc., and BP Exploration (Alaska)
Inc., will provide the best chance for delivering a successful
project.
8:46:06 AM
MR. MASSEY went on to explain that the producers have over 40
years of worldwide experience in oil and gas exploration in
northern climates. He noted that many innovations were
developed by ExxonMobil for use in cold weather exploration and
production. He attributed his company's success to long term
research, technical development, and a firm commitment to
improve the efficiency and safety of its operations. He
explained that technology is of great importance in this
industry, and that ExxonMobil invests a significant amount in
the development of new technologies.
8:49:20 AM
MR. MASSEY stated that it is important to remember that the
Alaska gas pipeline project is a basin-opening project that will
benefit the state and the oil and gas industry. He offered that
worldwide, basin-opening projects are most successful when there
is alignment between the host government and the lease holders.
He offered that for this project that means the state and
ExxonMobil, BP Exploration, and ConocoPhillips. He opined that
a producer-state gas pipeline project will produce the most
revenue for the state as those parties have the maximum
incentive to control costs, which will ultimately result in a
higher net-back price for gas. The state will receive the
majority of its revenue from the value of the gas, he said. He
opined that third-party owners do not share the same incentives
because they can actually benefit from increased capital costs.
MR. MASSEY said that due to the numerous costs and risks,
ExxonMobil requires fiscal terms that are predictable and
durable to proceed with this project. He relayed that
ExxonMobil is willing to take the geology, cost, and commodity
price risks. However, ExxonMobil cannot take the risk of a
change in fiscal terms, he said. He explained that his company
has developed an industry-leading approach for management of
geology and cost risks. He also noted that market risk is
inevitable and within his company's management expertise. In
contrast, fiscal risk is "totally outside our control," he
opined. He emphasized that ExxonMobil must have agreements
which will allow it to develop this "mega-project" in
predictable and durable terms so that it can make an adequate
investment decision. He offered that if fiscal terms are
subject to future changes, ExxonMobil cannot make a well-founded
investment decision on behalf of its shareholders. Due to the
large amount of investment required to develop the gas pipeline,
he opined that increases in taxes on oil and gas related
activities during the life of the project could significantly
impact the commercial viability of the project.
8:53:38 AM
MR. MASSEY opined that AGIA does not offer the fiscal stability
necessary for the project because it allows for modification of
fiscal terms. He suggested that development of a predictable
and durable fiscal framework means that the terms to be agreed
on between the state and the producers recognize the magnitude
and risks associated with the project; balance state and
producer needs, and provide for calculation of the "total state
take" in a transparent and predictable manner. He offered that
AGIA must bring together upstream and midstream concerns because
"the upstream pays for the midstream." Upstream means "the
revenue generated from the sale of the gas and liquids from the
pipeline project," he explained. In order to calculate the
revenue from the upstream, his company must have clarity on the
taxes and royalties, which must be set at a level to make the
project viable. He said that this must be done at the beginning
of the project to insure a viable project. He went on to say
that any proposal must demonstrate how a successful open season
will be achieved.
MR. MASSEY opined that AGIA should allow applicants to define
how they could achieve the state's objectives, rather than
prescribing specific requirements that must be met. He
suggested that AGIA offer broad key objectives and allow the
applicants flexibility in meeting those objectives. For
example, he said that ExxonMobil would prefer that the applicant
determine whether it wants any capital contribution from the
state.
8:57:07 AM
MR. MASSEY warned that shippers may be unwilling to commit to FT
commitments if there is a substantial likelihood that their
initial rates will be significantly increased in the future to
accommodate pipeline expansion. He offered his belief that the
terms of the federal Alaska Natural Gas Pipeline Act strikes the
proper balance between encouraging initial investment and
encouraging exploration by providing an opportunity for future
access to the pipeline. He opined that FERC approved of
"unprecedented policies" to enable a FERC-mandated expansion to
benefit explorers. He opined that issues of how potential
future shippers may access the pipeline and future pipeline
capacity should be administered by FERC. He noted that
expansion costs can be very high, up to $500 to $800 million per
year.
8:58:29 AM
REPRESENTATIVE RAMRAS asked about the calculation of roll-in
rates in determining additional expansion costs.
MR. MASSEY explained that the increased costs are calculated by
rolling the increased costs into the tariff rate to market,
multiplied by the volume of gas shipped.
REPRESENTATIVE RAMRAS asked about the aforementioned calculation
in the situation where ExxonMobil discovers additional gas for
inclusion in the pipeline; specifically, whether the company
would benefit from an increased roll-in rate in that situation.
MR. MASSEY agreed with the aforementioned point, but offered
that situation should not be mandated, but left open for
agreement by the stakeholders, or for negotiation with FERC. He
offered that FERC is capable determining what is in the best
interest of all parties.
MR. MASSEY explained in response to a question that this
decision is not for the state or legislature. He said FERC has
the authority to make the decisions regarding pipeline expansion
regardless of "what we write in our contract ...."
9:02:07 AM
MR. MASSEY suggested that the proposed upstream inducements in
AGIA require significant modification to ensure that a
commercially viable project is obtained. He offered it would be
preferable to leave that issue open and allow an applicant to
make a proposal to address those necessary terms. He opined
that the timelines set forth in AGIA are not conducive to good
project management and indicated that a commercially viable
project will proceed at an appropriate pace under producer
management.
9:02:59 AM
REPRESENTATIVE SAMUELS questioned how to assure that the work
will commence without some type of timeline.
MR. MASSEY opined that asking for something that "doesn't make
sense" will never work, particularly on a project of this size.
He offered that the appropriate standard is to be diligent, and
that failure to be diligent could result in loss of the contract
or other remedy.
MR. MASSEY continued by stating that AGIA lacks specifics on key
fiscal terms and other requirements. He opined that the
discretion given the commissioners of DOR and DNR creates
significant uncertainty. He further opined that AGIA's failure
to provide specific criteria for selecting the successful bidder
may lead to litigation from project proponents not selected for
inducements. He said that the project should provide for
binding neutral arbitration as a mechanism for dispute
resolution He characterized arbitration as a successful and
recognized method of dispute resolution.
9:07:13 AM
MR. MASSEY concluded by paraphrasing from written testimony
[original punctuation provided]:
In closing, I would like to reiterate that ExxonMobil
is committed to moving the gas project forward. Our
company possesses the financial strength and project
experience required to make this project a success.
We are ready to work with the Administration and the
Legislature to establish a framework that recognizes
the integrated nature of the project and mitigates the
risks I have discussed to allow the project to
progress. We would suggest AGIA be amended to include
the broad objectives the State wants to achieve and
allow each applicant to decide how best to meet those
objectives and to identify what is required from the
State to advance the project. The State can then
accept the proposal that delivers the most value. We
are ready to participate in a competitive open
transparent process under the approach I have
outlined.
9:08:39 AM
REPRESENTATIVE RAMRAS expressed his desire to move AGIA and
offered that he appreciates the efforts of ExxonMobil and other
producers to work towards development of a gas pipeline.
9:13:16 AM
REPRESENTATIVE DAHLSTROM asked how much ExxonMobil spent in
Alaska in 1992.
MR. MASSEY estimated capital investment in Alaska at about $150
to $200 million per year. He noted that his prior statement
regarding investment of $3 billion was related to investment in
technology.
REPRESENTATIVE DAHLSTROM asked whether any technology related to
the thermal model upon which Trans-Alaska Pipeline System (TAPS)
was based on is still under patent protection.
MR. MASSEY noted that since TAPS was built quite a few years
ago, the technology used then is out-dated. He commented that
ExxonMobil judges bids as a part of its business and stated that
his company first determines whether the bidder is able to do
the work. To make that determination, it reviews the
applicant's financial strength, project experience, safety, and
environmental compliance records. He opined that in this
instance, the ability to deliver a successful open season is the
key to project success. He opined that the second criteria
would be to determine the proposed project's value to the state.
The third issue would be to consider how the applicant proposes
to meet objectives of providing gas for in-state use, local hire
and other factors.
9:18:26 AM
REPRESENTATIVE DAHLSTROM asked for further clarification
regarding the issue of fiscal uncertainty.
MR. MASSEY replied that AGIA does not provide the predictable
and durable terms to make the project commercially viable. Of
particular concern are the taxation factors that will affect
upstream values, he explained. He said that applicable property
and state income taxes are not "well defined." He said that the
goal is to define how to allocate revenues for the life of the
project. He reiterated that ExxonMobil will take on the risks
of price, geology, and cost, but not the risk that the fiscal
terms will change.
9:20:30 AM
REPRESENTATIVE DAHLSTROM asked what would give the assurance of
predictability.
MR. MASSEY reiterated that the applicants be allowed to describe
their project approach, which the state can then review to
determine which project is best.
REPRESENTATIVE DOOGAN asked whether the witness is suggesting a
process whereby license applicants will propose a tax and
royalty structure for the project.
MR. MASSEY agreed with the aforementioned summation. He opined
that the petroleum profits tax (PPT) as currently in AGIA is too
high for a successful project and suggested applicants be
allowed to submit proposed rates for the project, which the
state can evaluate to determine which proposal is most favorable
to the state.
9:23:35 AM
REPRESENTATIVE DOOGAN asked how a non-producer could advise the
state as to what the producers' tax and royalty rates should be.
MR. MASSEY stated that pipeline companies understand economics
and project viability and could approach ExxonMobil to determine
a rate to make their project viable. He went on to say that if
a pipeline company did not feel like a producer was dealing with
them fairly, the pipeline company could suggest its own proposal
for a successful open season.
REPRESENTATIVE DOOGAN expressed some skepticism with the
aforementioned scenario since the competitors will be asking for
a key piece of information from ExxonMobil.
MR. MASSEY stated that it is obvious what ExxonMobil needs to
progress the project. He reiterated that companies can make
their own proposal. He agreed that the party with the lease has
a competitive advantage, and that there need to be assurances
the advantage is not mis-used.
9:26:25 AM
REPRESENTATIVE DOOGAN clarified that under the proposal
suggested, the commissioners would review the proposals, pick a
licensee, and then come before the legislature to finalize the
tax and royalty regime as spelled out in the proposal.
MR. MASSEY agreed with that characterization. He opined that
there should be enabling legislation to allow this approach to
proceed.
REPRESENTATIVE DOOGAN asked about other entities that may help
provide fiscal certainty for tax and royalty payments.
MR. MASSEY stated that ExxonMobil's business practice is to
discuss and resolve the project terms with the resource owner,
in this case the State. He agreed that there are other
interested governmental units, but the state of Alaska is the
resource owner and it is imperative that the resource owner and
the lease holder come to terms to make the project viable.
REPRESENTATIVE DOOGAN asked if ExxonMobil is asking other taxing
authorities to freeze their tax rates for this project.
MR. MASSEY replied that Alaska is the only entity because it is
the resource owner.
9:31:01 AM
REPRESENTATIVE SAMUELS asked whether there are concerns about
the possibility that Canada will increase its property taxes.
He also asked about the tax situation that applies to federal
property.
MR. MASSEY replied that while ExxonMobil would like the
Canadians to put a reasonable tax on the project, he noted that
the Canadian piece is relatively small, so a tax increase would
not have the same negative impact on the project. Furthermore,
since the federal government is not the resource owner at
Prudhoe Bay and Point Thompson, his company does not consider it
appropriate to request some sort of long-term fiscal terms
related to the project.
9:33:00 AM
REPRESENTATIVE SAMUELS asked whether ExxonMobil could ship gas
to market if the company's partners do not want to bid gas to
ExxonMobil's pipeline.
MR. MASSEY stated that his company believes that to be
successful, this project requires the participation and
alignment of the state, ExxonMobil, BP Exploration, and
ConocoPhillips. He stated there is the ability for an owner in
Prudhoe Bay to take its own gas, although it is complicated and
requires agreement of other owners.
9:35:45 AM
REPRESENTATIVE SAMUELS asked why Alaska was being asked to make
concessions that are not being requested from taxing authorities
in other areas where ExxonMobil has operations.
MR. MASSEY reiterated that the gas pipeline is a basin-opening
project and said that worldwide, basin opening projects require
alignment of the resource owner and the lease holders. He
emphasized that the upstream pays for the costs of the
infrastructure investment required in basin-opening projects.
He further reiterated that these projects require the developer
to take on great deal of risk and cost and that given the risks
involved, the risk-takers need to be able to manage that risk.
REPRESENTATIVE OLSON asked what the current project cost
estimate is for the gas pipeline.
MR. MASSEY stated it is difficult to estimate project cost at
present, but opined that costs to Chicago would be over $30
billion.
REPRESENTATIVE OLSON asked the witness to address the $500
million incentive provided in AGIA and whether there has been
any contact with First Nations peoples.
MR. MASSEY opined that the $500 million incentive is not much of
a leverage incentive in a project of this magnitude. He went on
to suggest that the applicant propose what incentives are
necessary to make the project viable. As to First Nations'
peoples, he noted that ExxonMobil has primarily focused on the
federal government in considering Canadian issues. He offered
that it is not appropriate to begin discussion until there is a
project.
9:41:24 AM
REPRESENTATIVE RAMRAS asked about the criteria ExxonMobil
suggests be considered in determining the gas pipeline lease
award.
MR. MASSEY reiterated his opinion that the first criteria should
be to consider whether the applicant has the financial strength
to complete the project. The state should consider the
applicant's past project experience and results, as well as the
applicant's safety and environmental performance. Furthermore,
the state should examine how that applicant will ensure a
successful open season. Secondly, the state should consider
overall value to the state. Last, the state should consider
other objective, such as in-state access to gas and local
employment.
9:46:54 AM
REPRESENTATIVE DOOGAN asked whether the applicants should
propose tax and royalty rates for both oil and gas.
Furthermore, he asked about the company's prior known position
on this issue in the Stranded Gas Development Act (SGDA).
MR. MASSEY agreed that ExxonMobil's position is that the
applicants propose the tax rates. He agreed that the company's
position on the SGDA is one example of what would be needed for
project success, although he offered it is not the only example.
9:50:09 AM
PATRICK GALVIN, Commissioner, Department of Revenue, stated that
ExxonMobil Corporation is a very successful company and has
presented a consistent position to the state on various oil and
gas resource matters throughout the years. He opined that the
suggestions made regarding AGIA are consistent with the
company's prior approach, and more like the model of the SGDA.
He opined that the state has proposed evaluation criteria
consistent with that suggested by ExxonMobil. He offered that
any requirement that an applicant ensure a successful open
season limits the award of the gas pipeline project to those
"with the gas." He stated that DOR is not expecting an
applicant to be able to come in and insure that there will be a
successful open season. However, he opined that the state has a
choice to go the route as suggested by ExxonMobil, or to take a
different path "which puts us in a different place in a year or
two from where we are today."
9:56:20 AM
REPRESENTATIVE RAMRAS referenced concerns about whether the
volume of gas available is sufficient for a gas pipeline to
Canada.
TOM IRWIN, Commissioner, Department of Natural Resources (DNR),
noted that prior negotiations had been somewhat closed.
COMMISSIONER GALVIN replied that the state does not know how
much gas is available at present and there is no current request
before the Alaska Oil and Gas Conservation Commission to examine
the effect of different off-take volumes. However, he opined
that between the Point Thompson and Prudhoe Bay units, there
will be the opportunity to take off gas, but stated that this
does need to be examined more closely.
MR. IRWIN responded to a question by explaining that DNR is
working with committee on the issue of appropriate criteria to
be used in evaluating proposals.
10:01:05 AM
REPRESENTATIVE SAMUELS noted that there are some concerns about
how to evaluate bids, especially if they meet all criteria but
one, yet that applicant has access to the gas.
MR. IRWIN responded that many issues have been considered, and
noted that the companies have significant business experience
that will help them design an approach to move the project
forward.
10:04:49 AM
COMMISSIONER GALVIN offered that as a public entity, the state
has some limitations on its approach because it must make a
collective decision on how to move forward. He said that it is
incumbent on the state to make sure the requests are
commercially reasonable and that they solicit commercially
reasonable responses. He recognized there are many factors to
consider in project planning, therefore the state has attempted
to establish a general framework for what is necessary for
project participation.
[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
10:08:30 AM.
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