Legislature(2007 - 2008)BARNES 124
04/11/2007 01:00 PM House RESOURCES
| 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 RESOURCES STANDING COMMITTEE
April 11, 2007
1:05 p.m.
MEMBERS PRESENT
Representative Carl Gatto, Co-Chair
Representative Craig Johnson, Co-Chair
Representative Vic Kohring
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
Representative Bryce Edgmon
Representative David Guttenberg
Representative Scott Kawasaki
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Anna Fairclough
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
03/23/07 (H) Heard & Held
03/23/07 (H) MINUTE(O&G)
03/24/07 (H) O&G AT 1:00 PM SENATE FINANCE 532
03/24/07 (H) -- Public Testimony --
03/26/07 (H) O&G AT 8:30 AM CAPITOL 106
03/26/07 (H) Heard & Held
03/26/07 (H) MINUTE(O&G)
03/27/07 (H) O&G AT 3:00 PM BARNES 124
03/28/07 (H) O&G AT 7:30 AM CAPITOL 106
03/28/07 (H) Heard & Held
03/28/07 (H) MINUTE(O&G)
03/28/07 (H) O&G AT 8:30 AM CAPITOL 106
03/28/07 (H) Heard & Held
03/28/07 (H) MINUTE(O&G)
03/29/07 (H) O&G AT 3:00 PM BARNES 124
03/29/07 (H) Heard & Held
03/29/07 (H) MINUTE(O&G)
03/30/07 (H) O&G AT 8:30 AM CAPITOL 106
03/30/07 (H) Heard & Held
03/30/07 (H) MINUTE(O&G)
03/31/07 (H) O&G AT 1:00 PM BARNES 124
03/31/07 (H) -- MEETING CANCELED --
04/02/07 (H) O&G AT 8:30 AM CAPITOL 106
04/02/07 (H) Heard & Held
04/02/07 (H) MINUTE(O&G)
04/03/07 (H) O&G AT 3:00 PM BARNES 124
04/03/07 (H) Moved CSHB 177(O&G) Out of Committee
04/03/07 (H) MINUTE(O&G)
04/04/07 (H) O&G RPT CS(O&G) NT 3DP 2NR 2AM
04/04/07 (H) DP: RAMRAS, DOOGAN, OLSON
04/04/07 (H) NR: SAMUELS, KAWASAKI
04/04/07 (H) AM: DAHLSTROM, KOHRING
04/04/07 (H) O&G AT 8:30 AM CAPITOL 106
04/04/07 (H) -- MEETING CANCELED --
04/05/07 (H) O&G AT 3:00 PM BARNES 124
04/05/07 (H) -- MEETING CANCELED --
04/10/07 (H) RES AT 1:00 PM BARNES 124
04/10/07 (H) Heard & Held
04/10/07 (H) MINUTE(RES)
04/11/07 (H) RES AT 1:00 PM BARNES 124
WITNESS REGISTER
PAT GALVIN, Commissioner
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Provided an overview of the Alaska Gasline
Inducement Act (AGIA) as proposed in HB 177.
DONALD SHEPLER, Attorney at Law
Greenberg Traurig, LLP
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: During hearing of HB 177, answered
questions.
KEVIN BANKS, Acting Director
Division of Oil & Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: During hearing of HB 177, answered
questions.
ACTION NARRATIVE
CO-CHAIR CARL GATTO called the House Resources Standing
Committee meeting to order at 1:05:34 PM. Representatives
Gatto, Johnson, Seaton, Roses, Guttenberg, Kohring, and Wilson
were present at the call to order. Representatives Edgmon and
Kawasaki arrived as the meeting was in progress. Also in
attendance was Representative Fairclough.
HB 177-NATURAL GAS PIPELINE PROJECT
1:06:12 PM
CO-CHAIR GATTO 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." [Before the committee is CSHB
177(O&G).]
1:11:49 PM
PAT GALVIN, Commissioner, Department of Revenue (DOR), drew
attention to the PowerPoint presentation dated 4/11/2007 from
the Palin-Parnell Administration. As specified on slide 1,
Commissioner Galvin said that the administration would like the
committee to recognize that the Alaska Gasline Inducement Act
(AGIA) is designed to be a commercial vehicle for the
opportunity to create a competitive environment in which the
commercial players can make their own independent decisions
regarding how to participate and develop solutions to the issues
that will arise with this project. Furthermore, AGIA is focused
on moving the project ahead because it's in Alaska's interest to
[construct] the pipeline sooner and have certain terms imbedded
in the contract. In order to do the aforementioned as a
government, it must be done in as transparent a manner as
possible. Therefore, the decision-making process is focused on
transparency. There is also the desire for the inducements that
Alaska puts forward to be transparent as well. The
aforementioned results in knowledge of what the state is
offering as well as the price for those inducements. The
aforementioned further provides knowledge of the risks and the
costs the state will face.
1:13:37 PM
COMMISSIONER GALVIN, referring to slide 2, emphasized that it's
important to note that AGIA is not a negotiation. The AGIA
model is to create a bidding opportunity through the request for
application process that allows all competing proposals to come
forward. The aforementioned will provide the state with an idea
of the opportunities it has among competing interests. The
legislation includes inducements that attempt to generate
interest in this project such that it results in the commercial
players moving ahead with the project per a specified timeline
and committing to certain terms and requirements. In order to
achieve the aforementioned there is a midstream inducement of
potentially $500 million capital contribution. He clarified
that although the amount of the contribution isn't necessarily
known at this point, it won't exceed $500 million. The
aforementioned is an important aspect of AGIA as it specifies
that the state has a limit on its exposure for this venture. He
pointed out that AGIA includes upstream tax and royalty
inducements that are geared toward obtaining a commitment to the
licensed project at the initial open season. Again, those are
being designed to be clear and transparent.
1:16:39 PM
COMMISSIONER GALVIN acknowledged that sometimes AGIA is compared
to the stranded gas contract. However, there was a lot of
concern that the stranded gas contract was developed out of
public view. The legislation attempts to address that concern.
There were also concerns with regard to the hidden costs [of the
stranded gas] contract. Therefore, AGIA is trying to eliminate
the aforementioned level of uncertainty with regard to the cost
to the state by ensuring that the inducements are quantifiable
and known at the onset.
1:17:50 PM
REPRESENTATIVE SEATON expressed concern that there is
uncertainty with regard to the tax rate. One of the big
components of this process is to get partners to the table, get
gas in the open season, and have bids made. If the tax rate is
unknown until the open season, it will be difficult for entities
to come forward and work with other partners. Representative
Seaton opined, "We basically have the most expertise we're ever
going to have on what [petroleum production profits tax] PPT was
and how the tax program was put together and what it means at
this time in the legislature." He questioned why some certainty
isn't given by specifying what tax rate is going to apply.
1:19:52 PM
COMMISSIONER GALVIN explained that the concept behind the
current structure of HB 177 is that the tax rate in place at the
time an interested party makes the decision will drive the
decision whether to commit or not. Under this concept, there is
no need to know the tax rate years in advance because the
decision won't be made until the commitment is made.
Commissioner Galvin said he understands the logic of the
argument of setting the tax rate before the applications are
due. However, one concern is the constitutionality of locking
in the tax rate [before the applications are due]. He opined
that the strongest argument for locking in the tax rate is based
upon the exchange of making the gas commitment for locking in
the tax rate at that time. The mechanism by which the tax rate
would be locked at the time the applications are due isn't
necessarily present because the gas isn't being committed at the
time of application. Therefore, there isn't the same immediate
exchange that would lock in that contractual relationship. If
the application doesn't lock in the tax rate, then it could
easily be changed by the legislature between [the submittal of
the application] and the open season.
COMMISSIONER GALVIN related his disagreement that there is a lot
of expertise at this point. He pointed out that the first
returns on PPT have only recently been received and are being
assessed. There was a gap in what was expected and what was
received. Some time will have to be taken to determine why that
occurred and whether the current PPT structure will deliver what
it was expected to deliver. He noted that the aforementioned
relates only to the oil side. With regard to the gas side, much
more information is necessary. The PPT discussions primarily
focused on oil, and therefore the gas tax rate now needs to be
more the focus. More information, he opined, is necessary to
have that discussion and be able to set a rate that can be
locked in for many years. Still, it's worthwhile to discuss
whether it's necessary to have a discussion on the PPT between
now and the current target date for applications being due,
October 1st. For the purposes of AGIA, Commissioner Galvin
stressed that [the administration] feels very strongly that this
legislation needs to be passed prior to addressing the
complication associated with setting the gas tax rate in HB 177.
1:25:39 PM
CO-CHAIR GATTO related his understanding that the real return
was less than the anticipated return by $813 million over 8
months. He calculated that $813 million over 8 months amounts
to about $100 million a month. Over 12 months, it would amount
to $1.2 billion, which is closer to what the PPT has produced.
COMMISSIONER GALVIN clarified that the expectation for what PPT
was going to produce for that [8-month] period of time was
approximately $950 million. The aforementioned was used as the
model for the evaluation of what the appropriate rate should be.
Therefore, there is a disconnect between what was expected and
what was received. Commissioner Galvin further clarified that
he is merely suggesting that more must be known about why that
happened prior to locking in some of these things for an
extended period of time.
1:27:26 PM
REPRESENTATIVE WILSON inquired as to how much of an adjustment
was made due to the oil spill that caused the shutdown.
COMMISSIONER GALVIN said that is part of the analysis. He
pointed out that the $950 million was the expectation after the
spill had occurred and the shortfall had occurred, and therefore
it was factored in the expectation. Commissioner Galvin
characterized it as an additional complication that requires
review.
1:28:16 PM
REPRESENTATIVE SEATON said he could appreciate those comments.
However, he pointed out that the state will never have
experience with gas until it is flowing. He recalled that what
he has heard continuously is that to achieve something that
works, people have to at least know what the tax rate is. He
then related his understanding from other committee hearings
that there has been testimony that the players anticipated to be
at the table as pipeline companies aren't going to proceed
unless they have some confidence that there's a source of gas.
Therefore, the lack of knowledge of the tax rate "may not get us
there," he said. Representative Seaton said he wasn't sure that
[a specific tax rate] isn't one of the components that should be
reviewed. He then related his understanding from analysis that
the PPT will be high because there are very few expenses since
the development costs of Prudhoe Bay have already occurred.
Furthermore, he opined that the economics are that the gas is
going to be more profitable. Still, knowing the tax rate may be
more important to obtain successful applications through AGIA
versus waiting to work on the upstream if no applications are
received.
1:30:52 PM
COMMISSIONER GALVIN turned to the characterization that
participants have expressed a reluctance to participate unless
they receive assurance that they get the gas if they
participate. He opined that the testimony was a reflection of
TransCanada's comments that it wasn't comfortable participating
given that the state was requiring a commitment to submit a
certificate. That's different than an entity not submitting an
application unless it knows that it's going to get the gas.
Commissioner Galvin opined that ultimately the state needs to
have a vehicle that is shown to be economic and provides the
lessees with a reason to place their gas in the line. He said,
"You have moved from a question of whether the producers need to
have this level of certainty that they keep talking about at the
time they submit the application or whether it's at the time
that they are being asked to commit their gas." The legislation
has structured a level of certainty that is believed to be
appropriate at the time the applicant commits the gas.
COMMISSIONER GALVIN opined that when one views the economics
from a Prudhoe Bay lessees' perspective, the economics are so
positive when $6 gas is factored in. That view results in a
potential rate of return of 50 percent due to the limited level
of investment required. The question becomes: what level of
tax change is needed to affect that decision. Upon review of
the history of Alaska's tax take, Alaska has never even come
close to the international norms. Therefore, Commissioner
Galvin said that he personally takes offense to the notion that
the state needs to provide certainty [to potential lessees].
The state is trying to be responsive by providing a 10-year
window to commit the gas to the line and whether that window
should be expanded is a different discussion.
1:35:16 PM
REPRESENTATIVE GUTTENBERG opined that the producers' major role
is to obscure the issue. He asked if this is the appropriate
time to provide the certainty or can it be compared to other
projects on the world market to determine when the certainty is
necessary. He also asked if the producers are in need of
certainty in the form of specific numbers.
COMMISSIONER GALVIN highlighted that no jurisdiction provides
the certainty the producers are requesting. "So, you don't have
a comparable to say when is this necessary along this timeline
because you don't have an example of where it was actually ever
provided," he pointed out. He reiterated that the legislation
attempts to provide an opportunity for participants to make
decisions regarding how and when they'll participate in this
process. When one talks about certainty it's really a response
to uncertainty. From a resource development company standpoint,
there are uncertainties that are dealt with daily. The question
before the state is regarding the point at which the state,
prior to other uncertainties, does Alaska need to lock in the
perceived uncertainties of the state fiscal system. He related
the belief that once the range of potential economics on the
pipeline has been defined and demonstrated through an open
season, the issues associated with the need for more certainty
on the state fiscal system will fall to the side. The
aforementioned is the point of AGIA. Commissioner Galvin then
commented that the issue raised by Representative Seaton is a
legitimate matter on which to hear from the industry. He
emphasized that the tax lock in is clearly trying to induce the
commitment of gas to the project. The [administration's]
feeling today is that it isn't necessary to lock in the tax rate
in AGIA.
1:40:39 PM
CO-CHAIR JOHNSON said that part of [the purpose] of AGIA is to
get people to bid on the pipeline. He questioned what would be
wrong, from the standpoint of AGIA, if taxes are locked in and
more people are brought to the table.
COMMISSIONER GALVIN answered, "Nothing." He said he would agree
if the producers say that they need to know the tax rate for the
10-year period prior to considering submitting an application.
Clearly, AGIA has been designed so that the producers will
decide to participate. "And, if that's one of the drivers, then
we need to address that," he said.
1:41:54 PM
CO-CHAIR JOHNSON asked then if a provision is included in HB 177
that locks in taxes now would impact other parts of the
legislation.
COMMISSIONER GALVIN opined that the question of locking in the
tax rate in AGIA is more a question of what is the tax rate [an
applicant] is willing to lock in. He reiterated his early
comment that his level of confidence in the current tax rate is
relatively low. Commissioner Galvin said he would be
uncomfortable saying that the state should lock in the current
tax rate for the [10-year] period of time. Furthermore, he
didn't believe the producers would view the current tax rate as
much of an inducement. Therefore, the question becomes whether
the state will somewhat arbitrarily pick a lower number for the
tax rate. The [administration] wouldn't support such action, he
said.
1:43:24 PM
REPRESENTATIVE WILSON, recalling the debate last year, related
her observation that it takes the producers a long time to make
decisions. Therefore, she surmised that the producers would
need some certainty as soon as possible, before they would even
[be interested].
COMMISSIONER GALVIN opined that he doesn't believe anyone is
suggesting that the rate be set weeks before an interested party
is asked to make the decision. This is a matter of when in the
sequence of events [the tax rate should be set]. There is
potentially up to three years between when the license is issued
and when the open season would take place.
1:45:15 PM
COMMISSIONER GALVIN, returning to his PowerPoint presentation,
directed the committee's attention to slide 3 regarding the
state's terms. He pointed out that the state's "must haves" are
located in the section of the legislation that addresses the
requirements placed on the licensee. The "must haves" are
geared toward achieving a competitive and vibrant oil and gas
industry on the North Slope in the future. In order to achieve
the aforementioned, there needs to be a pipeline that begins
with a low tariff and a pipeline that can and will be expanded
when new gas is found. That expansion must be something that
the explorers can rely upon, he said. He opined that the "must
haves" were developed after much thought and research into what
is commercially reasonable as well as where the state's true
interests lie in this pipeline. Additionally, the state wants
to ensure that there will be opportunities for in-state use and
that there are opportunities for Alaskans to enjoy job
opportunities due to the construction of the pipeline and the
expanding oil and gas sector in the North Slope. He
characterized the "must haves" as the state's bottom line. He
then opined that it's for the state, through this process, to
tell the industry and the nation what the state's "must haves"
are. Furthermore, the state should receive something in return
for its $500 million, a pipeline that meets the state's needs.
1:50:20 PM
CO-CHAIR GATTO asked if the producers have voiced any objection
to the "must haves."
COMMISSIONER GALVIN noted that there is a slight variation in
the message from the producers. For example, ExxonMobil
Corporation (ExxonMobil) has opined that the state shouldn't
establish "must haves" but rather should have broad objectives
and allow the applicants to suggest the "must haves." However,
other participants have suggested moving some of the items from
the "must have" list into a valuation criteria. When the latter
suggestion is made, one must consider why it was suggested.
Commissioner Galvin opined that the must have list includes
those things the state truly must have and shouldn't negotiate
away. He mentioned that another aspect to consider is whether
the change desired by the applicant is a change to the
competitive field that would provide that applicant with a
competitive advantage.
1:52:39 PM
REPRESENTATIVE ROSES related his understanding that during the
application process, the applicant must specify its project, the
route, size, design, timelines, budget, and its capacity.
However, he questioned how an entity can develop a comprehensive
plan for the capacity if there haven't been discussions with
those who have the gas regarding how much they're willing to
provide. An integral part of how much gas they're willing to
provide, he surmised, is probably directly proportional to the
tax they have to pay and whether it's profitable to distribute
the gas. Therefore, he questioned how the plan is put together
without having such a commitment from the producers.
Furthermore, if the state has a list of "must haves" it's likely
that all other companies that have to generate a profit do as
well. Representative Roses inquired as to how an entity reaches
a point in the application process to provide a somewhat
realistic expectation of capacity without having some commitment
from the producers as to what they're willing to provide. He
further inquired as to how the producers will know the
aforementioned if they don't know what their costs will be.
COMMISSIONER GALVIN explained that the sequence of events is
that [an applicant] is going to provide the state with the plans
for a pipeline that has a certain capacity. That capacity will
be based upon the expectation of what will be committed once an
open season occurs. The open season will confirm or deny
whether it's a reasonable expectation.
1:56:02 PM
REPRESENTATIVE ROSES posed a scenario in which an applicant has
preliminary conversations with the producers who say they will
provide a certain amount of gas or a certain amount of time and
the applicant says a pipe of a certain size is necessary.
During the open season the tax rate is determined and the
producers change the amount, although it was designed based on
what the applicant thought he/she would have. Representative
Roses then related his understanding that part of the design is
how to expand the capacity. In that regard, he questioned
whether the design would include expansion of the capacity due
to new exploration or the underestimation of the [amount of gas]
because of the lack of knowledge with regard to fixed costs.
COMMISSIONER GALVIN deferred to Mr. Shepler. He suggested that
there is some confusion with regard to how the uncertainties fit
into the level of gas that would be committed. If the tax rate
changes, there isn't suddenly more gas to flow.
1:57:37 PM
DONALD SHEPLER, Attorney at Law, Greenberg Traurig, LLP,
informed the committee that in the Lower 48 the open season
process evolved as a way for Federal Energy Regulatory
Commission (FERC) to assure that pipeline capacity, new
projects, and new expansions are offered to anyone who desired
such access. He characterized the open season as an interactive
process that involves communication with the potential shippers
and even perhaps nonbinding open seasons to test the waters.
Mr. Shepler said that it isn't unheard of for a pipeline to put
out an open season and determine that the demand was inadequate
for what it had in mind. He recalled an instance in which there
were at least four open seasons for a project that ultimately
resulted in a major pipeline interconnecting system. Another
aspect is that FERC is going to review this open season proposal
before it becomes official in order to ensure that it's not a
discriminatory open season.
2:00:01 PM
REPRESENTATIVE ROSES surmised then that an entity comes in with
a design in which a certain size [pipe] with a certain size
capacity is proposed, then an open season occurs. Based on the
results of that open season and the commitment of the producers
with regard to providing gas to the line, the [project] would be
resized based on the need.
MR. SHEPLER replied, "Generally, yes." In that context it's
important to note that the pipeline is talking to its future
customers, shippers, which can be producers or nonproducers. In
Alaska, for the most part, there is a known size of the resource
base on the North Slope.
2:01:22 PM
REPRESENTATIVE ROSES asked if the application process is
required to occur prior to the open season, or should the open
season occur first and then design a pipe to fit the capacity
that's guaranteed. He questioned why there should be multiple
open seasons to achieve the right size of the pipe.
MR. SHEPLER reminded the committee that the unique situation in
Alaska is that it's known that there is 8 billion cubic feet
(bcf), more or less, that's going around in circles.
Furthermore, the state also has the experience of negotiations
under the Stranded Gas Act a couple of years ago. Those
negotiations centered around a reasonably narrow range of sizes.
He opined that the real issue is whether the producers will
commit their gas to a project in the open season. The process
of the open season starts the FERC proceedings, which eventually
lead to a FERC certificate application. He characterized the
aforementioned as a funnel narrowing the level of uncertainties.
By the time FERC has approved a certificate, the size of the
pipe, the route, and the projected costs are known. The open
season starts the aforementioned process going and culminates
under AGIA with the commitment by the licensee or applicant to
process a FERC certificate.
2:04:30 PM
REPRESENTATIVE ROSES related his view that there is an
application process that uses theoretical concepts in terms of
the design. If the open season exceeds the expectation, then a
larger pipe may be needed. Representative Roses opined that
[under AGIA] it seems that the decision of who to grant the
license will be based on the size of the pipe, the route, and
the capacity. The open season occurs and after an applicant is
determined, that applicant's design work is modified based on
the open season. He asked if there is a law preventing an open
season from occurring prior to designing the size of the pipe
and awarding a license to move forward with the pipe.
COMMISSIONER GALVIN noted his agreement that the natural
progression of the project is what Representative Roses
described. However, it's not happening. He opined that it's
not happening because the market isn't working in that direction
since there are three companies that hold all the rights to all
the gas. Those three companies, the producers, aren't willing
to move ahead with any decision making until they receive
something more than they received last year.
2:07:08 PM
REPRESENTATIVE ROSES related his understanding then that by
doing AGIA and now having someone apply for a theoretical
construct for a pipe, the producers now have more than before.
COMMISSIONER GALVIN clarified that the producers have a project
that defines the economics of the line. The [producers] will
make their decision based on a known pipe and a known cost. The
producers will then explain to the state why they aren't
committing their gas to the line based on a real project.
Therefore, AGIA is intended to force the issue through the state
putting up the money to induce someone to move the project to
the open season. The project would then be on the table and the
costs, tariffs, and risks to the producers would be known. The
producers would then have to decide whether they are going to do
the project.
2:08:49 PM
REPRESENTATIVE ROSES inquired as to what happens if the
producers still aren't willing to cooperate.
COMMISSIONER GALVIN answered, "Because then we will have a
project that has an economic base." The state can then ask the
producers why they aren't putting their gas in the line. If the
producers, as suggested by Representative Roses, say it's
because they don't want to put their gas in the line, then
they'll have to explain that to Congress, consumers, the state,
and the Federal Trade Commission (FTC). If the project proves
to be economic and the producers choose not to participate, they
will have a lot of answers to provide.
2:10:46 PM
REPRESENTATIVE ROSES, returning to Representative Seaton's
earlier comment, opined that unless the producers see something
different that will entice them to sell what they aren't willing
to now, it sounds like the project is back at the point of the
Stranded Gas Act. However, much more time, 15-20 years, will
have passed at the time litigation is decided.
COMMISSIONER GALVIN stated that he and Representative Roses are
concerned about the same thing; the risk that as more time
passes, Alaska teeters closer to the financial edge. The
question is whether to have the discussion about what is
necessary to make this project happen today with all the
uncertainties or to have the project move ahead to the point at
which the cost of the project is known. He opined that when the
discussion occurs in that context, it's a completely different
discussion than what is occurring now. Furthermore, AGIA
provides an opportunity for the producers to decide now whether
they want to participate and take the state's terms in order to
ensure the opportunity isn't lost. The aforementioned is a much
better position for the state than the current situation.
2:14:40 PM
CO-CHAIR GATTO highlighted that the producers are not without
risk. In fact, at this moment it isn't their gas, they only
have a lease to produce it. However, if, in a few years, there
is a plan and a builder, the producers would be at risk because
there is a requirement. If the requirement isn't met, the
producers have to give up the gas. He characterized [AGIA] as
an opportunity for the producers to be the builder.
2:15:44 PM
REPRESENTATIVE WILSON, referring to page 4, lines 7-14 of CSHB
177(O&G), recalled that last year that [the producers] couldn't
make a decision on the size of the pipe until after the open
season. At that point, FERC would get involved. She further
recalled that [the producers] were contemplating 48-inch pipe,
which is the largest built thus far. However, a 52-inch pipe
would be cheaper in the long run due to the price of gas. As
more gas is found, it's cheaper to have the larger pipe than to
have feeder lines. Still, the 52-inch pipe hasn't yet been
invented nor has the machinery required to put it in place, and
therefore she questioned how such could be said to be
economically viable.
COMMISSIONER GALVIN said that any project based on materials
still in the laboratory will have to be seriously questioned in
regard to whether it will be delivered. The aforementioned is
why the analysis is both economic and technical. He reminded
the committee that when a proposal is made, it will be based on
the known resource and an expectation about what may be
committed at an open season. The pipe will be designed based on
the range of possible commitment that they'll receive.
Therefore, the state, in its analysis, will have to factor in
the likelihood of actually obtaining that level of commitment
and the plan's flexibility in regard to the various levels of
commitment. Commissioner Galvin stressed that everyone should
realize that what the producers propose now is before an open
season and before the actual commitments are received or there
is a sense of the initial shipping capacity. The producers, he
pointed out, will have to be responsive to the state's interests
and their interests in having a line that is expandable and
would be cost effective for some time. This means that the
producers' proposal will have to address those different
scenarios, which will also be reflective of both the design of
the pipe or the other steps to commit more gas or a particular
capacity.
2:20:40 PM
REPRESENTATIVE WILSON surmised then that the state is asking the
producers to put down on paper "imaginary" numbers they believe
will work. The state will then have to review those numbers and
decide whether they're possible.
COMMISSIONER GALVIN noted that all the numbers from the
producers will be based on the level of analysis done to that
point. The level of confidence that the state will have in the
producers' numbers will be based upon the level of detail
provided in the analysis. There will have to be [analysis/data]
to support the numbers proposed by the producers.
2:22:28 PM
COMMISSIONER GALVIN, in further response to Representative
Wilson, said that there is a certain amount of flexibility in
regard to what the producers choose to do at a certain point in
the process.
2:23:46 PM
CO-CHAIR JOHNSON inquired as to the location of the five
delivery points that are required in the legislation.
COMMISSIONER GALVIN clarified that the applicant has to commit
to five delivery points once the demand is present to require
them. In further response to Co-Chair Johnson, Commissioner
Galvin said that five isn't a magic number.
CO-CHAIR JOHNSON surmised then that [if there is flexibility
with regard to the number of delivery points required], then
five delivery points must not be a "must have." Therefore, he
questioned why it's a "must have."
COMMISSIONER GALVIN explained that the "must have" is that the
producers have to agree to meet in-state demand. One aspect of
that is having a commitment that the producers will provide for
five offtake points.
2:25:04 PM
CO-CHAIR JOHNSON inquired again as to why there are five
delivery points and the location of them. He pointed out that
the legislation calls for [applicants/producers] to come forward
with certainty that will be evaluated by the state. Therefore,
he questioned why the same can't be expected from the state.
COMMISSIONER GALVIN related that from the administration's
perspective if the delivery points were eliminated, [the
contract] isn't as valuable. From Commissioner Galvin's
perspective the question would be whether the state should
consider a proposal that doesn't include delivery points. By
placing the delivery points in the "must haves" section, it
means that the state doesn't want to consider an application
that doesn't have five delivery points. He clarified that the
application doesn't have to specify the five delivery points,
the applicant merely has to commit that when the opportunity
arises and there is a demand for in-state use, they will allow
the delivery point to take place. Whether there are three,
five, or seven delivery points is open to discussion. The five
delivery points was what [the department] anticipated within the
state.
CO-CHAIR JOHNSON said that he wants to know what are really
"must haves." He inquired as to what would happen if the
committee reduces the number of "must haves." He specifically
inquired as to what are the deal breakers.
COMMISSIONER GALVIN clarified that the items labeled as "must
haves" in the legislation are telling the world that these are
the state's "must haves." He related that "we" are open to
discuss what should or shouldn't be on the list of "must haves."
He further clarified that whether these are the administration's
"must haves" is a different question.
2:29:07 PM
CO-CHAIR JOHNSON inquired then as to why what is currently
referred to as "must haves" aren't set as guidelines/criteria,
such that the applicant that reaches or exceeds the guidelines
is awarded the contract. He questioned why an applicant that
meets all the requirements, but only has three delivery points
would be considered noncompliant.
COMMISSIONER GALVIN opined that since the state is willing to
put up $500 million and match [the applicant] in its costs, the
state has the right to ask for things in return. He further
opined that [the department] believes it's appropriate for the
state to establish at least a floor for what is expected and
allow the interested parties to compete on that basis. [The
administration], he related, believes that it's appropriate for
the state to tell applicants that five delivery points are a
"must have." [The administration], he further related, would
prefer that the five delivery points remain a requirement for an
application to be considered.
2:32:17 PM
CO-CHAIR JOHNSON said that he is looking at what is imperative
to the legislation. He again inquired as to what is a true
"must have" that's absolutely nonnegotiable. He then inquired
as to what can be included in HB 177 to broaden it [such that it
obtains many applicants].
COMMISSIONER GALVIN commented that it's a bit disconcerting to
have a discussion about the legislation in regard to what can be
stripped out and remain something the administration is willing
to endorse. Commissioner Galvin related that the administration
believes HB 177 is in great shape as it is now and doesn't need
to be changed much at all. He said that the administration is
interested in hearing what areas the committee finds to be
problematic.
2:34:48 PM
CO-CHAIR GATTO mentioned that in 2000 the producers invested
$125 million on a feasibility study, so there has been work done
[on this project].
COMMISSIONER GALVIN interjected that TransCanada will probably
comment on how much it has invested in the project also.
2:35:22 PM
COMMISSIONER GALVIN, returning to his PowerPoint presentation,
directed attention to slide 4. He related that the decision-
making process is intended to be transparent and competitive,
not a negotiated process. The process affords the opportunity
of the bids being reviewed in a public setting during which the
public can comment. The decision [as to who is awarded the
contract] is made and returned to the legislature for approval.
The entire process is intended to be as transparent as possible
so that the public can have confidence in the outcome.
2:36:26 PM
REPRESENTATIVE GUTTENBERG related his understanding that the
public is going to have 60 days for review. He then asked if
the administration is going to place the contract proposals
without analysis before the public or is there going to be some
process in which there are comparisons and data that a lay
person can understand.
COMMISSIONER GALVIN answered that at this point the
administration doesn't have a preconceived idea how the
information will be presented and thus the legislation doesn't
include such. However, in keeping with the intent of having
public involvement, it's incumbent upon the administration to
make information available to the public in a way that's
understandable. He then turned the presentation over to Mr.
Shepler.
2:38:12 PM
MR. SHEPLER, referring to slide 5, opined that expansion of the
pipeline is vital to the ultimate goal of establishing a
vibrant, competitive oil and gas driven economy on the North
Slope. The FERC, in its orders, have recognized the unique
situation of Alaska and that there will almost certainly be only
one pipeline built out of Alaska. The aforementioned has led
FERC to adopt a rebuttable presumption in favor of rolled-in
pricing, which means that as the costs are accumulated they are
divided amongst all the volumes under contract. The FERC orders
recognized that there are some governmental subsidies that are
included in the initial project in the form of federal loan
guarantees that will reduce the borrowing costs of the sponsor
of the pipeline project. Another subsidy is the seven-year
depreciation for income tax purposes, which reduces rates for
initial shippers. Mr. Shepler clarified that ultimately the
rates for all initial shippers will be reduced by the
aforementioned factors, and therefore reduce the real-world
impact of rolling in pricing when expansion becomes more
expensive. He informed the committee that initial expansions
will typically be based on adding new compressor units, which
are relatively low cost and produce a substantial bang for the
buck. However, in order to maximize the value of the pipeline
itself the expensive looping and expansions will increase the
rates for all shippers.
2:41:22 PM
REPRESENTATIVE GUTTENBERG requested clarification with regard to
the looping.
MR. SHEPLER explained that looping is a pipeline industry term
for putting in a parallel pipe, a welded in integrated piece of
the original pipe. Once the gas has been compressed and no more
expansion from compression exists, the size of the pipe can be
doubled by putting in another run of pipe. The aforementioned
is expensive because miles of pipe are being purchased. Mr.
Shepler related his understanding that the pipe would be
installed a few miles downstream of a compressor initially. As
more volumes come on, a few more miles would be put in
downstream of the compressor, ultimately resulting in a dual
line. He pointed out that looping is more expensive than simply
purchasing another compressor unit or station. At some point
during the looping, the rolled-in rates increase. Mr. Shepler
highlighted that AGIA specifies that the obligation for the
pipeline company to file for and support rolled-in rates is
capped. The pipeline company has to commit that it will file
for and propose rolled-in rates so long as that doesn't increase
the rate for shippers by more than 15 percent over initial
tariff rates.
2:43:40 PM
REPRESENTATIVE SEATON asked if that 15 percent over initial
tariff rates is in nominal dollars.
MR. SHEPLER reminded the committee that he is an attorney not an
economist. However, he offered that the target here is the
initial regulated rate that the FERC approved when the pipeline
went into service. The legislation, AGIA, contemplates the
initial rate increase of up to 15 percent through roll-ins and
the pipeline company would have the obligation to file for that,
subject to FERC approval.
2:44:44 PM
REPRESENTATIVE SEATON asked if this is a meaningless number 10
years later after inflation. He asked if it's the actual dollar
value at the time FERC decided the rate.
2:45:27 PM
KEVIN BANKS, Acting Director, Division of Oil & Gas, Department
of Natural Resources, posed a scenario in which the initial rate
is $2.00 and 10 years from now expansion is occurring that will
increase the cost of shipping to about $2.30 on a rolled-in
basis. Inflation isn't taken into account. He informed the
committee that the fact that it's based off of the rate in the
initial open season works in the favor of the initial shipper
because the 15 percent uptake is still measured against a $2.30
cap. If the expansion is more that $2.30, the amount above
$2.30 will be determined using an incremental basis and thus the
cost will shift to the new shippers. Mr. Banks, in response to
Co-Chair Gatto, said [the cost] is nominal and works to the
favor of the initial shipper if inflation has occurred during
the intervening period. The cap means that 15 percent over the
initial rate will be borne by the expansion shippers.
2:48:09 PM
REPRESENTATIVE ROSES questioned what occurs if there is another
roll-in later. He asked if since the 15 percent cap has been
reached, there would be no new increase and everything would be
passed on to the new guy. Or, would $2.30 become the initial
rate for the next roll-in, he asked.
MR. BANKS answered that the $2.30 will remain and thus the next
expansion will be incremental.
COMMISSIONER GALVIN clarified that it won't necessarily be
incremental. He explained that AGIA is set up to obligate the
licensee to support rolled-in rates up to this limit.
Therefore, the licensee may propose rolled-in rates for its own
purposes. This provision is included with the understanding
that the licensee may prefer not to roll-in rates beyond this
level.
2:50:17 PM
REPRESENTATIVE ROSES surmised then that this rate is the tariff
being paid to ship gas down the line.
COMMISSIONER GALVIN replied yes.
REPRESENTATIVE ROSES further surmised, "So, the initial
commitment by the producers to put 'X' volume of gas into the
line - they're going to start off with this initial rate. We
now expand the line because somebody else has come on with a new
field. They can be brought up to 15 percent more than what they
originally paid, still based on the volume that they had agreed
to pay."
COMMISSIONER GALVIN interjected that at each expansion, when the
rate changes, [the licensee] will have the opportunity to opt-
out of the commitment.
REPRESENTATIVE ROSES asked if the opportunity to opt-out is in
the legislation.
2:51:17 PM
MR. SHEPLER said that the opportunity to opt-out is part of
FERC's policy. He explained that FERC requires that for a
pipeline company that expands, there has to be an offer to let
parties "turn back" capacity. There might not need to be an
expansion at all if those holding the capacity are willing to
return it to the pipeline to sell it to those wanting the new
capacity.
2:51:49 PM
REPRESENTATIVE ROSES posed a scenario in which one of the three
producers agrees to sell the gas. However, five years after gas
flows down the line a new well is brought on and the three
original entities are offered the ability to opt-out. In such a
scenario, he questioned what would stop them from all opting out
unless there are new negotiations that result in a different
tariff rate.
2:52:33 PM
CO-CHAIR GATTO pointed out that just because there is expansion
doesn't mean that the price increases. He reminded the
committee that the price of a compressor is little compared to
the price of the pipeline. He opined that the initial expansion
probably lowers the price for everyone.
MR. SHEPLER confirmed the aforementioned.
CO-CHAIR GATTO said that part of expansion is beneficial.
2:53:19 PM
REPRESENTATIVE ROSES said he understood that, but pointed out
the potential in the legislation for a 15 percent increase. He
related his agreement that no one would opt-out if the price is
lowered. However, any increase in price could result in one
opting out since it would become a leverage point. He suggested
that the concern would be that once costs are increased there is
no mechanism or guarantee that all three major producers can't
pull out unless the state renegotiates.
2:53:51 PM
MR. SHEPLER stated that the turn back is limited to the amount
of the new demand. He then pointed out that the FERC policy in
the Lower 48 from 1960-1999 was for rolled-in treatment for all
expansions, even when it increased existing shippers' rates. In
1995, the aforementioned was somewhat limited such that if the
expansion had any system benefits to all users and increased
shippers' rates by 5 percent, rolled-in pricing was required.
In 1999 FERC changed its policy saying that it created an
unlevel playing field for competing pipelines. Therefore, the
policy in the Lower 48 switched over to incremental pricing and
thus it isn't a foreign concept in the Lower 48 for an existing
shipper to face increasing rates as a result of expansions. Mr.
Shepler then pointed out that rolled-in rates are the standard
operating practice for expansions in Canada.
2:55:54 PM
MR. BANKS highlighted that Canada, at the outset of its oil and
gas industry in Alberta, was much the same as Alaska today.
Initially, rolled-in rates made it possible for the market
within Alberta to expand dramatically. At the same time, very
long pipelines were built across Canada. Furthermore, the
development of the gas line system within Alberta has resulted
in thousands of producing fields and thousands of miles of
pipeline serving those fields. As a consequence of that
development, one sees the same access to the marketplace that is
present in the Lower 48 where a fairly competitive market for
transportation exists as a consequence of Canada's rate-setting
policies.
2:57:39 PM
MR. BANKS, referring to slide 7 regarding resource risk,
explained that resource risk pertains to what exploration and
production companies as well as the state have to review in
terms of their expectations. Mr. Banks then related the
following quote from Rex Talston (ph), ExxonMobil Corporation,
which read: "We're willing to take geological risk, we're
willing to take cost risk, we're willing to take price risk.
But we can't take fiscal terms changing on us risk because then
I can't calculate the basis on which to decide whether it's a
good investment or not." Mr. Banks indicated that the state is
similarly involved in each of those types of risk. With regard
to geological risk, the state has its own geological risk to
address. The state is more involved than ever in the cost of
developing those risks because the state has assumed a net
profit tax system through the PPT. Furthermore, the state
shares in the transportation cost risk. He noted that companies
will be allowed to deduct transportation costs, including the
potential "that they may have to pay for a 'take-for-pay'
situation." In the leases the state is proposing to make under
AGIA, the state would assume that the actual and reasonable
costs, including empty capacity, should be an allowable
deduction on the royalties and taxes. The state will assume the
same sort of market risk as the companies and will evaluate the
royalties and taxes based on the prices the market will deliver
at any given time.
MR. BANKS highlighted that the state faces other risks as well,
such as the risk of nonperformance by the lessee. He emphasized
that the state doesn't control the timing of production from the
leases. The aforementioned is a decision made by the lessee as
it works through its economics. Point Thomson is an extreme
example of how the state doesn't have control over inducing
production on the state's leases. Furthermore, the oil and gas
business is generally risky and is a business in which large
corporations participate daily. The reason these large
corporations can manage the risk is because they have a
portfolio of activities around the world. Mr. Banks said that
the primary reason the oil and gas industry is an integrated
industry is because it's a way of managing price risk and
geology due to the opportunity to develop high risk:high reward
prospects balanced against low risk:low reward prospects. The
state doesn't have that kind of broad portfolio. Therefore, in
a sense the state is faced with a different risk profile.
MR. BANKS then turned to price risk. He informed the committee
that the price risk has recently increased from $4 to $14 for
gas in the Lower 48. The aforementioned is a much greater swing
than the state thought it could possibly impose, in terms of
changing the state's fiscal terms. He acknowledged that the
lessees have raised this issue as they are accustomed to dealing
with much greater risk in their business. He opined that the
state is a fairly stable and patient regime with which the
lessees can work.
3:02:47 PM
REPRESENTATIVE GUTTENBERG returned to the PPT credits in
relation to oil versus gas, and requested further explanation.
COMMISSIONER GALVIN clarified that the PPT system is an
integrated oil and gas system. Therefore, deductible costs due
to gas production are deducted against the PPT payment, which is
either for oil and gas tax. To the extent that the lessee has
an allowable deduction, gas costs could be deducted against the
oil production tax or be a credit if there's no production tax.
With regard to what constitutes a deductible gas expense,
Commissioner Galvin pointed out that per the PPT it must be a
lease-hold expense. A lease-hold expense is based on what is
upstream of the point of production, which is where the gas
moves out of the control of the lessee to a more common system.
With oil, the aforementioned takes place either when the product
moves into a common carrier line or at TAPS. With gas, it would
take place at the entrance of the gas treatment plant (GTP).
The gas treatment plant would be downstream of the point of
production and thus wouldn't be a deductible expense under the
PPT. However, everything from [the gas treatment plant]
upstream would be deductible under the PPT, both as a capitol
expense, the 20 percent, and as part of the ongoing expenses,
the 22 percent deduction from the [lessees'] revenue.
[Co-Chair Gatto passed the gavel to Co-Chair Johnson.]
3:06:11 PM
REPRESENTATIVE GUTTENBERG surmised then that all of the
distribution lines would be able to be written off.
COMMISSIONER GALVIN answered that is a potential so long as the
distribution lines are part of a system short of that point of
production. In further response to Representative Guttenberg,
Commissioner Galvin said he wasn't sure if there is a way to
build in some pre-treatment on lease. Potentially, [the lessee]
could add additional costs in that sector of development that
could be deducted under the PPT.
3:07:11 PM
REPRESENTATIVE GUTTENBERG asked if the regulations on the PPT
have been completed.
COMMISSIONER GALVIN replied no.
3:07:18 PM
REPRESENTATIVE GUTTENBERG inquired as to how the deductions
would be written into the tariff.
MR. SHEPLER, noting his limited knowledge of how the PPT
actually works, said that he can't provide an answer.
COMMISSIONER GALVIN offered to review the question and provide
the committee with an answer.
3:08:39 PM
MR. BANKS, continuing with slide 9, explained that a system is
being created that is a prescription or a definition of a set of
terms for the state and the applicants in the form of a
contract. [The legislation] lays out a set of relatively
general requirements such that the marketplace is allowed to
generate the most creative solutions to these issues. For
example, overrun risk will be balanced and shared between the
pipeline and the upstream shippers. The "must haves" provide a
framework in AGIA between the state and the pipeline owner, the
lessees and resource owners, as well as between the pipeline
itself and the resource owners and those competing for the
application. Mr. Banks highlighted the importance of
recognizing that [AGIA] is establishing a mechanism that levels
the playing field while creating a setting in which all the
players come on the field. The "must haves" accomplish the
aforementioned and allow the state to achieve some critical
values out of the pipeline in terms of expansion, in-state use
of gas, jobs, low tariffs, et cetera by bringing all parties
together in a competitive setting. The evaluative criteria, he
said, is intended to establish the aforementioned by setting out
a mechanism in which the state specifies what it means in terms
of potential revenue for the state and balance that against
whether the pipeline applicant can really deliver.
[Co-Chair Johnson returned the gavel to Co-Chair Gatto.]
3:11:32 PM
COMMISSIONER GALVIN turned the committee's attention to slide 10
regarding the FERC process and requested that Mr. Shepler focus
on some aspects of the FERC process particular to Alaska. He
further requested discussion of the risk associated with the
initial open season and how it can be shared between the
pipeline company and the initial shippers.
3:12:06 PM
MR. SHEPLER said that the FERC process basically narrows the
range of uncertainty. The process begins with the open season
that has to be pre-approved by FERC and which results in binding
solicitation of capacity interest and precedent agreements that
define termination conditions. From there [an applicant] would
move through the FERC certification process, which involves a
detailed project description with environmental research.
Furthermore, FERC must make a finding on the project, as
required by the present public convenience and necessity.
Unique to Alaska is that Congress has already codified that the
pipeline is required by the public convenience and necessity.
In fact, two weeks ago FERC representatives before the House
Special Committee on Oil and Gas confirmed that from that
standpoint, it's a unique pipe.
3:13:43 PM
MR. SHEPLER, referring to slide 11, explained that the rates for
pipelines in the Lower 48 are divided into the following two
categories: recourse rates and negotiated rates. The recourse
rate is the default rate, the cost-based conventional rate the
[Regulatory Commission of Alaska] RCA would establish. The FERC
also allows for negotiated rates in which a willing buyer of
capacity and a willing seller of capacity meet and agree on
price terms that are agreeable to both parties so long as the
shipper has access to the default rate. The FERC encourages
parties in new projects and expansions to negotiate between
themselves the risks of cost overruns. For example, on the
Rockies Express Pipeline Project the company offered fixed rates
for the full 10-year term of the contract as a negotiated rate
option that was subject to change in future rate cases. Under
the negotiated rate if the pipeline company overruns its cost
estimate, the pipeline company and its shareholders will have to
bear the risks of that cost overrun. He noted that ultimately
FERC has to approve the negotiated rates.
3:15:54 PM
MR. SHEPLER, in response to Representative Seaton, said that
AGIA contemplates commercial activity structured around
commercially reasonable terms. There is no state veto, although
he suggested that the state, as a participant, could exercise
its right to comment on the setting of the recourse rates and
the negotiated rates. In the context of a project like this
most of the initial shippers will move forward under negotiated
rates as opposed to recourse rates, he opined.
3:17:06 PM
REPRESENTATIVE SEATON posed a scenario in which there is an open
season and the producers wait it out. In the meantime, Shell
comes forward and bids for the gas. In such a situation, what
is the state's position, he asked.
COMMISSIONER GALVIN, referring to slide 12, said that AGIA
provides applicants multiple opportunities to participate. He
opined that a scenario in which a pipeline is proposed and a
company is willing to commit its gas to the line even in the
face of incurring significant development costs in order to get
the gas into the line begs the question as to why the state's
lessee wouldn't be willing to put gas in the line when they
wouldn't have to incur the same development costs. The
aforementioned doesn't seem to be a realistic scenario, he
opined. He highlighted that the explorers would have a much
higher hurdle to commercialize the producers' gas than would the
producers. Therefore, it doesn't seem likely that a line would
be filled with OCS [outer continental shelf] gas as the initial
product. He reiterated that AGIA provides multiple
opportunities for the producers, in particular, to participate
as well as to the third party pipeline companies and other
entities during the initial inducement. At the point of the
open season, there is again an opportunity for the producers to
participate by committing their gas to the line. Explorers and
gas purchasers may decide to participate at this time as well.
He said that AGIA is structured so that the various participants
see opportunities at various stages and make a decision to move
the project ahead.
3:21:24 PM
COMMISSIONER GALVIN opined that as the state moves through this
process and the unknowns are eliminated and the actual project
is identified, the project will be clearer than it is today.
However, he acknowledged that there may still be some level of
uncertainty with some aspects of the project. Through the
negotiated ratemaking some of that uncertainty can be mitigated
between the pipeline and the shippers, although it may not be at
the point of obtaining the necessary commitment. Therefore, the
administration feels strongly that the state should obtain from
the licensee a commitment from the outset that it won't use that
as a sign of failure and that the licensee will move forward if
it's an economic project. Otherwise under the terms of AGIA it
would have been dropped along the process. With a significant
amount of confidence, Commissioner Galvin opined that the
producers in this process will recognize the opportunity at each
step of the process and determine it's in their interest to
participate.
3:24:26 PM
REPRESENTATIVE GUTTENBERG recalled that the 2005 FERC ruling
includes a section for an in-state demand study and a section
regarding methodology of determining value of bids for
deliveries in the state. He asked if those sections would be
appropriate in AGIA.
MR. SHEPLER clarified that the 2005 FERC ruling requires that a
"FERC-compliant open season" must have been preceded by the in-
state study and requires distance-sensitive rates for deliveries
in Alaska, as does AGIA. The aforementioned is already part of
the federal requirements. He said he didn't know whether the
aforementioned should be part of the AGIA "must haves."
However, the AGIA requirement for distance sensitive rates for
in-state deliveries is the real concern for Alaskans as well as
the instant delivery points.
3:26:18 PM
REPRESENTATIVE GUTTENBERG opined that it would be advantageous
to Alaska to do so sooner through AGIA rather than during the
FERC process.
COMMISSIONER GALVIN related his belief that the in-state demands
study has to be done prior to the open season under the FERC
rules. Therefore, it wouldn't be at the very end of the
process. Commissioner Galvin opined that [the administration]
clearly recognizes that meeting in-state demand is an important
part of the natural gas pipeline policy as a state. [The
administration] further recognizes that the pipeline needs to
move forward as quickly as possible and have the opportunity for
in-state demand to catch up to the initial open season. More
significantly, in-state demand is likely to be met through the
expansion and opportunities for future expansion and open
seasons for in-state use, he said. He opined that when [the
administration] reviewed how to meet in-state demand in AGIA the
focus was on long-term issues. He mentioned that the Alaska
Natural Gas Development Authority (ANGDA) has done in-state
studies and have expressed concern with regard to the level to
which the state will be ready to participate in an initial open
season. He mentioned that the House version of AGIA includes a
gasification revolving loan program. At some point, one must
decide where the initial priorities lay in order to get the
project moving and an initial open season. "We don't want to
necessarily have that slow down because of a need for an
additional study ... that's not going to actually meet in-state
demand in a timely manner," he opined. However, he opined that
it's worth reviewing in terms of where the state stands
regarding how to meet both goals.
3:29:46 PM
REPRESENTATIVE GUTTENBERG reminded members that he lives in a
town that has an oil pipeline, a refinery, and where he pays
high national averages for petroleum products. He then
commented that it's in the state's best interest to plan to have
optimal use of a gas pipeline throughout the state.
CO-CHAIR GATTO interjected that once a gas pipeline is in place
several things will follow, such as serving villages and propane
availability.
3:30:33 PM
REPRESENTATIVE SEATON recalled that yesterday there was
discussion about carbon dioxide as an evaluation criteria,
although there has been no mention of it today.
COMMISSIONER GALVIN confirmed that the state is interested in
working with the committee to address that issue. Therefore, a
number of different ways to address it are being reviewed in
terms of what language may or may not be necessary to include in
the legislation. The desire, he opined, is to achieve an
environmentally friendly project.
3:31:43 PM
REPRESENTATIVE SEATON, referring to Chevron's annual report
regarding its management of energy, directed attention to page
10, which relates that Chevron has installed California's first
mega-watt class hydrogen fuel cell co-generation plant.
MR. BANKS related his understanding that the aforementioned
plant uses methane.
REPRESENTATIVE SEATON confirmed that it does. He said, "As long
as you're not releasing methane or fugitive CO, that's what
2
we're trying to get at is so that we're not looking at a cap and
trade or something that could impact negatively the pipeline.
So, it's an interesting thing if we have fuel cell technology
that doesn't release methane, that actually uses methane for the
hydrogen source. But as long as we're not releasing CO that's
2
... the whole purpose of getting around addressing this somehow
in a criteria."
CO-CHAIR GATTO pointed out that there is CO that is a raw
2
material and there's COthat is created.
2
3:33:51 PM
COMMISSIONER GALVIN, drawing the committee's attention to slide
13, reiterated that AGIA sets up a commercial vehicle geared
toward leveling the playing field and having competition along
with a transparent process. Furthermore, AGIA meets the state's
needs, which are geared toward expansion and low costs. The
commercial interests in the project are used to try to resolve
some of the issues the state faces with this project.
Commissioner Galvin restated his earlier comments that AGIA
provides an opportunity for participants to enter the process
and receive state inducements for something in return. He
highlighted that any project can move forward without any state
participation and AGIA doesn't preclude the aforementioned.
Still, the administration believes that AGIA provides the best
mechanism for the state to participate in the project so that
ultimately there is the greatest likelihood of the project
moving forward in a timely manner with terms that are favorable
to the state's long-term future.
3:35:33 PM
CO-CHAIR JOHNSON asked if there can be a rolled-in and an
incremental rate request. He clarified that he was thinking of
Shell from which no tariffs or oil taxes are received. He
questioned whether the state can treat companies differently
during an expansion based on whether there's a rolled-in rate or
an incremental rate.
MR. SHEPLER said that technically a partial rolled-in rate and
an incremental rate can be used. However, he pointed out that
it's a policy call. He noted that ultimately FERC will review
the project in terms of consumers in the Lower 48 and the other
shippers on the system. Therefore, he surmised that FERC will
follow its policy of favoring rolled-in pricing for any
expansion, regardless of whether it benefits the state directly
or not.
[HB 177 was held over.]
3:38:40 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:30 p.m.
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