02/28/2003 01:06 PM House RES
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ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
February 28, 2003
1:06 p.m.
MEMBERS PRESENT
Representative Hugh Fate, Co-Chair
Representative Beverly Masek, Vice Chair
Representative Cheryll Heinze
Representative Kelly Wolf
Representative David Guttenberg
MEMBERS ABSENT
Representative Mike Chenault, Co-Chair
Representative Carl Gatto
Representative Bob Lynn
Representative Beth Kerttula
COMMITTEE CALENDAR
CONFIRMATION HEARING
Department of Natural Resources
Tom Irwin - Juneau
- CONFIRMATION(S) ADVANCED
HOUSE BILL NO. 16
"An Act amending the standards applicable to determining
whether, for purposes of the Alaska Stranded Gas Development
Act, a proposed new investment constitutes a qualified project,
and repealing the deadline for applications relating to the
development of contracts for payments in lieu of taxes and for
royalty adjustments that may be submitted for consideration
under that Act; and providing for an effective date."
- MOVED CSHB 16(RES) OUT OF COMMITTEE
PREVIOUS ACTION
BILL: HB 16
SHORT TITLE:STRANDED GAS DEVELOPMENT ACT AMENDMENTS
SPONSOR(S): REPRESENTATIVE(S)FATE
Jrn-Date Jrn-Page Action
01/21/03 0035 (H) PREFILE RELEASED (1/10/03)
01/21/03 0035 (H) READ THE FIRST TIME -
REFERRALS
01/21/03 0035 (H) O&G, RES, FIN
02/06/03 (H) O&G AT 3:15 PM CAPITOL 124
02/06/03 (H) Heard & Held
02/06/03 (H) MINUTE(O&G)
02/07/03 0153 (H) COSPONSOR(S): CHENAULT
02/07/03 (H) RES AT 1:00 PM CAPITOL 124
02/07/03 (H) <Pending Referral>
02/10/03 0172 (H) COSPONSOR(S): HOLM
02/14/03 (H) RES AT 1:00 PM CAPITOL 124
02/14/03 (H) <Pending Referral> -- Meeting
Canceled --
02/21/03 (H) RES AT 1:00 PM CAPITOL 124
02/21/03 (H) <Bill Hearing Canceled>
02/25/03 (H) O&G AT 3:15 PM CAPITOL 124
02/25/03 (H) Moved CSHB 16(O&G) Out of
Committee
02/25/03 (H) MINUTE(O&G)
02/28/03 0336 (H) O&G RPT CS(O&G) NT 6DP
02/28/03 0336 (H) DP: CHENAULT, FATE, ROKEBERG,
02/28/03 0336 (H) CRAWFORD, MCGUIRE, KOHRING
02/28/03 0337 (H) FN1: ZERO(CED)
02/28/03 0337 (H) FN2: (DNR)
02/28/03 0337 (H) FN3: (REV)
02/28/03 0344 (H) COSPONSOR(S): KOHRING
02/28/03 (H) RES AT 1:00 PM CAPITOL 124
WITNESS REGISTER
WENDY KING, Gas Strategies
ConocoPhillips
Alaska North Slope Development Team
Anchorage, Alaska
POSITION STATEMENT: Related ConocoPhillips support of [CSHB
16(O&G) as amended].
DAN DICKINSON, Director
Tax Division
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Noted the administration's strong support
of the committee substitute [CSHB 16(O&G)].
ROGER MARKS, Petroleum Economist
Tax Division
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Provided an overview of the Stranded Gas
Development Act during discussion of HB 16.
KEN KONRAD, Senior Vice President
BP Exploration (Alaska) Inc.
Anchorage, Alaska
POSITION STATEMENT: Testified in support of [CSHB 16(O&G) as
amended].
MARK MYERS, Director
Division of Oil & Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: During discussion of HB 16, answered
questions.
ACTION NARRATIVE
TAPE 03-8, SIDE A
Number 0001
CO-CHAIR HUGH FATE called the House Resources Standing Committee
meeting to order at 1:06 p.m. Representatives Fate, Masek,
Heinze, Wolf, and Guttenberg were present at the call to order.
CONFIRMATION HEARING
Department of Natural Resources
CO-CHAIR FATE announced that the first order of business would
be the confirmation hearing on the appointment of Tom Irwin as
commissioner of the Department of Natural Resources (DNR). Co-
Chair Fate noted that everyone on the committee had heard
Commissioner Irwin's presentation and thus he opened the hearing
to questions.
Number 0246
REPRESENTATIVE MASEK mentioned the issue in which a strip of
land between Anchorage and the Matanuska Valley owned by the
Bureau of Land Management (BLM) was closed to access for hunting
and target practice due to the amount of lead from the gun shell
cartridges. Representative Masek related her understanding that
there could be a land swap such that this parcel of land is
returned to the state under DNR. Therefore, she requested that
Commissioner Irwin review that situation and provide thoughts on
such a swap.
Number 0426
TOM IRWIN, Commissioner, Department of Natural Resources,
related his limited understanding that the BLM is trying to
cleanup this land for transfer. Commissioner Irwin said this
would fall in line with the belief that the state wants to
obtain all the land it's due transferred to it. He welcomed
Representative Masek's input.
REPRESENTATIVE GUTTENBERG remarked that DNR is the face of
Alaska and he wished the commissioner the best in management of
DNR.
[Although there was no formal motion, the confirmation of Tom
Irwin, Commissioner, Department of Natural Resources, was
treated as advanced from the House Resources Standing
Committee.]
HB 16-STRANDED GAS DEVELOPMENT ACT AMENDMENTS
CO-CHAIR FATE announced that the next order of business would be
HOUSE BILL NO. 16, "An Act amending the standards applicable to
determining whether, for purposes of the Alaska Stranded Gas
Development Act, a proposed new investment constitutes a
qualified project, and repealing the deadline for applications
relating to the development of contracts for payments in lieu of
taxes and for royalty adjustments that may be submitted for
consideration under that Act; and providing for an effective
date."
CO-CHAIR FATE noted that before the committee is CSHB 16(O&G).
He then turned the gavel over to Vice Chair Masek.
Number 0696
CO-CHAIR FATE, Alaska State Legislature, speaking as the sponsor
of HB 16, informed the committee that [CSHB 16(O&G)] encompasses
six changes to the [Stranded Gas Development Act]. This
legislation doesn't limit the technology to liquefied natural
gas (LNG) as was the case with the [current] Act. Furthermore,
this legislation allows a value-added perspective because [a
qualified project is expanded to include] other markets as well
as those markets within the state. This legislation changes the
net worth of a qualified sponsor from 33 percent net worth of
the project to 15 percent, which allows and even encourages
others to do exploration. This legislation also changes the
date for submitting applications from June 30, 2001, to June 30,
2004. He informed the committee that there will be an amendment
offered to change the aforementioned date to March 31, 2005,
because the 2004 date was determined to be too soon. He noted
that this was discussed with the administration, who is in
agreement. This legislation changes the "contractor" language
to the plural, "contractors", because there is usually more than
one contractor with which negotiations are occurring. Finally,
this legislation changed language relating to a $1 million
expense that's rebated to the state when expenses are incurred
by the contractors. In the House Special Committee on Oil and
Gas much time was spent working on this language. Today an
amendment will be offered in which the comma between
"reasonable, nonredundant" will be deleted. He explained that
the language has been in the Act so that the expenses incurred
by the contractors are reliable, reasonable, and not
duplicative.
Number 1144
REPRESENTATIVE GUTTENBERG inquired as to the definition of
stranded gas.
CO-CHAIR FATE explained that there is only one place in the
state that has stranded gas, the North Slope. Therefore, when
one refers to stranded gas they are referring to gas on the
North Slope. In further response to Representative Guttenberg,
Co-Chair Fate clarified that "stranded" means that the gas is
going to market while "reinjection" does not go to market.
VICE CHAIR MASEK returned to the gavel to Co-Chair Fate and
testimony was taken.
Number 1272
WENDY KING, Gas Strategies, ConocoPhillips, Alaska North Slope
Development Team, related ConocoPhillips support of the passage
of HB 16. She provided the following testimony:
ConocoPhillips has a three-prong strategy to make a
gas pipeline through Alaska and Canada a reality.
First, federal legislation to streamline the
permitting process. Second, federal fiscal
legislation which provides insurance against the risk
of extreme price volatility. And third, state
legislation [reauthorizing] the Stranded Gas
Development Act. The Stranded Gas Development Act is
currently in statute and it provides a framework for
negotiations and reaching an agreement between the
state and other parties like ConocoPhillips over a
number of issues. House Bill 16 is needed to modify
the Stranded Gas Development Act; the existing
statute, as currently written, applies only to an LNG
project and not to a gas pipeline. In addition, the
Stranded Gas Development Act has a date of June 30th
2001 by which companies had to file an application.
If it were not for these two limitations, companies
that want to build a gas pipeline could be negotiating
with the state today under the Act and be further down
the road toward creating jobs and revenues through
building a gas pipeline. In conclusion, we support
passage of HB 16 in as clean a form as possible. That
means making the Stranded Gas Act applicable to a gas
pipeline and extending or repealing the date of the
Act. The committee substitute for HB 16 addresses
these two requirements and we urge the committee to
pass the bill.
Number 1441
DAN DICKINSON, Director, Tax Division, Department of Revenue,
provided the following testimony:
With me is Roger Marks, a Petroleum Economist with the
Tax Division, who will speak briefly about the
history, intent, and mechanics of the Stranded Gas
Act. But first I think it is very important to
introduce ourselves, as the Department of Revenue has
many responsibilities under the Stranded Gas Act, and
the Tax Division has considerable expertise and
experience in oil and gas matters. Five years ago we
were three different divisions - the Oil and Gas Audit
Division, the Income and Excise Audit Division and the
Charitable Gaming Division. ... What we do can be seen
from the fiscal year 2002 Comprehensive Annual
Financial Report for the State of Alaska. [You
should] have a copy of an excerpt from Table 1.13 ....
Of total government fund revenues of $3.5 billion:
· ... $1.3 billion comes from the Feds
· Taxes are a another [$1] billion
· Royalties are another $900 million
· Interest [and] investment income, plus all
the other ways the government raises money
through charges for services, fines and
forfeitures and "other", is more than offset
by the investment losses in the state's
account.
The Tax Division administers 19 of the 20 tax types
that make up the $1 billion tax figure. Of the
billion dollars in taxes, all but a couple hundred
million are oil and gas taxes. The state's oil and
gas take is often characterized as four bites of the
apple, and we are experienced in all four bites.
For the first bite: We are charged with auditing
royalties and net profit share leases, and we work
closely with DNR on those matters. The other three
bites of the apple cover the three areas that we
anticipate will be our focus in any Stranded Gas Act
negotiation. The second bite of that apple is the oil
and gas property tax. The 2003 tax roll showing oil
and gas property valued at just about $13.5 billion is
being mailed out ... to meet the March 1st deadline.
As petroleum economist Roger Marks will explain later,
property taxes play a unique role in determining any
natural gas project's profitability. The next bite of
the apple is the oil and gas corporate income tax.
Income taxes are focused on taxing profits. As Roger
will elaborate later on - the more we focus on taxing
profits, the more progressive our system becomes.
That is one of the stated goals of the Stranded Gas
Act. We have a large experienced group in our
division that works these issues and we expect them to
be critical. The last bite of the apple is the
production tax. Like royalty, the production tax
focuses on the commodity value of the resource at or
near the wellhead. We have lots of experience in this
area dealing with market pricing, inter-company
transfer pricing, how markets work, how energy
contracts work, business practices, and cost analysis.
I would like to add a personal observation, but one
that I think reflects what many of us in the division
believe the state should be trying to achieve in an
Stranded Gas Act negotiation.
Taxes and the government take in general ... should
not distort commercial realities. The government's
take should not be what is red-lighting this project.
As Roger will explain, our current fiscal system
intensifies some of the risks faced by the producers.
Ironically, not only the producers but [also] the
state could be better off changing these aspects of
its fiscal system. The Stranded Gas Act negotiations
should be about risk sharing, and who among the state
and the commercial entities involved can best handle
what risks. As soon as HB 16 becomes law we can start
discussing how price risk will be shared or how return
on the investment in the pipeline will be taxed, or
really figure out what each party wants to get from
this project - aside from "more." There are lots of
specifics that can be set aside until it's clearer how
our gas will fit in the market mechanisms that will be
in place when we are finally ready to market.
Fundamentally, the state's role should not be to
increase the risks. And maybe we can make the project
fly by reducing risk.
Number 1716
On the other hand, we have to make sure that the state
is not naively underwriting a risky project. As the
only ones who will still be around if things go sour,
we don't want to be left holding a bag we didn't quite
understand the dimensions of. That's my quick
overview of the Department of Revenue Tax Division.
The administration strongly supports the committee
substitute for this bill. We think it creates a great
mechanism to work these difficult issues we face. The
Tax Division looks forward to being able to play our
part in that work.
Number 1756
REPRESENTATIVE GUTTENBERG turned the issue of risk sharing and
asked how the risks are balanced.
MR. DICKINSON answered that the state has to determine what it
wants with regard to the stream of revenue it wants, the amount
of built-in progressivism, and the risk the state is willing to
take. Therefore, this requires thoroughly airing and
investigating the issues.
REPRESENTATIVE GUTTENBERG asked whether HB 16 places the state
out of the way by opening the definition of stranded gas and
extending the expiration date. He also asked if there is
anything else that the state can do to avoid being an obstacle.
MR. DICKINSON related his belief that this legislation starts
the conversation and allows the parties to know where the
conversation can go. Mr. Dickinson said he believes that it's
best to pass the bill with the amendments.
CO-CHAIR FATE asked if, after passage of HB 16 in both houses,
negotiations would begin to explore the aforementioned areas.
MR. DICKINSON said that he hoped that would be the case. He
identified the first piece to be negotiations for large
contracts, which he said could start soon.
Number 1951
ROGER MARKS, Petroleum Economist, Tax Division, Department of
Revenue, provided the following testimony:
I worked on the original Stranded Gas Act in 1998 and
am familiar with its history, intent, and mechanics.
And I would like to provide a very brief overview of
the Act at AS 43.82. A more detailed synopsis is with
the fiscal note.
The Act originated in HB 250 in 1997, which
established a North Slope Gas Commercialization team
in the administration to research and recommend
changes to state law to encourage commercialization of
North Slope gas. The team concluded that the project
faced considerable risk, namely gas price risk and
cost overrun risk, and that the state's fiscal system
exacerbated those risks. Two of the risks of
particular concern were fiscal uncertainty and the
state's regressive tax system.
A brief comment on the price risk: the cost of the
project is very large: $20 billion. That is a lot of
money to any corporation. If this project is built
and prices go very low, the producers face very large
losses which some of them may not be able to tolerate.
That is why the price mechanism proposed in Congress
may be a very necessary linchpin in making this
project a reality. By fiscal uncertainty we mean the
threat of changes in fiscal provisions, after a
project is built, that may change the project's
viability after it is too late to do anything about
it. A project may be feasible under one tax system if
it is built under the assumption that the tax system
in place will stay in place. But [if] the tax system
changes, the changes could cause heavy financial
losses.
Number 2046
Second, there are two significant elements of the
state's fiscal system that make it regressive. By
regressive we mean that the state's take is a high
percentage of income at low prices, and a low
percentage at high prices. First, the property tax is
based on cost. The higher the cost the higher the
tax. This is a double whammy to an investor who
incurs a cost overrun. Moreover, the property tax is
payable when construction begins, years before
revenues start accruing. On a time value of money
basis this diminishes the rate of return, and
increases the risk of not recovering the investment.
The second regressive elements are the severance tax
and royalty. They are based on the value at the point
where the gas comes out of the ground, and ignore
upstream costs such as capital and operating costs.
Thus when costs are high and prices are low, the
state's take is a high percentage of low income.
Again, this intensifies the danger of low prices. I
might add that a regressive system also limits the
state's take at high prices. Fixing that could be
very important to the state for securing more revenue
when prices are high, without threatening the
viability of the project.
The Stranded Gas Act was the result of trying to fix
these shortcomings. The law provided a mechanism for
converting the state's fiscal system from a statutory
basis to a contractual basis. This would provide for
greater fiscal certainty. The fiscal system would be
negotiated between the state and the project sponsors,
and approved by the legislature, after a public review
period. Payments to the state would be made in-lieu
of taxes. And per the Act the contract terms would
provide for a more progressive or less regressive
system.
Most of the provisions subject to negotiation are the
tax provisions. Given that the royalty represents the
state's ownership share, there was not interest in
making the royalty rate subject to change. The only
royalty provisions subject to negotiation would be gas
valuation method, and the timing of royalty in-kind
and in-value notices. The commissioner of [the
Department of] Revenue would be the primary agent for
negotiating and implementing the contact. However,
the commissioner of [the Department of] Natural
Resources is also responsible for reviewing the
project plan for acceptability, and for negotiating
any changes in those royalty issues.
There was concern by local municipalities that a
contract could compromise their property tax revenues.
Accordingly, the Act created a municipal advisory
group to participate in developing contract terms, and
the Act requires that a fair and reasonable share of
the payments due under the contract be paid to
affected municipalities with due regard to the size of
the tax base that may be exempted, and the economic
and social burdens imposed by construction and
operation. The Act also has provisions for sponsors
to help make gas available to communities, to promote
local hire, to deal with confidential information
provided by the sponsors, and to reimburse the state
for contractors it may use to assist in the
negotiation process.
Finally, there were some questions raised as to
whether this would surrender or contract away the
power to tax, which is forbidden by our constitution.
It was the administration's judgment that this would
not preclude future legislatures from imposing other
taxes, but this contract would represent a solemn
pledge, a moral commitment by the state, and a message
to future legislatures that once it agrees to the
terms it will not change them.
Number 2252
REPRESENTATIVE GUTTENBERG related the notion that a gas project
will occur when the market allows it and inquired as to Mr.
Marks' opinion of that.
MR. MARKS highlighted that a significant linchpin is what occurs
in Congress. The price risk here is very scary for companies,
even those the size of ConocoPhillips.
REPRESENTATIVE GUTTENBERG asked if there will be a conflict with
the commissioner of the Department of Revenue being the primary
negotiator for negotiation and implementation since the
commissioner of DNR is responsible for reviewing the project
plan for acceptability.
MR. MARKS clarified that both commissioners would review a
project application for suitability. He expressed confidence
that both commissioners will "land on the same page in that
judgment."
CO-CHAIR FATE interjected that at one point the commissioners
were separated, but that language wasn't brought forth because
it was determined that was an internal matter for which a
memorandum of understanding would be written between the
departments. This is an administrative issue that shouldn't
receive legislative interference.
Number 2394
REPRESENTATIVE MASEK highlighted the importance of Mr.
Dickinson's earlier statement: "As soon as HB 16 becomes law we
can start discussing how price risk will be shared or how return
on the investment in the pipeline will be taxed, or really
figure out what each party wants to get from this project -
aside from 'more.'" She expressed the need to expedite HB 16 in
order to begin working on an LNG or natural gas project.
MR. DICKINSON said that clearly there are a gamut of issues that
would be addressed and the earlier [discussions] start the more
likely they will be productive.
CO-CHAIR FATE, in response to Representative Masek, clarified
that the proposed date change that was mentioned earlier refers
to the application deadline. He reiterated that the date change
will be offered as an amendment.
Number 2529
KEN KONRAD, Senior Vice President, BP Exploration (Alaska) Inc.,
provided the following testimony:
Establishing a clear, simple, and predictable
framework regarding royalty and taxes is essential if
the gas pipeline project is going to advance to the
next phase of activity. Without knowing what the
rules are in advance, a project of this magnitude will
not be able to attract investment. BP has been a
supporter of the Stranded Gas Act since its
development many years ago and we continue to be a
supporter. And as such we support HB 16. However,
... we would be prepared to sit down at any time and
begin these discussions and don't necessarily feel
that we need to wait too long to begin these
discussions because we are concerned that we can't
finish the discussions until we begin them. So, we
are ready at any time to move forward. And I would
echo what Ms. King conveyed earlier that as the bill
passes through the legislative process that we ensure
that it remain a clean bill and that you don't ... add
amendments that could inadvertently lead to being a
disincentive for the project. But, as the bill stands
now, we are firmly in support.
CO-CHAIR FATE, upon determining that no one else wished to
testify, closed public testimony. He then turned the gavel over
to Representative Masek.
The committee took an at-ease from 2:46 p.m. to 2:50 p.m.
Number 2666
REPRESENTATIVE HEINZE moved that the committee adopt Amendment
1, which reads:
Page 3 Line 6
Change date from June 30, 2004 to March 31, 2005
There being no objection, Amendment 1 was adopted.
Number 2689
REPRESENTATIVE HEINZE moved that the committee adopt Amendment
2, which reads:
Page 3 Line 12
Delete comma between reasonable and nonredundant
REPRESENTATIVE GUTTENBERG objected and inquired as to what
Amendment 2 would accomplish.
CO-CHAIR FATE explained that the [deletion of the comma] ensures
that there won't be duplicate billing. This is a protective
mechanism, he said.
REPRESENTATIVE GUTTENBERG withdrew his objection.
There being no objection, Amendment 2 was adopted.
Number 2839
REPRESENTATIVE GUTTENBERG turned to AS 43.82.200 and referred to
the following language: "terms regarding an equity or other
participating interests in a project by one or more Alaskan
based corporations or business." He interpreted that to mean
that Alaskan-based corporation or business is guaranteed
involvement. Representative Guttenberg inquired as to how that
would impact the negotiation.
MR. MARKS related his belief that the process would be such that
a sponsor group would come forward to the state with an
application and whoever is going to have an equity interest in
the project would be part of the sponsor group approaching the
state for a stranded gas contract. He said he didn't believe it
to be appropriate to bring in further equity participants in the
contract development process. Whoever is going to be a sponsor
should come in at the beginning to negotiate as one body.
However, nothing precludes multiple sponsor groups from coming
in to negotiate contracts if there is more than one possibility
available.
REPRESENTATIVE GUTTENBERG expressed concern that an oil and gas
field developer will come in after the fact and not have a gas
line to take his/her product to market. In that case, what
would happen; would that developer have access to the pipeline,
he asked.
MR. MARKS explained that at the time the pipeline is
constructed, there will be an open season. This is due to the
Federal Energy Regulatory Commission (FERC) law. Anyone
anticipating having gas to ship to the pipeline at that time
[during the open season] can secure capacity. He related the
[department's] judgment that having the original sponsors build
for capacity that might not be there is [inappropriate].
TAPE 03-8, SIDE B
MR. MARKS clarified that building for capacity that might not be
there would add additional cost and risk to the project.
Furthermore, pipelines could be constructed to have some
expansion of capacity.
Number 2965
MARK MYERS, Director, Division of Oil & Gas, Department of
Natural Resources, returned to Representative Guttenberg's
question regarding contract development. He said, "The contract
development part there in three and four under the Act, doesn't
address the issue of access really." However, issues of access
could be addressed under the more general provisions under the
other conditions. Mr. Myers noted that access is of concern for
all parties involved with the gas line. He related his
interpretation that access could be included as part of the
negotiations, although it isn't implicit in the Act that
[access] would be negotiated.
Number 2895
CO-CHAIR FATE informed the committee that last year during the
discussion of HB 519, two of the most critical issues were the
frequency of open season and access to any proposed pipeline.
The negotiators and the industry are aware of these issues. As
has been expressed by the major producers, we need and want a
second level mid-cap oil industry. Co-Chair Fate related his
belief that the legislature could still weigh in with
legislation should [there be the need]. However, Co-Chair Fate
mentioned that he didn't want to interfere with these
negotiations. Co-Chair Fate also mentioned that he didn't have
a concern with regard to access and open season as he did a year
ago and thus he hoped that this legislation could be forwarded
to the House Finance Committee.
Number 2811
REPRESENTATIVE HEINZE moved to report CSHB 16(O&G) as amended
out of committee with individual recommendations and the
accompanying fiscal notes. There being no objection, CSHB
16(RES) was reported from the House Resources Standing
Committee.
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 2:03 p.m.
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