Legislature(1997 - 1998)
04/02/1998 02:30 PM RES
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE RESOURCES STANDING COMMITTEE April 2, 1998 2:30 p.m. MEMBERS PRESENT Representative Bill Hudson, Co-Chairman Representative Scott Ogan, Co-Chairman Representative Beverly Masek, Vice Chair Representative Ramona Barnes Representative Fred Dyson Representative Joe Green Representative William K. (Bill) Williams Representative Irene Nicholia Representative Reggie Joule MEMBERS ABSENT All members present. COMMITTEE CALENDAR HOUSE BILL NO. 393 "An Act relating to contracts with the state establishing payments in lieu of other taxes by a qualified sponsor or qualified sponsor group for projects to develop stranded gas resources in the state; providing for the inclusion in such contracts of terms making certain adjustments regarding royalty value and the timing and notice of the state's right to take royalty in kind or in value from such projects; relating to the effect of such contracts on municipal taxation; and providing for an effective date." - MOVED CSHB 393(RES) OUT OF COMMITTEE (* First public hearing) PREVIOUS ACTION BILL: HB 393 SHORT TITLE: DEVELOP STRANDED GAS RESOURCES SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR Jrn-Date Jrn-Page Action 2/11/98 2280 (H) READ THE FIRST TIME - REFERRAL(S) 2/11/98 2281 (H) OIL & GAS, FINANCE 2/11/98 2281 (H) 2 FISCAL NOTES (DNR, REV) 2/11/98 2281 (H) GOVERNOR'S TRANSMITTAL LETTER 2/19/98 (H) O&G AT 11:00 AM CAPITOL 124 2/19/98 (H) MINUTE(O&G) 2/24/98 (H) O&G AT 10:00 AM CAPITOL 124 2/24/98 (H) MINUTE(O&G) 2/26/98 (H) O&G AT 10:00 AM CAPITOL 124 2/26/98 (H) MINUTE(O&G) 3/03/98 (H) O&G AT 10:00 AM CAPITOL 124 3/03/98 (H) MINUTE(O&G) 3/05/98 (H) MINUTE(O&G) 3/09/98 2578 (H) RES REFERRAL ADDED 3/10/98 (H) O&G AT 10:00 AM CAPITOL 124 3/10/98 (H) MINUTE(O&G) 3/12/98 (H) O&G AT 10:00 AM CAPITOL 124 3/12/98 (H) MINUTE(O&G) 3/19/98 (H) O&G AT 10:00 AM CAPITOL 124 3/19/98 (H) MINUTE(O&G) 3/24/98 (H) O&G AT 10:00 AM CAPITOL 124 3/24/98 (H) MINUTE(O&G) 3/24/98 (H) O&G AT 5:00 PM CAPITOL 124 3/24/98 (H) MINUTE(O&G) 3/26/98 (H) O&G AT 10:00 AM CAPITOL 124 3/26/98 (H) MINUTE(O&G) 3/26/98 (H) O&G RPT PROPOSED COMMITTEE SUBSTITUTE O&G NT & ATTACHED AM 1DP 5NR DP: HODGINS; NR: BUNDE, OGAN, ROKEBERG, BRICE, KEMPLEN 3/26/98 2750 (H) 2 FISCAL NOTES (DNR, REV) 2/11/98 3/26/98 (H) RES AT 1:00 PM CAPITOL 124 3/26/98 (H) MINUTE(RES) 3/28/98 (H) RES AT 1:00 PM CAPITOL 124 3/28/98 (H) MINUTE(RES) 3/31/98 (H) RES AT 1:00 PM CAPITOL 124 3/28/98 (H) MINUTE(RES) 3/31/98 (H) RES AT 1:00 PM CAPITOL 124 3/31/98 (H) MINUTE(RES) 4/02/98 (H) RES AT 1:00 PM CAPITOL 124 WITNESS REGISTER WILSON CONDON, Commissioner Department of Revenue P.O. Box 110400 Juneau, Alaska 99811-0400 Telephone: (907) 465-2300 POSITION STATEMENT: Answered questions of the committee members on HB 393. JOHN SHIVELY, Commissioner Department of Natural Resources 400 Willoughby Avenue Juneau, Alaska 99801-1724 Telephone: (907) 465-2400 POSITION STATEMENT: Answered questions of the committee members on HB 393. ACTION NARRATIVE TAPE 98-41, SIDE A Number 001 CO-CHAIRMAN SCOTT OGAN called the House Resources Standing Committee meeting to order at 2:30 p.m. Members present at the call to order were Representatives Hudson, Ogan, Masek, Green, and Williams. Representatives Barnes, Dyson, Nicholia and Joule arrived at 2:31 p.m., 2:36 p.m., 3:10 p.m., and 3:15 p.m., respectively. HB 393 - DEVELOP STRANDED GAS RESOURCES CO-CHAIRMAN OGAN announced the only order of business today was House Bill Number 393, "An Act relating to contracts with the state establishing payments in lieu of other taxes by a qualified sponsor or qualified sponsor group for projects to develop stranded gas resources in the state; providing for the inclusion in such contracts of terms making certain adjustments regarding royalty value and the timing and notice of the state's right to take royalty in kind or in value from such projects; relating to the effect of such contracts on municipal taxation; and providing for an effective date." CO-CHAIRMAN OGAN entertained a motion to adopt the proposed committee substitute for HB 393, version 0-GH2006\Q, Glover, 4/1/98. Number 056 CO-CHAIRMAN BILL HUDSON made a motion and asked unanimous consent to adopt the proposed committee substitute for HB 393, version 0- GH2006\Q, Glover, 4/1/98, for consideration. There being no objection, it was so adopted. CO-CHAIRMAN OGAN announced that Roger Marks, a petroleum economist from the Department of Revenue; and Bill Van Dyke, Division of Oil and Gas, Department of Natural Resources, are online in Anchorage. to answer any technical questions in regards to gas-to-liquids (GTL). CO-CHAIRMAN OGAN announced the arrival of Representative Barnes. CO-CHAIRMAN OGAN called on Commissioner Condon from the Department of Revenue and Commissioner Shively from the Department of Natural Resources. Number 116 WILSON CONDON, Commissioner, Department of Revenue, testified in Juneau. He is prepared to talk about the chemistry of GTL. CO-CHAIRMAN OGAN stated it seems that incorporating GTL in the bill is an apple-orange comparison. It would no doubt take a considerable capital investment to create a facility to convert natural gas to liquid. He asked Commissioner Condon to brief him on the logic of including GTL language in the bill, especially in light of the effective date. Number 159 COMMISSIONER CONDON replied the sunset date in the bill means that the chances of someone bringing a GTL proposal are remote, given where technology stands today. Nevertheless, we believe that taking the gas to market as liquid natural gas (LNG) is the best alternative today for monetizing the tremendous resource on the North Slope. But, GTL technology is being developed. The bill is a framework for the executive branch to develop proposals to bring to the legislature in order to develop stranded gas either as an LNG, GTL, methanol, or a gas pipeline project. Number 213 REPRESENTATIVE RAMONA BARNES asked Commissioner Condon whose idea was it to put GTL in the bill. COMMISSIONER CONDON replied he really doesn't remember. REPRESENTATIVE BARNES asked Commissioner Condon whether he knows how long the technology for GTL has been around. COMMISSIONER CONDON replied it has been around in one form or another since the 1920s. REPRESENTATIVE BARNES asked Commissioner Condon whether Hitler developed it during World War II. COMMISSIONER CONDON replied it was developed well before he gained political power, but Hitler used it to manufacture fuel for his war machines. REPRESENTATIVE BARNES asked Commissioner Condon why hasn't it been developed commercially to this point in time. COMMISSIONER CONDON replied it has been commercially developed for some limited uses. It has not been commercially developed on a scale that would be useful for Alaska. It has been developed in a way that it is economical for making wax. It was also developed in South Africa when it was subject to an oil embargo. REPRESENTATIVE BARNES asked Commissioner Condon, with a project the size of the stranded gas reserves at Prudhoe Bay and Point Thomson, how long would it take for technology to develop in order to take it to the marketplace. COMMISSIONER CONDON replied at least a decade, but that is his own personal guess. REPRESENTATIVE BARNES asked Commissioner Condon whether he was the person who hired Dr. Pedro van Meurs. COMMISSIONER CONDON replied he is the person responsible for having him hired. REPRESENTATIVE BARNES asked Commissioner Condon whether Pedro van Meurs indicated the window of opportunity for Alaska is around the year 2005, otherwise other projects would "nibble ours to death." She read the following from Dr. van Meurs' report: "The main drawback of delays in the Alaska project is that the project may be nibbled to death by small projects coming in ahead of the Alaska project. Petroleum exploration in Asia used to be primarily for oil; gas was considered a byproduct. However, the strongly emerging gas markets in Asia have now created a situation where petroleum companies are now exploring for gas." COMMISSIONER CONDON stated he does remember him talking about that. REPRESENTATIVE BARNES asked Commissioner Condon whether anything has changed that would cause Alaska to think it would be viable in the marketplace as late as the year 2010 and before the year 2015. COMMISSIONER CONDON replied the sooner Alaska's project gets in the cue the better the chances of successfully marketing its gas. Dr. van Meurs didn't indicate that the window would close, but it needs to be in-line as quickly as possible. REPRESENTATIVE BARNES stated van Meurs didn't indicate that the window would close. He laid out a scenario of how the economy of Asia would grow and the window would broaden. Since that time, the economy of Asia has contracted considerably and it is not likely to grow anywhere near the rate he laid out. She asked Commissioner Condon whether he believes that the window of opportunity will continue to grow as fast as the scenario that was laid out in van Meurs' report. COMMISSIONER CONDON replied he does not. He thinks there will be a period of two to three years where growth will be close to zero then it will continue at its previous rate. REPRESENTATIVE BARNES stated it is her belief that with the GTL language in the bill it will be used as an excuse to slow down the development of building a gas pipeline to get the gas to the marketplace. She asked Commissioner Condon whether he would take exception to that language coming out of the bill. COMMISSIONER CONDON replied he understands her concerns, but he doesn't share the same belief. There are some good reasons for leaving all possibilities open. It is a question of evaluating motives. REPRESENTATIVE BARNES asked Commissioner Condon what would preclude the administration from coming back to the legislature when the technology is developed. COMMISSIONER CONDON replied, "Not a thing." REPRESENTATIVE BARNES asked Co-Chairman Ogan whether there is anybody to discuss the makeup of GTL, the loss of the product to the atmosphere, and the fact that there is no taxing structure in place for diesel fuel. CO-CHAIRMAN OGAN replied there are people here to testify on those concerns. Number 385 REPRESENTATIVE JOE GREEN asked Commissioner Condon whether it would make sense to keep all of the avenues open even though there might be a loss of a product. COMMISSIONER CONDON replied, "Yes." Both LNG and GTL options would use the resource and take it to the market. A little less than 10 percent of the gas would be used to run the pipeline, power the refrigeration plant, and run the ships for an LNG project. The state would tax and get a royalty on all of the gas supplied at the front end of the project. About 65 to 70 percent of the energy would get to the market for a GTL project. The other 35 percent would be used to run the chemical plant. Nevertheless, the state would get a royalty on it or tax the entire volume delivered to the GTL plant. In both instances the economics would be the cost of getting it there and to make it. It would be a net-back procedure. It would be cheaper by a considerable amount to move liquid rather than gas to the marketplace. Once it is at the market the values would be roughly the same. Diesel would go for a little bit more than delivered gas, but it would be roughly the same. The cost to get the diesel there would be a lot less, but it would cost a lot of money to make it. REPRESENTATIVE GREEN said, "As we move through our utilization from stationary sources to maybe mobile sources of using the energy right now we're unfortunate in realizing a glut of conventional oil, but in the future is it conceivable that, as I understand this product, whatever form it is it's essentially pure in that you don't have impurities like sulfur really common in other forms of diesel and lower-ends than the normal gas line - CH4 gas. That there could be with flexibility of going either way a market response that would not necessarily be there if you maintained your eggs in one basket so to speak. So that--for example, if gas becomes a like oil is right now that if--at that same time maybe diesel fuel or whatever this product is GTL. I wish we had a sample of that so we could see what it looked like. But, if that might be a more marketable product, that you would have the flexibility and that both the operators and the state could stand to benefit with that flexibility." COMMISSIONER CONDON stated Representative Green is correct in that an LNG plan would be built around long-term contracts so that there wouldn't be a lot of flexibility. In a GTL plan there wouldn't be long-term contracts. It would be marketed differently, even if it was blended with crude oil. Number 491 CO-CHAIRMAN OGAN said, "We take--the way it's gonna--if detail happens, we have a refinery up there on the North Slope. It refines this product. It's a relatively pure product. We mix it in with the oil, get it all dirty again and mixed up with all the oil. I guess, the only advantage might be that we keep more liquids going through the pipeline in the long-term because there's probably capacity there cause were not running at full capacity anyway. But, then it has to be--the whole soup has to be refined on the other end anyway. Correct?" COMMISSIONER CONDON replied if it is blended together that is correct. CO-CHAIRMAN OGAN said, "If you send it down the pipeline un-blended you'd have to put in a pig, you'd have to have storage facilities built on--for the oil, you'd have to have storage facilities built for the GTL, put in a pig and ship it down that way." COMMISSIONER CONDON replied that is correct. Storage facilities would have to be at both ends in order not to shut in the oil field while shipping the GTLs. CO-CHAIRMAN OGAN stated oil fields don't shut in very easily. COMMISSIONER CONDON stated they aren't hard to shut in, but "your not happy about it when you cash the checks at the end of the month." Number 510 JOHN SHIVELY, Commissioner, Department of Natural Resources, stated the pipeline has run at about 2.2 million barrels a day. It is running at 1.3 million barrels a day now. There was storage capacity at Valdez for 2.2 million barrels when it was running at that capacity, but they probably will have to be a redesigned. "My opinion is that if they do this most likely they will ship it in slugs. I mean that--it doesn't make a lot of sense to make a basically pure product then mix it back in with crude, but the technology to shipping slugs is not new. I mean it's done in other places." Number 518 REPRESENTATIVE GREEN said, "Would it be your--in your discussions or maybe we should talk to one of the operators. would it be significant enough through put if GTLs seem to be reasonable that you could keep the slugging that you could go beyond whatever the (indisc.--sneezing) number is and we've heard anything from two to three (indisc.--coughing) barrels a day before the existing pipeline just is not efficient enough to keep running, that by batching you could run that down to a significantly lower oil throughput thereby keeping the fields that are producing there longer." Would batching allow us to extend the lives of the fields? he asked. COMMISSIONER SHIVELY replied, "Basically it's our feeling that in order to have a project that would be economic, if the technology changes, you'd process about two billion cubic feet a day which would translate into about 200,000 barrels under current technology and people don't know when the pipeline might shut down, the 300,000-barrels-a-day figure has--what has been used. So, yeah, it could make a difference and as you know right now we're producing up there about six to seven million cubic feet a day. It's about two billion a day also for the LNG so, I mean, there is even under existing resources plenty of resource to do both. And that doesn't take into account the fact that I think most people believe that if there were an outlet for the gas there's a lot of opportunity to look for additional gas on the North Slope." Number 547 REPRESENTATIVE BILL WILLIAMS asked Commissioner Condon whether the bill is to create options to find out how to get the gas to the marketplace economically. COMMISSIONER CONDON replied, "Correct." REPRESENTATIVE WILLIAMS asked Commissioner Condon whether somebody in the administration follows the marketplace. COMMISSIONER CONDON replied, "We certainly do." REPRESENTATIVE WILLIAMS asked Commissioner Condon whether the people who follow the marketplace always agree. COMMISSIONER CONDON replied, "No." REPRESENTATIVE WILLIAMS asked Commissioner Condon whether the state would want to force itself into the marketplace if it wasn't economical. COMMISSIONER CONDON replied, "I don't think we would want to. That's not to say we couldn't do it, but I think we'd have to spend our own money. And I would hope that we wouldn't do that." REPRESENTATIVE WILLIAMS asked Commissioner Condon whether the state would want to close any options off, such as GTL or anything else, in order to maximize the economics. COMMISSIONER CONDON replied the purpose of the legislation is to require the administration to come before the legislature with a proposal to make stranded gas economical. REPRESENTATIVE WILLIAMS asked Commissioner Condon how far out in the future would the state know that the marketplace is ready for GTL. COMMISSIONER CONDON replied when there are deals in place to build a project. REPRESENTATIVE WILLIAMS asked Commissioner Condon to give a good reason why the bill should have a sunset date. COMMISSIONER CONDON replied the argument for a sunset date is to create an incentive for people to make up their minds in regards to the opportunities that may face the state right now. REPRESENTATIVE WILLIAMS asked Commissioner Condon whether part of an incentive today would be tax breaks. COMMISSIONER CONDON replied there aren't any tax breaks now. The bill calls for proposals and fiscal systems to be authorized by the legislature. The argument for a cutoff date is to get people to step forward and take advantage of the opportunity or to not take advantage of the opportunity. If an opportunity is open ended people may wait. REPRESENTATIVE WILLIAMS asked Commissioner Condon whether the market dictates whether an opportunity is open ended. COMMISSIONER CONDON replied it is a judgement call. REPRESENTATIVE WILLIAMS stated he realizes that the state wants to get the gas to the market, show the industry that it is willing to work with them, and make arrangements to be partners. He is concerned about the sunset clause in the bill forcing private industry into the marketplace, however. Number 653 REPRESENTATIVE BARNES stated, if GTL is left in the bill, the state will wait for a long-time for the major oil companies to step forward to get the gas to the market. She asked Commissioner Condon whether GTL would be economical, if all the state revenues were given up - taxes, royalties, and etc. COMMISSIONER CONDON replied, "I do not believe that." REPRESENTATIVE BARNES asked Commissioner Condon why the language should be included in the bill. COMMISSIONER CONDON replied because, "I know that I don't know everything." REPRESENTATIVE BARNES said, "I'd like to say to you Commissioner that none of us know everything. But a lot of times after dealing with people over a long period of time, you get a real gut feeling about what's going on, especially after you hear them tell stories in two different perspectives depending on which side of the comments that you're on, and then you begin to have this feeling that all is not right in the world. You understand what I mean?" COMMISSIONER CONDON replied, "I certainly do." REPRESENTATIVE BARNES asked Commissioner Condon whether he would have any real heartburn if GTL came out of the bill. COMMISSIONER CONDON replied if GTL came out of the bill it would not give him heartburn. The wise decision would be to leave it in, however. REPRESENTATIVE BARNES asked Commissioner Shively whether he would have any real heartburn if GTL came out of the bill. COMMISSIONER SHIVELY replied, "No." He said, "One of the reasons that it is in here--even if it is not economic today that there is a lot going on looking at technology which could change that. And, you know it is a chance to market." REPRESENTATIVE BARNES asked whether the administration could always come back to the legislature for a new bill if GTL became viable. COMMISSIONER SHIVELY replied, "Correct." CO-CHAIRMAN OGAN announced the arrival of Representative Nicholia. CO-CHAIRMAN HUDSON stated he has heard enough to believe that when GTL is feasible and economical that the legislature would jump to the opportunity. But, because of the unknown now, he would favor removing it from the bill. TAPE 98-41, SIDE B Number 002 CO-CHAIRMAN HUDSON made a motion and asked unanimous consent to insert a period after the word "tankers" on page 2, line 20; and delete all the language after "tankers" on page 2, lines 20-25. REPRESENTATIVE BARNES suggested taking out any reference to GTL in the bill. COMMISSIONER SHIVELY pointed out that a semicolon would go after the word "tankers" not a period. CO-CHAIRMAN HUDSON agreed with Commissioner Shively. REPRESENTATIVE WILLIAMS objected. The bill is enabling legislation. All options need to be looked at. CO-CHAIRMAN OGAN stated that by amending language referring to GTL out of the bill, he hopes that the industry doesn't see it as a signal to looking into GTL. Certainly, LNG is a priority in the short-term. If the sunset date remains in the bill, it is a moot point anyway. CO-CHAIRMAN OGAN announced the arrival of Representative Joule. CO-CHAIRMAN OGAN explained the motion is to insert a semicolon after the word "tankers" on page 2, line 20; and delete all the language after "tankers" on page 2, lines 20-25. CO-CHAIRMAN OGAN called for a roll call vote. Representatives Barnes, Joule, Nicholia, and Williams voted against the motion. Representatives Barnes, Masek and Hudson voted in favor of the motion. Representative Ogan did not vote and called for a brief at ease. Representatives Dyson and Green were not present to vote. CO-CHAIRMAN OGAN called the meeting back to order. CO-CHAIRMAN OGAN called for a second roll call vote. Representatives Barnes, Dyson, Masek, Hudson and Ogan voted in favor of the motion. Representatives Green, Joule, Nicholia and Williams voted against the motion. The motion carried. Number 175 REPRESENTATIVE BARNES stated Commissioners Condon and Shively have answered her questions regarding the loss of GTL as it is converted and the taxing regimes to her satisfaction. Number 190 REPRESENTATIVE BARNES made a motion and asked unanimous consent to move the proposed committee substitute for HB 393, version 0- GH2006\Q, Glover, 4/1/98, as amended, from the committee with individual recommendations and the attached fiscal note(s). There being no objection, CSHB 393(RES) moved from the House Resources Standing Committee. ADJOURNMENT Number 196 CO-CHAIRMAN OGAN adjourned the House Resources Standing Committee meeting at 3:27 p.m.