Legislature(2011 - 2012)SENATE FINANCE 532
03/13/2012 01:00 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB192 | |
| SB160 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| = | SB 192 | ||
| += | SB 160 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
March 13, 2012
1:02 p.m.
1:02:36 PM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 1:02 p.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Lesil McGuire, Vice-Chair
Senator Johnny Ellis
Senator Donny Olson
Senator Joe Thomas
MEMBERS ABSENT
Senator Dennis Egan
ALSO PRESENT
Senator Joe Paskvan; Jeff, Stepp, Staff, Senator Joe
Paskvan; Patrick Gamble, President, University of Alaska;
Daniel R. Fauske, Chief Executive Officer and Executive
Director, Alaska Housing Finance Corporation, Department of
Revenue and President, Alaska Gasline Development
Corporation; Joe Dubler, Vice President and Chief Financial
Officer, Alaska Gasline Development Corporation and
Director of Finance, Alaska Housing Finance Corporation,
Department of Revenue; Les Campbell, Director of Budget,
Alaska Housing Finance Corporation, Department of Revenue.
PRESENT VIA TELECONFERENCE
Mark Myers, Vice-Chancellor, Research, University of
Alaska, Fairbanks.
SUMMARY
SB 160 BUDGET: CAPITAL
UNIVERSITY OF ALASKA
ALASKA HOUSING FINANCE CORPORATION
DEPARTMENT OF PUBLIC SAFETY
SB 160 was HEARD and HELD in Committee for
further consideration.
SB 192 OIL AND GAS PRODUCTION TAX RATES
SB 192 was HEARD and HELD in Committee for
further consideration.
SENATE BILL NO. 192
"An Act relating to the oil and gas production tax;
and providing for an effective date."
1:03:23 PM
SENATOR JOE PASKVAN, began on slide 60 of a PowerPoint
presentation [also heard during the March 13, 2012 morning
meeting] titled "Committee Substitute for Senate Bill 192
(RES) Oil and Gas Production Tax Rates" (copy on file). He
referred to a hearing before the Committee on Energy and
Natural Resources, United States Senate, New Developments
in Upstream Oil and Gas Technologies: Testimony by Kevin
Banks, Director, Division of Oil and Gas, Alaska Department
of Natural Resources (May 10, 2011). He explained that Mr.
Banks had spoken about potential for production and
throughput through the Trans-Alaska Pipeline System (TAPS)
including heavy and shale oil. He quoted from Mr. Banks'
testimony:
There are no known conventional resources on State or
Native lands that are likely sufficient to replace the
decline in the existing production rates.
Senator Paskvan believed that although the state should
remain optimistic about heavy and shale oil and Outer
Continental Shelf resources, the information from Mr. Banks
was poignant. He moved to slide 61 titled "TAPS Throughput
Continues Steady Decline" that included testimony from a
March 1, 2012 Senate Resources Committee meeting. He had
asked Scott Jepsen, Vice President, External Affairs,
ConocoPhillips Alaska whether Alaskans should expect to see
1 million barrels a day from state lands in conventional
oil with the $5 billion investment over the next ten years.
Mr. Jepsen had remarked previously that the expenditure of
the $5 billion would commence in the upcoming three years,
but would be spent over the next six to ten years. Mr.
Jepsen had indicated that 1 million barrels a day was a
good aspirational goal, but he didn't think it was possible
to get there with conventional oil. Mr. Jepsen hoped that
other types of technologies may increase throughput from
shale or heavy oil.
1:06:52 PM
Senator Paskvan addressed slide 62 "Other Oil Producing
Regions Enjoying Production and Employment Booms" and the
resurging North American oil production issues. He
referenced how technology had created an upheaval in the
North American natural gas markets. The slide highlighted
the transfer of technology that had transformed the natural
gas field and its promise to improve oil production in the
United States. The technology had caused the surge in
natural gas production, which was transforming the outlook
for oil production in America. He quoted material from the
slide (source: Citi Investment Research & Analysis,
February 15, 2012):
Advances in the use of horizontal drilling and
hydraulic fracturing have unlocked vast reserves of
hydrocarbons originally trapped in highly dense shale
rocks. The two shale oil plays that have benefited
most from this transformation so far are the Bakken
and Eagle Ford.
Senator Paskvan noted that Bakken was located in North
Dakota and that Eagle Ford was in Texas. He hoped that the
shale and heavy oils would arrive in and benefit Alaska in
the near future. He asked his staff to walk through the
subsequent slides related to rig counts.
JEFF, STEPP, STAFF, SENATOR JOE PASKVAN, referenced a
comment by Senator Paskvan that Alaskans expected policy
makers to act like "sophisticated owners of a world-class
resource." He stated that part of being a sophisticated
owner was performing a sophisticated analysis of the
relevant issues. He pointed to comparisons made between
Alaska, North Dakota, and Texas. He quoted from slide 62:
The unrelenting increase in oil rig count has been
driven by two major forces: the sustained, high price
of the commodity and the promise of improved oil
production using the technology that has transformed
the gas sector.
Mr. Stepp elaborated that the technology referred to in the
quote was horizontal drilling and hydraulic fracturing. He
looked at a map of the Baker Hughes oil rig count in
Bakken, North Dakota on slide 63. According to the Baker
Hughes website and app the current active rig count was
196; all of the rigs were for shale "oil play," a strategy
not currently used in Alaska. He stressed that there was a
substantial amount of infrastructure in North Dakota
compared to Alaska's North Slope. The map indicated the
presence of many state highways and county roads that
provided access to infrastructure hydraulic fracturing
technology.
1:11:40 PM
Senator Paskvan turned to slides 69 and 70: "Other Oil
Producing Regions Enjoying Production and Employment
Booms." He referred to an article: Alaska Economic Trends:
Alaska's Oil Industry September, 2008 (copy on file). He
believed that it was a fact that there had been dramatic
improvements in technology in the past decade. The article
addressed examples including, horizontal drilling, ultra
extended-reach drilling, 3-D and 4-D seismic surveys, drill
bit sensors, and other advancements that reduced the number
of wells that needed to be drilled; the number was
significantly lower than it was ten years earlier. Slide 70
addressed that the national oil and gas industry had been a
leader in productivity gains throughout the 1990s and that
the industry had been able to perform more work with fewer
workers (page 6 of the Alaska Economic Trends: Alaska's Oil
Industry September, 2008). He furthered that the industry
goal of fewer workers did not match up with the state's
goal of increased employment for Alaskans in the industry.
He stressed that policy makers should expect to see
continued advances in technology given the industry's
motivation to continue the development of new technologies
to perform more work using fewer workers.
Senator Paskvan directed attention to slide 71 that
compared Alaska to other oil producing states. Based on the
size of Alaska's oil industry work force a person would not
guess how important oil was to the state's economy
according to the Alaska Economic Trends: Alaska's Oil
Industry September, 2008. He cited from the report that
"Alaska produced 15 percent of the nation's domestic oil
supply in 2007 but employed only 3 percent of the U.S. oil
and gas work force...(page 10)."
1:14:10 PM
Senator Paskvan pointed to slide 72 that continued to focus
on how Alaska compared to other oil producing states:
One big reason is simply that Alaska's oil fields
enjoy large economies of scale. Prudhoe Bay is the
largest oil field in the nation and doesn't need a
huge work force to produce its oil...
In Texas, Oklahoma, Wyoming and other oil-producing
states, some oil is produced from very small fields.
There are 400,000 marginal fields or stripper wells
operating in the U.S. and a stripper well produces 10
barrels of oil or less per day. In many of the states,
there are literally thousands of families and small
companies engaged in producing oil - something nearly
totally absent in Alaska.
Senator Paskvan recalled that when legislators had been in
Texas in 2011 they had been told that the average Texan
well produced less than 5 barrels a day; something unknown
to Alaska where the production per well greatly exceeded
the amount. He read from slide 73 "Other Oil Producing
Regions Enjoying Production and Employment Booms":
Technology advances lead to more drilling and more
jobs in the new, unconventional (i.e., shale) oil
plays in North Dakota and Texas.
At the same time, technology advances lead to fewer
wells and fewer jobs in the mature, conventional oil
plays on Alaska's North Slope.
Senator Paskvan relayed that the state awaited the
application of technology in conventional resources in
heavy and shale oils and hoped for breakthroughs in the
area in order to compare to Texas and North Dakota.
1:16:23 PM
Senator Paskvan discussed slide 74 "Competition is High -
Many Other Areas to Invest Around the World." He observed
that the Alaska North Slope remained a world class basin;
the Prudhoe Bay field was one of the ten largest fields in
the world. He pointed to the vertical integration of the
"big three" on the central North Slope [BP, ConocoPhillips,
and ExxonMobile] and discussed that dollars were made by
distribution from the upstream to midstream and at the
wellhead. The industry was in a transition from "majors
only to mid-majors and independents." He related that
national oil companies had limited the areas in which
investments could be made. The final bullet point addressed
the concept of immobile capital including sunk costs; the
incentive was to keep areas functioning as long as
possible; a significant Central North Slope infrastructure
the that remained attractive to the industry.
1:17:57 PM
Senator Paskvan reviewed components included in SB 192
beginning on slide 76: "CSSB 192(RES) Rationale and
Overview." He highlighted that the legislation:
· Preserves Industry-Friendly Components of ACES
· Reduces the Rate and Cap of Progressivity
· Rewards Increased Production
· Establishes a Gross Minimum Tax
· Separates oil and natural gas for purposes of
calculating the progressivity portion of the
production tax
· Creates an Oil Information System
Senator Paskvan elaborated that the goal of the oil
information system was to make the access to information
more readily available to policy makers.
1:19:29 PM
Senator Paskvan highlighted industry-friendly components of
Alaska's Clear and Equitable Share (ACES) that SB 192 would
preserve. Expenditures and transportation costs were
preserved so the calculation of production tax was applied
after the removal of the deductions. The bill maintained
the current tax credits. He explained that for the same
dollar a company could deduct a 20 percent credit (a
company could deduct 100 percent of the dollar spent in the
year it was spent), which was a powerful investment
incentive. The royalty rate that ranged from 12.5 percent
to 16 percent was preserved and was attractive to the
industry; royalty rates ranged from 25 percent to 30
percent in other states including North Dakota and Texas.
The concept of royalty modification was sustained; if an
operator was able to prove a need for assistance the
Departments of Revenue and Natural Resources could reduce
the royalty down to as low as 3 percent to allow the fields
to continue production.
1:21:34 PM
Senator Paskvan addressed the progressivity rate and cap
reduction that would occur under SB 192 (slide 78). The
bill retained the original trigger of $30 in production tax
value (PTV). He explained that the PTV was assessed after
deductions for transportation costs and for qualified and
operating expenditures. The PTV was a $30 gap that was
maintained at the base 25 percent, at which point the
progressivity rate was reduced from a 0.4 per dollar
increase in PTV to a 0.35 per dollar increase that was
capped at 50 percent. At 50 percent there was a second
trigger on the progressive tax rate calculation to further
reduce the rate of progressivity from 0.35 per dollar to
0.1 per dollar up to 60 percent. The 60 percent
progressivity cap was a reduction from the current 75
percent cap. He stressed that the reductions were
significant and material.
Senator Paskvan pointed out that the bill would reward
increased production (slide 79). He relayed that a joint
Senate Finance and Resources Committee meeting had heard
from petroleum consultant Pedro van Muers who had addressed
the concept of an allowance for an increase in new oil or
incremental oil; it had been deemed important that the bill
provide incentives based on the concept. An allowance was
included that would reduce a company's PTV by $10 for new
and/or incremental barrels produced.
1:23:54 PM
Senator Paskvan communicated that the bill would establish
a gross minimum tax of 10 percent on the legacy fields of
Kuparuk and Prudhoe Bay to ensure that the revenue streams
would always maintain a minimum floor. In addition to the
adjustment for the oil industry at high oil prices the bill
factored in the potential for oil price volatility and the
need to balance the risk to the state at low oil prices. He
relayed that consultants had expressed the need for ACES to
be durable in a wide range of price environments; the
provision helped achieve that goal and protected the state
at the downside.
1:25:17 PM
Senator Paskvan reviewed the decoupling of the oil and
natural gas taxation systems on slide 81. He explained that
the tax rate applied in Alaska was based on the combined
BTU [British Thermal Unit] value of oil and gas; oil and
the BTUs created by oil were valued substantially higher
than BTUs of natural gas. There was a dilution effect that
dramatically reduced revenue streams to the state if the
taxes were not decoupled. The legislation removed the
dilution effect by having progressivity calculated
distinctly for oil and gas.
Senator Paskvan detailed that SB 192 would create an oil
and gas information system (slide 82); it was believed that
as much historical and current oil and gas information as
possible should be available to policy makers to help them
make decisions based on substantive data. The Alaska Oil
and Gas Conservation Commission (AOGCC) would be required
to develop the electronic Petroleum Information Management
System in order to make information more readily available
to policy makers.
1:27:20 PM
Senator Paskvan believed that there was more reason for
optimism related to Alaska's future than ever before (slide
84). There were 7 billion to 8 billion barrels of
conventional oil on the Central North Slope; additionally
there were other resources including, heavy and shale oils,
undiscovered conventional oil, Outer Continental Shelf in
the Beaufort and Chukchi Seas, National Petroleum Reserve-
Alaska, and the Alaska National Wildlife Refuge. The North
Slope was worth more currently than it had been over 30
years earlier because the value of oil had increased. He
noted that spending forecasts were up; there had been
significant work performed below ground in well workovers
and there had been a rebuilding of infrastructure below and
above ground. He believed the work would set the stage for
a "viable and vibrant" oil industry for decades to come. He
recalled that Cathy Foerster with AOGCC had reported that
the North Slope was healthy. He agreed with the Department
of Natural Resources (DNR) advertisement that read:
"Alaska: We're Open for Business"; he believed that the
state was competitive and had a world class resource to
offer. He pointed to a recent Petroleum News headline
"North Slope Booms"; legislators had been told in the past
year that exploration on the North Slope was at a level
that had not been seen in 40 years; as such, there were
currently not enough rigs to perform all of the work that
North Slope operators wanted. He referred to a practice
called "hot sheeting" where workers alternated sleeping in
beds due to the numerous employees working on the North
Slope.
Senator Paskvan concluded that Alaskans wanted to see the
legislature act like a sophisticated owner of a world class
resource and expected that Alaska would obtain the maximum
value for its resources for its citizens.
1:30:47 PM
Senator Thomas wondered whether members' packets included
the following detailed information: a memo from Mark Meyers
regarding mergers and market concentrations, Prudhoe Bay
development history and future potential (slides 31 through
33), and the optimization of production from mature fields
(slide 34).
Senator Paskvan replied that his office would provide the
articles and any additional information that the committee
wanted.
Senator Thomas referred to slide 60 and wondered whether
Senator Paskvan had heard from the Department of
Administration or DNR that remarks made by Kevin Banks to
the U.S. Senate the prior year were false or misleading.
Senator Paskvan replied in the negative. He believed the
remarks were true at the time they were made and continued
to be true.
1:32:13 PM
Co-Chair Hoffman referred to an unlabeled handout from
DNR's Division of Oil and Gas; it stated that the past two
years of lease sales of the North Slope successfully leased
a total of 1,276,000 acres to small companies. He asked how
many wells had been drilled on the leases in the past two
years.
Senator Paskvan responded that he did not have the
information.
Senator Stedman would ask DNR to respond to the question at
a later time.
1:32:57 PM
Senator Ellis asked about any Senate Resources Committee
discussions related to lease terms and the duty to produce.
Additionally, he was interested in any discussion on state
direct financial investment (SDFI) to better align industry
and state interests. He asked about facilities access; he
had heard from individuals in the industry that there was
no problem with facilities access and that it was a
commercial transaction that could occur in the future.
Senator Paskvan affirmed that all of the topics had been
discussed in the Senate Resources Committee. The ideas from
members were valid, but the issue was whether tax
legislation should be confined to the tax components. He
believed that there should be some "footage on the cutting
room floor" to keep the bill as precise as possible. He
referred to a slide in the presentation that included
remarks made by Bob Bartlett at the Alaska Constitutional
Convention; Mr. Bartlett had discussed the acquisition of
large tracks of land with the intent not to purchase. The
Senate Resources Committee had discussed that there were
exclusive rights provided under the lease structure that
could be for 10 years where no activity occurred; the
question was would the lease be tendered back to the state.
The topics of duty to explore, produce, and sell had been a
source of significant discussion in the committee. He hoped
that issues would be better developed throughout the
legislative session, particularly relating to the duty to
produce.
1:36:22 PM
Senator Olson referred to the Gleason Decision (slide 36).
He asked whether there were any points in the decision that
were in the repeal or reconsideration process that may
change the date from 2065 or 2075.
Senator Paskvan answered in the affirmative. There had been
a state request for reconsideration of the decision. He
elaborated that he prior week Judge Guidi had denied the
state's application with respect to one component of the
decision (the case had been transferred to Judge Guidi
given that Judge Gleason was made a federal district court
judge); Judge Guidi supported Judge Gleason's decision. He
expected that the decision would be appealed, but as of yet
the appeal for tax years 2007 through 2009 had not
occurred.
1:38:27 PM
AT EASE
1:43:30 PM
RECONVENED
SENATE BILL NO. 160
"An Act making and amending appropriations, including
capital appropriations and other appropriations;
making appropriations to capitalize funds; and
providing for an effective date."
UNIVERSITY OF ALASKA
PATRICK GAMBLE, PRESIDENT, UNIVERSITY OF ALASKA, introduced
himself and other staff that were available to answer
questions. He communicated that the $37.5 million increment
for deferred maintenance or replacement and renovation (the
funding was for year three of a five-year program) was the
only item in the governor's budget that was included in the
current bill. He explained that the prior year he had
proposed a two-year program to examine the university and
state financial situation; the budget had been flattened
considerably and the university had not asked for any
planning or programing money for new projects. With the
exception of the deferred maintenance area the university
budget was in a good position due to a generous bond
issuance. When he had taken the position as president a
deferred maintenance problem was identified and he and
other university staff had marked it as the top priority.
He furthered that other areas including any new
construction would stay "lean and mean" during the deferred
maintenance improvements. He noted that the university had
already been given generous funding for construction and
that the days of increasing the budget from year-to-year
(as in the past ten years) were over; employees had been
told that the budget would at least be flat and could
decline depending on the economy.
1:47:36 PM
President Gamble reemphasized that the number one priority
was deferred maintenance, which was beginning to impact
every corner of the university; it had the largest single
ownership of state buildings, many of which were quite old.
He clarified that the number one academic priority was
engineering. He relayed that the question was how to
programmatically maintain and improve the facilities; the
university had not been programmatic about the upkeep of
its facilities in the past. He added that operations and
maintenance money had generally been funded on a year-to-
year basis. He explained that the repurposing dollars for
older engineering facilities became an accreditation
problem when engineers were currently far in advance of
where they had been when the facility was built. The
deferred maintenance and replacement and renovation (R&R)
were connected but separate; buildings could be
reconditioned to add years to their life, but if the upkeep
was not maintained systems could fail and were then moved
to the deferred maintenance list.
1:49:50 PM
President Gamble stressed that the deferred maintenance
list had become so large that the dollar amounts were
staggering. He remarked that because the large numbers were
competitive with other needs of the state the tendency was
to not want to deal with them. He understood the
legislature's challenge when confronted with the budget
decisions. The university's request was for flat funding of
deferred maintenance projects and no new money for
programing, design, or engineering. The prior year the
university had requested $50 million for R&R (it had
received $2 million); the amount was needed on an annual
basis in order to avoid a problem similar to deferred
maintenance. The legislature had authorized the sale of
$100 million in bonds for the university that would pay for
them internally; he expressed appreciation for the funds
and noted that the amount had been cut back to $50 million.
The university was striving to put the money to work as
quickly as possible on pre-identified projects by each of
the main campuses; each campus had been polled to determine
the highest priority projects; the total cost for the
priority "mission failure potential" projects was $100
million. He stressed that the deferred maintenance was not
an optional number that would go away if it was not funded
in one year. The university had asked for another $100
million and the R&R funds in the current budget, which had
all been removed. The rate of accumulation of deferred
maintenance from year to year had grown to compete with the
governor's funds designated to reduce deferred maintenance;
however, it only slowed growth that continued to
accumulate. He expounded that the entity had its work cut
out for it; it would use the $37.5 million and had asked
for $15 million in receipt authority in case it was able to
obtain federal money during the current year.
1:53:54 PM
President Gamble referred to a chart titled "FY 13
Sustainment Funding Plan for UA Facilities" that
illustrated the effect of funding items versus not funding
items. Even with the $50 million and $37.5 million funding
allocations the deferred maintenance number had gone from
$750 million down to $710 million; the growth had been
slowed, but would begin all over again as soon as money
stopped being directed at the items. The model was
essentially unchanged from the prior year given that the
concerns were still the same. He discussed the idea of a
sustainment approach that would enable facilities to
operate going forward and to bring the large deferred
maintenance number down to a reasonable number; reasonable
to the university was a number in mid-$300 million dollar
range as opposed to $700 million.
President Gamble communicated that risk increased with
advancing deferred maintenance (e.g. HVAC, roof, or pluming
failures). He compared one of the engineering buildings
built in 1983 to airplanes constructed in the same year
that were no longer functional; he explained that planes
went to the "bone yard," but buildings went to deferred
maintenance. When failures occurred the university had to
borrow from other fund sources to provide a band-aid for
the problems. He provided an example of a Fairbanks
dormitory that had been taken down due to an internal
plumbing failure; as a result students had to move out and
the university had lost the revenue. He hoped the
legislature would enable the university to develop a
programmatic plan to address the problem.
1:58:24 PM
President Gamble acknowledged that the governor's budget
was the budget before the committee. He stressed that there
was no padding to the deferred maintenance list; each
represented a specific project at one of the university
campuses.
1:59:34 PM
Co-Chair Hoffman recognized the importance of deferred
maintenance. He recalled the first time the university had
received funding for deferred maintenance years earlier. He
listed various funding request items: $2.5 million for
parking security (page 3); $561,000 for Mat-Su door lock
key access; $6 million for a master plan at the lower
campus; $3.6 million for a sports facility renovation; and
$6 million for campus roads, curbs, gutters, and ramps. He
pointed out that campuses in Lower Kuskokwim had
experienced failures due to extremely cold weather; the
campus needed HVAC upgrades as the current system was
causing teachers and students to have headaches. During the
cold spell many individuals had to spend the night at the
facility to provide 24-hour supervision of the system. He
believed the issues represented higher priority problems
than parking and security. He wondered whether the
university had a list of repairs needed at rural campuses.
President Gamble replied in the affirmative. He elaborated
that the number one priority specified by the Kuskokwim
campus was a $5.1 million project; $900,000 would go to the
campus if the university only received the $37.5 million.
He furthered that the dollars provided to the campus would
increase proportionally based on funding received above the
$37.5 million. He added that the priority lists were
provided by campuses.
Co-Chair Hoffman emphasized that the problem at the Lower
Kuskokwim campus represented a health/life safety issue. He
opined that the issue should rank higher than parking and
security.
President Gamble agreed. He promised to look into the
concern and explained that funding was reallocated from
another area if safety issues existed.
Co-Chair Hoffman would provide the information.
President Gamble pointed to the chart and explained that
projects were not prioritized and that they all fell under
the urgent category.
2:05:03 PM
Senator McGuire asked President Gamble to meet with Dan
Fauske [Executive Director, Alaska Housing Finance
Corporation (AHFC), Department of Revenue] and report back
to the committee on whether some of the replacement and
upgrade projects would qualify under the loan program that
originated under the omnibus energy package. She elaborated
that the package included $250 million for AHFC for
upgrades and replacements on roof repair, HVAC systems,
windows, power infrastructures, etc. She added that the
program may present another funding option for the projects
that would potentially free up funding for Senator
Hoffman's district [Lower Kuskokwim].
President Gamble agreed. He would discuss the option with
Mr. Fauske during a meeting the following week.
Senator Thomas pointed to a line on the chart representing
the status quo; it was defined as "deferred maintenance
backlog without adequate R&R." He wondered what was
considered an adequate R&R number. He asked what funding
amount would reduce the number below $362.5 million. He
asked whether $100 million was the amount needed.
President Gamble explained that if the university received
$50 million per year for R&R the deferred maintenance line
would still increase, but at a controllable slope. He
detailed that if nothing was done the slope would increase
by 15 to 20 degrees. The chart's assumption was that the
$50 million would help flatten the line; however, it would
not take care of the deferred maintenance projects that had
already accumulated. The accumulated projects were separate
(shown by the down-sloping green line on the chart). He
explained that the light colored line indicated what would
have happened if the university had received the requested
$100 million the prior year. The $750 million total had
been reduced to approximately $710 million; however, if
funds were not funneled to deferred maintenance as a
separate entity, the number would continue to increase,
albeit at a slower rate.
2:09:03 PM
Senator Thomas asked for details on the $10 million Board
of Regents budget request related to solutions for Alaska's
energy needs and the relationship between the Alaska Center
for Energy and Power and the industry.
President Gamble deferred the question to Mark Meyers, head
of research at the university.
MARK MYERS, VICE-CHANCELLOR, RESEARCH, UNIVERSITY OF
ALASKA, FAIRBANKS (VIA TELECONFERENCE), explained that the
$10 million proposal was for a partnership to develop
statewide energy, which had three components: (1) work with
Alaska Center for Energy and Power on hydrokinetic issues,
rural energy systems like wind-diesel coupling, geothermal
energy, etc.; (2) form an energy analysis group to gain an
apples to apples project comparison, and to determine
project risks and how they would integrate with each other;
(3) integrated fossil fuel research. Research was largely
funded by industry, but the petroleum research labs were
old. The research included questions on shale oil, oil
recovery, heavy oil, and environmental work on the North
Slope related to water supply and new infrastructure. He
relayed that investment in an integrated fashion would help
to shorten the development cycle time of the alternative
energy sources.
Co-Chair Stedman believed there were related documents that
could be provided to the committee.
2:12:15 PM
Senator Ellis appreciated hearing that the number one non-
deferred maintenance priority was engineering. He remarked
that he and other members had been encouraging support of
the funding for Fairbanks and Anchorage engineering
upgrades. He asked whether industry had come together to
request the university's support for the engineering
buildings. He referred to a recent address by U.S. Senator
Mark Begich who had spoken in support of a $5 million
university increment for an unmanned drone program at the
Eielson Air Force Base. Senator Begich was working to
inform others in Washington D.C. that Alaska could be a
center for excellence through the university related to the
unmanned drone program. He asked President Gamble to speak
to the items.
President Gamble responded that the demand for engineers
was high in Alaska; graduates from the university had the
advantage of partnering with companies in the state.
Engineering areas included fisheries, mining, the North
Slope, and other. He furthered that undergraduates were
able to obtain hands-on experience while getting their
graduate degrees; the retention was excellent for Alaska.
He moved on to address the second question related to the
unmanned drone program. He relayed that he was currently
part of a group that advised the governor on military
issues and was the chairman of the Alaska Aerospace
Corporation. He discussed that Alaska could be one of the
first places in the U.S. to put drones to work.
Additionally, the state could help work out any airspace
bugs the Federal Aviation Administration was dealing with.
He had been pleasantly surprised by Senator Begich's recent
request. Work was being done predominately at the Fairbanks
campus on safely integrating drone operations in airspace.
He expounded that the Alaska Aerospace Corporation saw
potential for bringing drones into the state and conduction
large scale operations potentially at a base like Eielson
Air Force Base. He believed that drones were the future;
Alaska's airspace was uncomplicated and encroachment was
not a problem. He emphasized his support for the
university's involvement.
2:17:09 PM
President Gamble stressed that there was cutting edge
research underway primarily at the Fairbanks campus. He
accentuated that scientific information provided to the
committee from outside could be provided by the university.
He furthered that the university wanted to conduct research
that was directly applicable to Alaska's needs. He relayed
that unfortunately the item had not made the current or
last budget. He hoped that he could link the university's
answers to legislator's questions for a cheaper rate than
offered by outside consultants. He asked for a
reconsideration of the research component of the
university's budget request.
2:18:52 PM
ALASKA HOUSING FINANCE CORPORATION
DANIEL R. FAUSKE, CHIEF EXECUTIVE OFFICER, ALASKA HOUSING
FINANCE CORPORATION (AHFC), DEPARTMENT OF REVENUE, and
PRESIDENT, ALASKA GASLINE DEVELOPMENT CORPORATION (AGDC),
pointed to AGDC's $21 million capital request.
Co-Chair Stedman informed the committee that it would hear
from AGDC and then move to AHFC.
JOE DUBLER, VICE PRESIDENT AND CHIEF FINANCIAL OFFICER,
ALASKA GASLINE DEVELOPMENT CORPORATION AND DIRECTOR OF
FINANCE, ALASKA HOUSING FINANCE CORPORATION, DEPARTMENT OF
REVENUE, directed attention to page 10 of the governor's
proposed FY 13 capital budget project detail sheets: Item
51753 (copy on file). He explained that the $21 million
request would continue AGDC's efforts to develop an instate
gas pipeline from the North Slope to the Railbelt with off-
takes in Fairbanks and Anchorage. The funding would allow
for the continuation of engineering, data acquisition and
refinement of engineering design, permitting, the
environmental impact statement (EIS) process, the
attainment of a federal and private right-of-way,
subsistence impact review, project risk and phasing
analysis, commercial analysis that would culminate in an
open season in the end of calendar year 2013, preparation
of a comprehensive financing plan, and discussions with
affected parties along the alignment of the pipeline.
Mr. Dubler turned to a breakdown of the $21 million request
shown on a spreadsheet titled "Alaska Gasline Development
Corporation: ASAP - Funding Outline Thru FEL 3" (copy on
file).
Mr. Dubler reviewed the spreadsheet. He explained that
commercial operations for FY 13 were budgeted at $3.8
million; the item would include discussions with potential
shippers, to develop markets for the gas, work with Prudhoe
Bay operators and owners, and integration plans for
commercial operations. He elaborated that there had been a
successful expression of interest in June 2011 and AGDC was
currently working on an open season. Pipeline engineering
and environmental permitting was budgeted at $6 million;
the increment included progression of the pipeline route,
data collection and design, utilizing information to
upgrade the project design, and cost estimates. The cost
estimates were refined from the current plus or minus 30
percent interval down to a plus or minus 10 percent for the
open season. He furthered that important requirements for a
successful open season were fairly accurate design and cost
estimates. The pipeline engineering had obtained a right-
of-way for state land and a right-of-way for the federal
land would be issued once the environmental impact
statement was provided to the Bureau of Land Management;
the rights-of-way represented a couple of large hurdles.
Staff were currently working to obtain the right-of-way for
private land.
2:24:34 PM
Co-Chair Hoffman asked about the right-of-way route. Mr.
Dubler explained the route would go from the North Slope
through Dunbar - with a lateral line going to Fairbanks -
and would cut across the Minto flats to follow the Parks
Highway through Big Lake to the Little Susitna River (where
the current Enstar project was located).
Co-Chair Hoffman asked how the route had been determined.
Mr. Fauske answered that the route had been determined a
number of years earlier. The route was seen to be in
compliance with the intent of HB 369, which had mandated
the deliverability of gas from the North Slope to tidewater
at the lowest cost. The entity had asked whether there was
any information in the difference between the Parks Highway
versus the Richardson Highway that would mitigate a $0.5
billion difference; the Parks Highway was 93 miles shorter
than the Richardson Highway and the pipeline would cost
approximately $5 million to $6 million per mile.
Additionally, the federal government would have to examine
the longer alternate route for environmental factors to
determine whether one of the routes was better
environmentally. He explained that AGDC had been given one
year from the passage of HB 369 to provide a report to the
legislature and governor by July 1, 2011; the report had
been provided and much of the existing information had been
utilized.
2:27:29 PM
Co-Chair Stedman asked for detail on any overlaps with
Alaska Gasline Inducement Act (AGIA) and any interest in
private parties. He noted that he and others had
"heartburn" with AGIA related to the 90 percent
reimbursement and little private enterprise money to the
state; the scenario would
cost $500 million and he was concerned that the state was
heading towards "AGIA version 2" with a $400 million cost.
He asked what assurances could be provided that his concern
would not come to fruition. He wondered about private
enterprise.
Mr. Fauske relayed that AGDC had invited industry to a
meeting in Anchorage to determine potential interest in the
gasline. He related that under AGIA the gasline would be
limited to 500 million cubic feet (mcf) of gas per day; the
restriction was lifted if the location was below the 68th
parallel. The meeting had required questions to be
submitted in writing in advance. He furthered that the
total amount of gas needed for Fairbanks, Anchorage, the
military bases, and the Central Corridor was approximately
240 mcf of gas per day. The entity's concern had been
whether there was a commercial interest in the 260 mcf of
gas per day that remained; AGDC had been pleasantly
surprised to find that the commercial interest existed. The
500 mcf of gas per day had been maxed out by the non-
binding interest expressed. The commission was currently in
discussions with the producers and was working on alignment
going forward as requested by the governor. Work could
include a spur line; the AGIA contract required 5 off-take
points from the gasline.
Mr. Fauske pointed out that with the EIS that was expected
to be completed in May 2012 and the transfer of lands to
Department of Natural Resources under the state right-of-
way, the project had made incredible progress. He discussed
the frontend-loaded FELs 1 through 3; the project was
currently at about plus or minus 30 percent and the goal
was to reach FEL 3 in the fall of 2014 into 2015 (after an
open season had been conducted and to look at sanctioning
the project) and to reach plus or minus 10 percent. He
remained very hopeful and believed that the project could
be quite meaningful for bringing a gas supply to the
Central Corridor of the state that hopefully reached
outlying areas once gas was flowing.
2:32:02 PM
Co-Chair Stedman wondered where private enterprise was. He
asked whether there were pipeline companies willing to do
the work or whether the project was "just another scoping
project being financed by the state." Mr. Fauske answered
that AGDC had met with producers and pipeline companies. He
stressed that the $400 million work had to be done by the
state prior to industry involvement. He relayed that
nationwide builder/owner/operators had expressed a great
deal of interest in the project. The commission was working
to exchange information with producers to determine
alignment. He remarked that there was legislation related
to confidentiality agreements that had presented a problem
because companies were unwilling to provide necessary
information if it was not kept confidential. He reiterated
that the work was going well.
Co-Chair Stedman expressed concern that industry had not
shown up at the table. He wondered how much information had
been purchased twice by the state due to an overlap with
AGIA. Mr. Fauske did not believe any information had been
paid for twice. He explained that ADGC was concentrating
most of its work from Fairbanks south, while AGIA work
continued in the north to avoid duplication. He had relayed
to participants that the commission had promised the
legislature that it would not duplicate expenses.
Co-Chair Stedman thought Mr. Fauske had referred to some
duplication during a recent phone conversation.
2:34:53 PM
Mr. Dubler replied that AGDC had been in close contact with
the AGIA Alaska Pipeline Project (APP). He explained that
the confidentiality presented the biggest problem in the
communications. Maps of the APP project had been shown to
AGDC, but AGDC was not able to keep the information. He
anticipated that there would be some overlap, but he did
not know that there had been any as of yet. Most of the
work done by the APP was different from the work done by
AGDC; there were various types of data gathering required
for a project (e.g. rivers and streams, bird, vegetation,
and fish surveys, stream crossings, and other). The
commission was hoping to get a confidentiality agreement in
place that AGIA was comfortable with to enable more
meaningful conversation regarding the progression of work
and to avoid charges for duplicate information.
2:36:11 PM
Co-chair Stedman surmised that there would be some caution
given the amount of money spent on AGIA compared to what
had been gained. The legislature had been told that it did
not need to worry about the three major industry players
and that utilities would step up to the plate that would
enable a large line to be constructed through Canada;
however, utilities had scoffed at the idea of committing
without gas given the significant financial risk. He
wondered whether the entity that Mr. Dubler had mentioned
(that had expressed interest in the 260 mcf per day) was
interested in taking commitments without gas.
Mr. Dubler replied that he could not divulge the name of
the entity. He relayed that there was gas involved.
2:37:46 pm
Co-chair Stedman felt apprehensive as the legislature had
been told similar things several years earlier on a
different project.
Mr. Dubler responded that AGDC had been cautious as well,
which had prompted the commission to conduct an expression
of interest meeting in May 2011; the results showed that
there was enough gas available on the north-side of the
pipeline from producers and enough customers and shippers
on the south-side of the pipeline to fill the pipeline at
0.5 billion cubic feet (bcf) per day. Although the interest
was non-binding, AGDC was comforted by the achieved
results; it was working towards a binding open season at
the end of 2013 and expected to have firm transportation
commitments for the entire capacity of the line.
Co-Chair Stedman asked for verification that the capacity
would be 0.5 bcf per day. Mr. Dubler replied in the
affirmative.
2:39:05 pm
Mr. Fauske relayed that the commission had been in
discussions with Doyon in the Nenana Basin related to
contract versus common carrier; the field had not been
proven, but was one of great interest. The commission had
also been in discussion with mining entities that wanted
gas for their projects. He stressed that there had been a
great deal of interest stated by private enterprise in the
project. He believed that because the debate had been
ongoing people thought the project was just another study;
therefore, it was difficult to gain interest. He had worked
hard on the project and emphasized that he had no vested
interest in the proposal. He was proud of the project and
believed in it because it continued to make headway. He
clarified that the project would be funded with revenue
bonds. He referred to discussions that the project would
require a large infusion of cash by the state; when he had
taken the position he had believed the cost would be $3
billion to $4 billion. He had been pleasantly surprised by
the tariff numbers showing that the project would only
require $400 million in state funds. He emphasized that
there was no cash outlay by the state in any of the
financial information that had been supplied.
Mr. Fauske stressed that the project had real potential. He
opined that the producers and others would not stand by
while the state moved gas off the North Slope without some
type of involvement if it ended up being a stand-alone
project. He had heard from Exxon and others that they would
certainly want an equity piece equivalent to the amount of
gas flowing. He agreed that a bigger line would be good,
but stressed that there would need to be a large commercial
activity paying the cost; the incremental cost of a 48 inch
line from Prudhoe Bay to Fairbanks was $2.8 billion. He
held his reservations on the larger line and noted that
AGIA had been working on it. The commission had avoided the
area due to the $500 million limitation and existing state
activity pursuing the idea. He disagreed with people who
thought a smaller line was not feasible. He wondered what
the alternative would be (especially if the reserves in
Cook Inlet were not as substantial as anticipated) and
pointed to the dire conditions in Fairbanks and rural
Alaska. He explained that HB 369 had resulted from a belief
by some that the big line would not occur. He commended
Anchorage Mayor Sullivan for engaging the public when he
held a brown-out practice. He reminded people that the
intent was to get gas to Alaskans; the beauty of a
commercial application was to keep tariffs lower. He
concluded that a perpetuating goal had been to beat the
price of imported Liquid Natural Gas (LNG); the proposed
analysis did just that. He noted that the number was
currently $14 to $16 per million cubic feet; tariffs to
Anchorage would be $9.63 and $10.33 to Fairbanks.
2:43:57 pm
Co-chair Stedman stated that he was not questioning Mr.
Fauske's good intention, but he was questioning where
private enterprise was. He remarked that the state was not
a shining model of bigger projects; he pointed to the
recent prison that had cost around $200 million as an
example and added that the gasline project was
substantially larger. The project could have negative
repercussions on the state if it went upside-down. He
opined that it was a bad business practice to move forward
on a project without private enterprise at the state's
side. He emphasized that additional red flags went up
related to the privacy issues. The legislature had heard
all of the "lines" delivered to it regarding AGIA and the
state would be $500 million down the drain. He did not want
to see another $400 million wasted and surmised that $900
million could essentially fix Fairbanks' problem.
2:45:07 pm
Mr. Fauske agreed. He explained that the $400 million was
the price the state needed to pay to get industry at its
side. He pointed to the FEL 1 through 3 "trumpet curve" and
explained that milestones were reached along the process
that would determine whether the project would proceed. He
furthered that it could always be determined that the
project was not worthwhile, but to reach the determination
some money had to be spent to prove it.
Co-Chair Stedman remarked that whose money was the relevant
issue. Mr. Fauske replied that the money was the $400
million [that would be spent by the state].
2:45:55 PM
Co-Chair Hoffman discussed that none of the smaller state
energy projects (between $1 million to $5 million) could
move forward without a power purchase agreement; many of
the grants had not come to fruition because they had not
obtained the agreement. He could see the enthusiasm for the
proposed project, but that was not a requirement; the
legislature had a financial fiduciary responsibility for
the project. He asked for a list of mines that could
potentially benefit from the proposed gasline.
2:47:15 PM
Mr. Fauske stressed that he had not ever advocated for the
construction of a state-operated pipeline; he had voiced
that the state could be an equity participant and owner. He
stressed that the state needed to spend money to let
industry know that the project was real. He noted that the
industry would not spend the initial money.
Co-Chair Stedman felt that the fact the industry would not
spend the money represented a red flag.
2:48:10 PM
Senator Thomas referred to needs addressed by the project
on pages 11 and 12 of the governor's proposed FY 13 capital
budget project detail sheets. He asked whether the
expression of interest had been from instate users or
companies planning to export gas. Mr. Dubler answered that
that the expression of interest had been open to all
interested parties.
Senator Thomas assumed that AGDC would know whether
interested companies would import or export the gas. Page
12 of the governor's detail sheet specified that one of the
needs the project would address was the decline of fields
in Cook Inlet that "may not meet demand as early as 2014";
he asked if AGDC believed that was the case. He believed it
was critical to know whether the interest was for
exportation or for Cook Inlet. He stressed that the need
for the project would be cancelled if Cook Inlet had 9 to
20 trillion cubic feet of gas. Mr. Fauske answered that the
state's maximum need was 240 mcf. He surmised that the
interest expressed in the remaining 260 mcf was probably
not for local use.
Senator Thomas believed that it made sense to continue if
the interest was for export, but he did not agree with the
need specified on page 12 if the gas was not for export.
Mr. Dubler answered that the Railbelt used less than 250
mcf of gas and that the remaining 250 mcf would leave the
state.
2:50:37 PM
Co-Chair Stedman believed the issue created another
problem; the idea was to shift demand and build industry
off of the gas. He was concerned about selling all of the
gas, building a line and not being able to expand it.
Mr. Dubler responded that the 500 mcf AGIA restriction
would be removed if the licensee abandoned the license or
the state determined it was not actively pursuing the item.
The proposed 24 inch, 2500 psi gasline with compression
could go up to 1 bcf per day and would be able to
accommodate a significant increase in state activity.
2:51:39 PM
LES CAMPBELL, DIRECTOR OF BUDGET, ALASKA HOUSING FINANCE
CORPORATION, DEPARTMENT OF REVENUE, turned to the request
for a new item 54796 related to domestic violence rental
assistance for $1,328,400 in general funds. The purpose of
the item was to provide rental assistance to victims of
domestic violence or sexual assault who had been displaced
or were in need of alternate housing to prevent further
harm to the household. Some of the outcomes included,
rental assistance for up to 150 households statewide that
had been displaced from permanent housing or were otherwise
at risk of displacement because of recent or reoccurring
domestic violence instances.
Mr. Campbell spoke to statewide project improvements (item
40068) in the amount of $2 million in corporate dividends.
The purpose of the project was to provide funding to
address known and unknown conditions in AHFC housing stock.
Outcomes included, advancements in providing funding for
emergency repairs, roof replacements, fire alarm systems,
allowing quick response to code changes and life safety
issues, providing amenities, allowing quick response for
seen conditions, and enhancing operations for individual
project developments.
Co-Chair Hoffman requested a list of how the funds had been
spent in the past three fiscal years.
2:54:02 PM
Mr. Campbell addressed a request for the Building System
Replacement Program (item 47069) in the amount of $1.5
million in corporate dividends. The program's purpose was
to address the specific major repair and replacement
identified in a five-year review. The program would reduce
maintenance costs, increase the useful life of the
structures, and increase tenant safety. The program was
ongoing to replace component parts.
Mr. Campbell turned to a request for fire protection
systems (item 47066) in the amount of $2.2 million in
corporate dividends. The purpose was to flush, evaluate,
and make life safety code repairs to public housing fire
protection systems throughout the state. Projected outcomes
included maintenance cost reductions, increased structure
life, and increased tenant safety. The ongoing project was
projected to continue for several future fiscal years.
Mr. Campbell directed attention to item 47068 related to
security systems replacement upgrades in the amount of
$500,000 in corporate dividends. The purpose was to upgrade
existing security and door access systems to senior,
disabled, and multi-family public housing complexes.
Projected outcomes included increased security for
residents, reduced theft and vandalism, reduced maintenance
and custodial costs, and increased useful life of the
structures. He relayed that Anchorage and Fairbanks were
close to completion. The funds would target the Juneau
area.
Mr. Campbell pointed to item 6323 for the Supplemental
Housing Development Program in the amount of $2,559,800 in
corporate dividends and $4,440,200 in general funds. The
program's purpose was to supplement the federal housing
funds provided to regional housing authorities to ensure
safe, decent, and affordable housing statewide. Projected
outcomes were: construction of affordable homes in up to 20
urban and rural communities; build onsite water and sewer
facilities; provide energy efficient design features in
homes; construct roads to project sites; provide electrical
distribution systems; retrofit homes to provide safe and
healthy environment; and provide clients with new, safe,
and energy efficient housing. The program was for stock
owned by regional housing authorities.
Mr. Campbell discussed item 6351 related to energy
efficiency monitoring research in the amount of $1 million
in corporate dividends. The purpose was to conduct research
analysis, information dissemination, and interchange among
members of the industry and between the industry and
public. The project was ongoing and was a designated grant
to the Cold Climate Housing Research Center in Fairbanks.
2:57:36 PM
Mr. Campbell moved to item 6334 for the Senior Citizen
Housing Development Program in the amount of $4.5 million
in state general funds. The purpose was to provide funds
for the development of senior citizen housing and
accessibility modifications to senior's residences. To date
the program had funded 1,209 senior units and had provided
accessibility modifications to over 150 homes. The project
outcomes for the current request was for three development
projects (30 units), modifications for accessibility for 40
units, and technical grant assistance for building capacity
and organizations developing senior housing. Program funds
were used only to fund the development gap (the amount
necessary to make the project financially feasible or the
difference between all other funding sources expected to be
contributed including, loan funds and the cost of the
development projects).
Mr. Campbell highlighted item 6347 related to the Housing
and Urban Development Capital Fund Program in the amount of
$750,000 in corporate dividends to work as a match for $3.3
million in federal receipts. The purpose was to expand the
supply of affordable low and moderate income housing and to
strengthen the state's ability to design and implement
strategies to achieve an adequate supply of energy
efficient and affordable housing. The program had funded 44
rental projects containing 818 units, rehabilitated 373 low
income homes, and assisted 315 low income families in
purchasing homes.
2:59:50 PM
Co-Chair Stedman relayed that the capital budget item
discussion would continue during the afternoon meeting on
the following day.
Co-Chair Hoffman requested a report from AHFC showing the
beginning balance of the proposed FY 13 level of funds
available in AHFC receipts and dividends including funds
the agency planned to expend, the amount it would receive
under the budget, and the balance at the end of the fiscal
year.
Co-Chair Stedman explained that because interest rates were
so low there was concern about dividend impacts in areas
including the permanent fund and the state retirement
system. He asked the corporation to include projected AHFC
dividend items for upcoming years.
Co-Chair Stedman discussed the schedule for the following
day.
ADJOURNMENT
3:02:40 PM
The meeting was adjourned at 3:02 PM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 160 AGDC FY 2013 Budget Request.pdf |
SFIN 3/13/2012 1:00:00 PM |
SB 160 |
| SB 160 AGDC Funding Profile JMD.pdf |
SFIN 3/13/2012 1:00:00 PM |
SB 160 |
| SB 160 DPS King Air Proposal 031212.pdf |
SFIN 3/13/2012 1:00:00 PM |
SB 160 |
| SB 160 Interior Helo -final- 11_28_11.pdf |
SFIN 3/13/2012 1:00:00 PM |
SB 160 |