Legislature(2003 - 2004)

04/03/2003 09:00 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                              MINUTES                                                                                         
                     SENATE FINANCE COMMITTEE                                                                                 
                          April 03, 2003                                                                                      
                              9:00 AM                                                                                         
                                                                                                                                
                                                                                                                                
TAPES                                                                                                                       
                                                                                                                                
SFC-03 # 39, Side A                                                                                                             
SFC 03 # 39, Side B                                                                                                             
                                                                                                                              
CALL TO ORDER                                                                                                               
                                                                                                                                
Co-Chair Gary Wilken convened  the meeting at approximately 9:00 AM.                                                            
                                                                                                                                
PRESENT                                                                                                                     
                                                                                                                                
Senator Lyda Green, Co-Chair                                                                                                    
Senator Gary Wilken, Co-Chair                                                                                                   
Senator Con Bunde, Vice Chair                                                                                                   
Senator Robin Taylor                                                                                                            
Senator Ben Stevens                                                                                                             
Senator Donny Olson                                                                                                             
                                                                                                                                
Also  Attending:  SENATOR  SCOTT  OGAN;  REPRESENTATIVE  HUGH  FATE;                                                          
REPRESENTATIVE VIC KOHRING                                                                                                      
                                                                                                                                
Attending  via  Teleconference:  from  offnet  sites:  ROGER  MARKS,                                                          
Petroleum Economist,  Division of  Tax, Department of Revenue;  MARK                                                            
MYERS,  Director, Division  of Oil  and Gas,  Department of  Natural                                                            
Resources;    From   Anchorage:    WENDY    KING,   Representative,                                                             
ConocoPhillips                                                                                                                  
                                                                                                                                
SUMMARY INFORMATION                                                                                                         
                                                                                                                                
HB 16-STRANDED GAS DEVELOPMENT ACT AMENDMENTS                                                                                   
                                                                                                                                
The  Committee  heard  testimony   from  members  of  the  House  of                                                            
Representatives,   the   Department   of  Natural   Resources,   the                                                            
Department  of Revenue, and  heard public  testimony. One  amendment                                                            
failed to be adopted, and the bill reported from Committee.                                                                     
                                                                                                                                
SB 86-INTEREST ON DELINQUENT TAXES                                                                                              
                                                                                                                                
This bill was scheduled but not heard.                                                                                          
                                                                                                                                
                                                                                                                                
     CS FOR HOUSE BILL NO. 16(FIN) am                                                                                           
     "An  Act amending,  for  purposes of  the Alaska  Stranded  Gas                                                            
     Development  Act,  the  standards  applicable   to determining                                                             
     whether  a  proposed new  investment  constitutes  a  qualified                                                            
     project,  the standards used  to determine whether a  person or                                                            
     group qualifies as  a project sponsor or project sponsor group,                                                            
     and 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,  and                                                            
     modifying  the conditions  bearing  on the  use of independent                                                             
     contractors  to evaluate  applications  or to develop  contract                                                            
     terms; providing  statements of intent for the  Act relating to                                                            
     use of project labor  agreements and to reopening of contracts;                                                            
     and providing for an effective date."                                                                                      
                                                                                                                                
                                                                                                                                
     SENATE CS FOR CS FOR HOUSE BILL NO. 16(RES)                                                                                
     "An  Act amending,  for  purposes of  the Alaska  Stranded  Gas                                                            
     Development  Act,  the  standards  applicable   to determining                                                             
     whether  a  proposed new  investment  constitutes  a  qualified                                                            
     project,  the standards used  to determine whether a  person or                                                            
     group qualifies as  a project sponsor or project sponsor group,                                                            
     and 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,  and                                                            
     modifying  the conditions  bearing  on the  use of independent                                                             
     contractors  to evaluate  applications  or to develop  contract                                                            
     terms; providing  statements of intent for the  Act relating to                                                            
     use of project labor  agreements and to reopening of contracts;                                                            
     and providing for an effective date."                                                                                      
                                                                                                                                
                                                                                                                                
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Committee.                                                                                                                      
                                                                                                                                
Co-Chair  Wilken informed  the Committee that  this bill  "clarifies                                                            
the qualification and application  procedures" involving natural gas                                                            
projects  for  the Commissioners  of  the  Department  of Labor  and                                                            
Workforce   Development,  the   Department   of  Revenue,  and   the                                                            
Department  of  Natural  Resources.  He  explained  that  the  "sole                                                            
difference"  between  the  two bill  versions,  SCS  for  CS for  HB                                                            
#16(RES) and CS  HB #16(FIN)am, is that SCS for CS  for HB #16 (RES)                                                            
inserts  the  words "North  Slope"  and  "a natural  gas"  into  the                                                            
language of Section 2, Subsection 43.82.100 (1)(A) as follows.                                                                  
                                                                                                                                
     (A) the transportation  of North Slope natural gas by a natural                                                        
     gas  pipeline  to  one  or  more  markets,  together  with  any                                                          
     associated processing or treatment;                                                                                        
                                                                                                                                
     New Text Underlined                                                                                                      
                                                                                                                                
Co-chair  Wilken opined  that the  addition of  the Senate  Resource                                                            
Committee  language  "restricts  the  bill  and the  intent  of  the                                                            
language," and as such,  he continued, has the potential to restrict                                                            
an  upcoming  project  in  the  Fairbanks  district.  He  urged  the                                                            
Committee to adopt the CS HB #16(FIN)am version of the bill.                                                                    
                                                                                                                                
Senator  Bunde  moved to  adopt  CS  HB #16(FIN)am  as  the  working                                                            
document.                                                                                                                       
                                                                                                                                
There  being no  objection,  CS HB  #16(FIN)am  was  adopted as  the                                                            
working document.                                                                                                               
                                                                                                                                
REPRESENTATIVE  HUGH FATE, the bill's sponsor, explained  that CS HB                                                            
#16(FIN)am would:  eliminate language referring to  the North Slope;                                                            
extend  the application  deadline  to  March  2005; and  reduce  the                                                            
requirements regarding  who might qualify as a project  sponsor from                                                            
33 percent  of net worth of the project  to ten percent which  would                                                            
encourage exploration  and investments  in natural gas projects.  He                                                            
continued  that  the bill  would  additionally  reduce  the  project                                                            
sponsor's required  line of credit from 25 percent  to 15 percent of                                                            
the  project,  and specify  that  the reimbursable  amount  of  $1.5                                                            
billion per contract to  the State. He stressed that this bill would                                                            
provide  a boarder  approach  to  the development  of  stranded  gas                                                            
projects.                                                                                                                       
                                                                                                                                
SENATOR  SCOTT OGAN  noted  that the  sponsor  was included  in  the                                                            
Senate Resources Committee  discussions and had voiced acceptance of                                                            
the changes to the bill.                                                                                                        
                                                                                                                                
Representative  Fate explained that  he "concurred with the  changes                                                            
that  were  made,"  as, he  continued,  a  legal  opinion  from  the                                                            
Department  of Law specified  that those  changes would not  prevent                                                            
"other  gas  discoveries"  from having  access  to  the use  of  the                                                            
pipeline.                                                                                                                       
                                                                                                                                
ROGER MARKS,  Petroleum Economist,  Division  of Tax, Department  of                                                            
Revenue testified  via teleconference  from an offnet site  and read                                                            
his testimony as follows.                                                                                                       
                                                                                                                                
     Good morning,  co-chairs Wilken  and Green, and members  of the                                                            
     committee.  My name is Roger Marks. I am a petroleum  economist                                                            
     with the  Tax Division of the  Department of Revenue.  I worked                                                            
     on the original  Stranded Gas Act in 1998 and  am familiar with                                                            
     its history,  intent, and mechanics. 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.                                                                                          
                                                                                                                                
Co-Chair Wilken interjected that Mr. Marks' written testimony,                                                                  
titled "Overview of HB 16" dated April 3, 2003 [copy on file] has                                                               
been provided to Committee members.                                                                                             
                                                                                                                                
Mr. Marks continued reading his testimony as follows.                                                                           
                                                                                                                                
     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 actually                                                            
     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,   even   ones   the   size   of  Exxon,   BP,   or                                                            
     ConocoPhillips.  If this  project is  built and something  goes                                                            
     wrong,  such  as  low prices,  the  sponsors  face  very  large                                                            
     losses.  And  even  if these  are  relatively  low probability                                                             
     events,  the  project may  not  be built  is a  company  cannot                                                            
     tolerate  a loss  that size.  That  is why  the risk  reduction                                                            
     mechanism  proposed in  Congress, which  is currently  in place                                                            
     for  non-conventional  gas  in  the lower  48,  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 the tax system  changes, the changes  could                                                            
     cause heavy financial losses.                                                                                              
                                                                                                                                
     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 diminished  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 (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 the gas valuation method,  and the timing                                                            
     of royalty in-kind and in-value notices.                                                                                   
                                                                                                                                
     The  Commissioner  of Revenue would  be the  primary agent  for                                                            
     negotiating   and  implementing   the  contact.  However,   the                                                            
     Commissioner  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  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                                                             
     judgement  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.                                                                                                      
                                                                                                                                
Senator  Ogan  asked  the  testifier  whether   the  communities  of                                                            
Anchorage,  Mat-Su   and  Kenai  participated  in  the  discussions                                                             
regarding this bill as,  he continued, this legislation provides the                                                            
Department  of Revenue with  the ability  to "basically" remove  the                                                            
communities' "taxing authority."  He reminded the Committee that the                                                            
original  version   of  this  legislation  "did  not   affect  those                                                            
communities at all."                                                                                                            
                                                                                                                                
Mr. Marks responded that,  while "the North Slope Borough, Fairbanks                                                            
and Valdez"  were involved  in the discussions,  the communities  of                                                            
Anchorage, Mat-Su and Kenai were not.                                                                                           
                                                                                                                                
Senator Ogan  avowed that the amended  version of this bill  affects                                                            
"the powers" of these communities  without their input. He continued                                                            
that "not developing  a dialogue"  with the affected communities  is                                                            
"bad   public  policy,"   as   this  bill   would   apply  to   "the                                                            
transportation  of  natural gas  "in any  pipeline  anywhere in  the                                                            
State."                                                                                                                         
                                                                                                                                
Senator Taylor  questioned the involvement of the  City of Valdez in                                                            
the  discussion,  as the  proposed  pipeline  does not  affect  that                                                            
community.                                                                                                                      
                                                                                                                                
Mr.  Marks  responded  that  the  original  act,  adopted  in  1998,                                                            
concentrated on  the transportation of liquefied natural  gas (LNG),                                                            
and he stated  that, at the time,  Valdez "was an integral  part" of                                                            
the project. He agreed  that a highway pipeline project would reduce                                                            
the role of Valdez in the proceedings.                                                                                          
                                                                                                                                
Senator Taylor  asserted that because the original  Act concentrated                                                            
on LNG, an LNG market study had been conducted.                                                                                 
                                                                                                                                
Mr.  Marks  replied  that  a  sponsor  group   consisting  of  ARCO,                                                            
Foothills Pipeline  Company, Phillips Petroleum, Yukon  Pacific, and                                                            
British  Petroleum conducted  a LNG  feasibility  study in 1998.  He                                                            
stated that the viability study cost approximately $2 million.                                                                  
                                                                                                                                
MARK  MYERS,  Director,  Division  of Oil  and  Gas,  Department  of                                                            
Natural Resources testified  via teleconference from an offnet site.                                                            
He expressed  that  the gas  pipeline project  is  important to  the                                                            
State  because it  would provide  for "the development  of  Alaska's                                                            
incredible gas  resources for the next fifty years  plus." He stated                                                            
that,  "the  Stranded  Gas  Act  sets  the  stage   for broad-based                                                             
technical   negotiations    between   project   sponsors   and   the                                                            
Administration."  He  stressed  that  the  Administration   strongly                                                            
supports the Act  and recognizes it "as a vehicle  to accelerate the                                                            
construction of a North  Slope natural gas pipeline." He voiced that                                                            
these broad-based  negotiations would enable the various  expertises                                                            
within the Departments  and the industry to work together. He stated                                                            
that the  debate  regarding the  committee substitutes  pertains  to                                                            
whether  independent  natural  gas  basin projects  outside  of  the                                                            
Fairbanks  and North Slope  regions would be  allowed access  to the                                                            
gas pipeline.                                                                                                                   
                                                                                                                                
Senator Taylor  asked the average percentage of "in  place" gas that                                                            
is typically owned by the  entities who own and operate the existing                                                            
major pipelines in the  United States; specifically whether there is                                                            
a ten percent or higher  ownership requirement that must be in place                                                            
before  an entity  is  allowed  to own  and  operate a  natural  gas                                                            
pipeline.                                                                                                                       
                                                                                                                                
Mr. Myers  responded  that, "there  is no such  rule." He  continued                                                            
that the most  common scenario is that the pipeline  is "separately"                                                            
owned from the  producers "so that non-affiliated  pipelines are the                                                            
norm." However,  he noted that there  are exceptions. He  summarized                                                            
that "owning the gas is  not a prerequisite to owning the pipeline."                                                            
                                                                                                                                
Senator Taylor  asked, therefore,  why a ten  percent interest  in a                                                            
stranded gas project is  identified as a requirement in the bill. He                                                            
ventured  that perhaps  this is  an exclusivity  qualifier "to  make                                                            
certain that  there is only  two or three  total bidders" who  could                                                            
apply.                                                                                                                          
                                                                                                                                
Mr. Myers clarified  that, rather than the language  requiring a ten                                                            
percent  ownership  in the  gas,  the language  specifies  that  the                                                            
applicant must  have "an equity of  at least ten percent  of the net                                                            
worth  of  the project."   He acknowledged   that this  would  be  a                                                            
limiting factor, as it  would require a significant amount of money.                                                            
                                                                                                                                
Senator Taylor referred  to the qualifying language in Section 3, of                                                            
the bill that reads as follows.                                                                                                 
                                                                                                                                
     Sec. 3. AS43.82.110 is amended to read:                                                                                    
          Sec.43.82.110. Qualified sponsor or qualified sponsor                                                                 
     group. The commissioner may determine that a person or group                                                               
     is a qualified sponsor or qualified sponsor group if the                                                                   
     person or a member of the group                                                                                            
                (1)  intends  to   own  an  equity  interest   in  a                                                            
                qualified project,  intends  to commit  gas that  it                                                            
                owns to a  qualified project,  or holds the  permits                                                            
                that the  department  determines  are  essential  to                                                            
                construct and operate a qualified project; and                                                                  
                (2) meets one or more of the following criteria:                                                                
                     (A) owns a working interest in at least 10                                                                 
                percent  of   the  stranded   gas  proposed   to  be                                                            
                developed by a qualified project;                                                                               
                     (B) has the right to purchase at least 10                                                                  
                percent  of   the  stranded   gas  proposed   to  be                                                            
                developed by a qualified project;                                                                               
                     (C) has the right to acquire, control, or                                                                  
                market  at least  10  percent  of the  stranded  gas                                                            
                proposed to be developed by a qualified project;                                                                
                     (D) has a net worth equal to at least 10 [33]                                                            
                percent  of the  estimated  cost of  constructing  a                                                            
                qualified project;                                                                                              
                     (E) has an unused line of credit equal to at                                                               
                least 15  [25]  percent  of the  estimated  cost  of                                                          
                constructing a qualified project.                                                                               
                                                                                                                                
     New Text underlined [Deleted Text Bracketed]                                                                             
                                                                                                                                
Senator Taylor  agreed that  while the language  does not require  a                                                            
company to own ten percent  of the stranded gas, the requirement for                                                            
an applicant to  have a net worth exceeding $3 billion,  factored on                                                            
a  percent  of  the   total  projected  cost  of  the   project,  is                                                            
restrictive.  He noted  that the  committee substitutes  propose  to                                                            
reduce the  percentage levels of the  qualifiers; however,  he asked                                                            
whether the level of these  five qualifying standards is a universal                                                            
norm.                                                                                                                           
                                                                                                                                
Mr. Myers responded  that these qualifier  standards "are  more of a                                                            
commercial agreement"  from a consortium of major  producers, rather                                                            
than a  government  recommendation.  He continued  that because  the                                                            
scope and cost  of a qualifying project is unknown,  it is difficult                                                            
to determine  total project  costs. He mentioned  that, because  the                                                            
exact  route  of  the  pipeline  has  not  been  determined,  it  is                                                            
difficult to compile  the financial data. Nonetheless,  he estimated                                                            
the pipeline costs to be  in "the billions of dollars," and that few                                                            
companies would qualify.                                                                                                        
                                                                                                                                
Senator  Taylor asked  the number  of companies  that meet the  five                                                            
criteria outlined in the bill.                                                                                                  
                                                                                                                                
Mr. Myers commented that  "the upstream producers" would benefit "in                                                            
terms  of re-negotiating  their  royalties  or tax  terms  involving                                                            
production." He continued  that "there is not a direct affect on the                                                            
pipeline but  there are issues involving  pipeline tariffs  or stuff                                                            
that could be  negotiated under this that could affect  the pipeline                                                            
portion of the project."  He stated that "this very broad based bill                                                            
would benefit the lessees"  consisting of the large producers on the                                                            
North Slope  such as Exxon,  ConocoPhillips,  British Petroleum  and                                                            
Chevron, who have gas that  would go into the line, as well as a few                                                            
large exploratory  groups. He noted  that a potential consortium  of                                                            
Native groups  as well as  a multitude of  pipeline companies  could                                                            
qualify.  He stated that  while "this  is a fairly  large group,  it                                                            
certainly   is  a   limited   group  when   you   look  at   Alaskan                                                            
corporations."                                                                                                                  
                                                                                                                                
Senator  Taylor  declared  that  the  Legislature  "struggles"  with                                                            
determining an  accurate cost of the pipeline project,  and he asked                                                            
whether the industry  has provided specific proprietary  information                                                            
rather than  general information  to assist  in the cost  projection                                                            
endeavor.  He voiced displeasure  at not being  able to determine  a                                                            
cost range.                                                                                                                     
                                                                                                                                
Mr. Myers  verified that  the Department  of Natural Resources  does                                                            
not  have  sufficient  "detailed   financial  data  to  support"  an                                                            
accurate figure  nor has the Department received any  financial data                                                            
to  further  this  effort.  He  stated   that  until  a  project  is                                                            
identified, it  would continue to be difficult to  determine a cost.                                                            
He mentioned  that producers  have spent in  excess of $100  billion                                                            
dollars  in analyzing the  project and  determining costs;  however,                                                            
the State  does not  have access  to that information.  He  asserted                                                            
that the State must develop a much more detailed cost analysis.                                                                 
                                                                                                                                
Senator  Taylor  declared  that  neither  the  Legislature  nor  the                                                            
Departments have  been provided any industry financial  information.                                                            
                                                                                                                                
Mr. Myers stated that this is "absolutely correct."                                                                             
                                                                                                                                
WENDY KING, Director  of External Strategies, ConocoPhillips  Alaska                                                            
North  Slope Development  Team,  testified via  teleconference  from                                                            
Anchorage  to voice support  for this bill,  as it would modify  and                                                            
reauthorize the Stranded  Gas Act to include a gas pipeline project.                                                            
She  communicated that  passage  of this  bill, passage  of  federal                                                            
legislation  intended  to streamline  the  permitting  process,  and                                                            
federal  fiscal legislation  ensuring  against the  risk of  extreme                                                            
price  volatility   are  parts  of   ConocoPhillips  "three-pronged                                                             
strategy  to  make  a gas  pipeline  through  Alaska  and  Canada  a                                                            
reality." She urged the Committee to pass the bill.                                                                             
                                                                                                                                
REPRESENTATIVE  VIC KORING spoke in  support of the legislation,  as                                                            
he stated, it would allow  the stranded gas industry in the State to                                                            
develop. He  furthered that construction  of a natural gas  pipeline                                                            
would produce  jobs, boost  the economy,  and increase revenues  for                                                            
the State.  He stated  that this  legislation would  work in  tandem                                                            
with federal legislation  currently being addressed  in Congress. He                                                            
"respectfully  requested"  the Committee  to adopt  "a clean  simple                                                            
bill…to expedite the process."                                                                                                  
                                                                                                                                
Senator Taylor  asked whether language  on page two of the  bill was                                                            
changed  to allow  "for  more than  LNG" to  be transported  in  the                                                            
pipeline.                                                                                                                       
                                                                                                                                
Representative Fate answered  that the changes would allow for other                                                            
gas related products from the field to be included.                                                                             
                                                                                                                                
Senator  Taylor  stated that  he  is unaware  of  a variety  of  gas                                                            
products. He asked the  intent of the qualifying language on page 2,                                                            
line 19 that reads as follows.                                                                                                  
                                                                                                                                
     Sec. 2 (1) (B) [IS A PROJECT FOR] the export of liquefied                                                                  
     natural gas from the state to one or more other states or                                                                
     countries; or                                                                                                            
                                                                                                                                
     New Text Underlined [DELETED TEXT BRACKETED]                                                                             
                                                                                                                                
Representative  Fate responded that this language  would provide for                                                            
the use of gas within the  State or provide for a gas infrastructure                                                            
within  the State.  He  clarified  that the  original  bill did  not                                                            
authorize  these  uses,  and  he  continued  that  the  language  is                                                            
included for clarification.                                                                                                     
                                                                                                                                
Senator Ogan shared  that he has "struggled" with  the gas-to-liquid                                                            
(GTL) issue.  He asserted  that the language  included in Section  2                                                            
(1)(C) located on page 2, line 19 is very broad.                                                                                
                                                                                                                                
     Sec 2 (1)(C) and other technology that commercializes the                                                                
     shipment of natural gas within the state or from the state to                                                            
     one or more other stated or countries;                                                                                   
                                                                                                                                
     New Text Underlined [DELETED TEXT BRACKETED]                                                                             
                                                                                                                                
Senator  Ogan expressed  that were  this language  not included,  it                                                            
would  inhibit  the Commissioner   of the  Department  of  Revenue's                                                            
ability  to  negotiate  for  a possible  petrol-chemical   industry;                                                            
however, he continued,  "this bill is so broad that  you could drive                                                            
a truck  through it." He  stated that the  language would allow  for                                                            
any technology,  anywhere  in the State  "without consultation  with                                                            
any communities"  being affected.  He read from Alaskan pioneer  and                                                            
State Constitution consultant,  Bob Bartlett's writings which warned                                                            
of  two dangers  to  the  State's  resources:  the first  being  the                                                            
exploitation  of the State's resources  "under the thin disguise  of                                                            
exploration"  and the second  being outside  interests' attempts  to                                                            
inhibit  development   of  Alaska's  lands  to  protect   their  own                                                            
interests.  He noted  that the  State has discussed  developing  its                                                            
natural  gas resources  for more  than 27  years, and  he urged  the                                                            
Committee  to narrow the  language to specify  that the State  would                                                            
"develop a  natural gas or LTG pipeline  either to Valdez  or to the                                                            
Lower 48." He suspected  that there might be ulterior motives to the                                                            
companies'  strategy; therefore, he  opined that the project  should                                                            
be more  clearly identified.  He warned that  this bill would  allow                                                            
for entities  to include  projects "that  are not  yet on the  radar                                                            
screen."  He declared  that he  could not  support  the language  as                                                            
presented.                                                                                                                      
                                                                                                                                
Co-Chair  Green asked  for an  example of  a project  that would  be                                                            
permitted by  the language in the  working document, but  prohibited                                                            
by the language of the Senate Resources committee substitute.                                                                   
                                                                                                                                
Senator  Ogan   responded  that  the   Senate  Resources   committee                                                            
substitute would prohibit  a gas pipeline from being built unless it                                                            
was attached to the North  Slope Natural Gas Pipeline. He reiterated                                                            
his concern that  Mat-Su, Anchorage, and Kenai were  not involved in                                                            
discussions regarding the changes in the bill.                                                                                  
                                                                                                                                
Co-Chair Green asked the definition of stranded gas.                                                                            
                                                                                                                                
Representative  Fate explained that, "stranded gas  is that gas that                                                            
is either a byproduct  or is in itself a primary well  that has been                                                            
put down  and the  utilization  of that  product which  is gas  or a                                                            
byproduct  of oil  has not  been used  in a commercial  market."  He                                                            
expressed  that  North  Slope  gas is  recognized  as  stranded  gas                                                            
because  it has  never  reached  a commercial  market  although,  he                                                            
explained,  the industry uses  the gas in  its North Slope  oil well                                                            
operations.                                                                                                                     
                                                                                                                                
                                                                                                                                
SFC 03 # 39, Side B 09:48 AM                                                                                                    
                                                                                                                                
                                                                                                                                
Co-Chair  Green asked  the advantage  or disadvantage  that an  area                                                            
would experience by being allowed to transport stranded gas.                                                                    
                                                                                                                                
Senator  Ogan  clarified  that being  authorized  to  transport  gas                                                            
"would be a good thing  for a borough;" however, he argued, boroughs                                                            
should  be   provided  the  opportunity   to  be  included   in  the                                                            
discussions.                                                                                                                    
                                                                                                                                
Senator Taylor asked how,  for instance, a new gas field in the Mat-                                                            
Su valley and  a group seeking to  transport that gas would  qualify                                                            
under this  bill's language, as he  contended, the bill's  "limiting                                                            
factors"  appear to  restrict  rather than  expand  the options.  He                                                            
voiced  that  this  bill focuses  only  on  areas  that are  in  the                                                            
vicinity  of the  proposed pipeline  routes rather  than  permitting                                                            
"the whole  State" to  develop fields  and transport  gas. He  asked                                                            
whether  "the qualifiers  preclude"  the  development  of small  new                                                            
fields, small developers and small pipelines.                                                                                   
                                                                                                                                
Mr. Myers responded  that while the  cost of developing some  of the                                                            
projects  is  in the  millions  or  billions  of dollars;  the  bill                                                            
specifies that qualifying  groups must have a net worth equal to "at                                                            
least ten percent  of the qualified  project which is indeterminate                                                             
until you know what the  project is." He defined stranded gas as gas                                                            
that is not  being marketed due to  prevailing economic conditions.                                                             
                                                                                                                                
Senator   Taylor  acknowledged   the  information.   He  asked   for                                                            
confirmation that  the ability to produce 500 billion  cubic feet of                                                            
stranded  gas  over  a  twenty-year  period  is  required  to  be  a                                                            
qualified project.                                                                                                              
                                                                                                                                
Mr. Myers verified  that the required  amount of gas is 500  billion                                                            
cubic feet. He  remarked that this is "not a huge  number, but it is                                                            
a substantial  number." He stated that there are multiple  fields of                                                            
this  size,  and  he  continued,  there   is the  possibility   that                                                            
potentially larger fields exist.                                                                                                
                                                                                                                                
Senator  Taylor  asked  the  reason the  State  would  support  this                                                            
limiting factor.                                                                                                                
                                                                                                                                
Mr. Myers responded that  the language is a "screening criteria," as                                                            
he surmised, it  might be easier to negotiate with  a smaller number                                                            
of entities.                                                                                                                    
                                                                                                                                
Senator  Bunde asked  whether  this  legislation correlates  to  any                                                            
Congressional action regarding the gas pipeline.                                                                                
                                                                                                                                
Representative  Fate noted that at a recent National  Energy Council                                                            
meeting, Alaskan  Legislators entertained  many questions  regarding                                                            
the  status of  the  State's Stranded  Gas  Act. He  continued  that                                                            
action  on this legislation  "would  give credence  to the State  of                                                            
Alaska's  effort to get  the negotiations  going." He declared  that                                                            
action at  the State and  federal level is  required to further  gas                                                            
pipeline negotiations.                                                                                                          
                                                                                                                                
Senator Bunde  asked whether the likelihood that these  negotiations                                                            
would occur is increasing.                                                                                                      
                                                                                                                                
Representative  Fate responded  yes, as he  understands that  the US                                                            
House  of Representatives   is currently  addressing  both  the  gas                                                            
pipeline issue  and the Arctic National  Wildlife Refuge  (ANWR). He                                                            
asserted  that  State  action   on  this  bill  and  action  at  the                                                            
Congressional   level   would   assist   in   furthering    pipeline                                                            
negotiations.                                                                                                                   
                                                                                                                                
Senator Taylor  opined that deletion  of the words "natural  gas" on                                                            
page 2, line 16 of the  bill would expand the utilization parameters                                                            
of the Trans-Alaska  Pipeline System (TAPS). He concluded  that were                                                            
the existing crude  oil pipeline alternately used  to transport GTL,                                                            
a separate pipeline would not be required.                                                                                      
                                                                                                                                
Representative  Fate conveyed that  a separate gas pipeline  has not                                                            
been constructed  partially  because private  industry research  has                                                            
not been  able to demonstrate  that commercial  marketing of  GTL in                                                            
today's economic market  would be financially feasible. He expressed                                                            
that were the  commercial market for  natural gas more competitive,                                                             
the  transportation  of  GTL or  any  other product  in  TAPS  would                                                            
generate  "quicker money and  even enhanced  revenue" for the  State                                                            
because  the resource  and the  pipeline are  already available.  He                                                            
stated that the commercialization  of natural gas would additionally                                                            
allow for a value-added  in-State infrastructure to be developed. He                                                            
asserted  that the  economic market  is the  determining factor.  He                                                            
considered the Stranded  Gas Act 2005 reauthorization requirement to                                                            
be "an additional safeguard."                                                                                                   
                                                                                                                                
Senator  Taylor specified,  therefore,  that TAPS  could be used  to                                                            
transport GTL.                                                                                                                  
                                                                                                                                
Representative Fate responded, "the answer is yes."                                                                             
                                                                                                                                
Senator Bunde  asked whether the $871,500 expenditure,  reflected in                                                            
the Department  of Revenue  fiscal  note #4, would  be supported  by                                                            
statutory designated program  receipts rather than by Constitutional                                                            
Budget Reserve (CBR) funding.                                                                                                   
                                                                                                                                
Representative  Fate answered in the affirmative.  He clarified that                                                            
monies  generated  from  the "$1.5  million  limit"  per  negotiated                                                            
project  fee,  as   specified  in  the  bill,  would   support  this                                                            
expenditure.                                                                                                                    
                                                                                                                                
Senator  Taylor  reviewed the  political  arguments  concerning  the                                                            
development of  a gas pipeline, and he observed that  there has been                                                            
"a significant  policy shift" regarding  the historical Legislative                                                             
position  that a  gas  pipeline should  be  separate  from TAPS.  He                                                            
argued  that  this legislation  would  provide  an  economic  "blank                                                            
check"  to an industry  that does  not share  pertinent information                                                             
with the  State concerning  the costs of the  project nor does  this                                                            
legislation  account for the  cost to the  citizens of the  State in                                                            
terms  of such  things as  tax incentives  that the  State might  be                                                            
"giving up." Additionally,  he countered, the same  companies who do                                                            
not share their cost analysis  with the State are the same ones that                                                            
supply "the economic viability  information" that the State utilizes                                                            
to  assess  the  project.  He  argued  that if  the  intent  of  the                                                            
legislation is to expand  the options, it should be "opened wide up"                                                            
rather  than  limiting   the  opportunity  to  a  select   group  of                                                            
multinational  companies that  would receive  "significant  economic                                                            
benefits."                                                                                                                      
                                                                                                                                
Senator  Bunde  understood  that  although  this  bill  would  allow                                                            
companies  to negotiate  with the  Administration,  the Legislature                                                             
would determine whether or not to approve the project.                                                                          
                                                                                                                                
Representative Fate verified  that even though the Commissioner must                                                            
approve   a  qualified  project   and  a   qualified  sponsor,   the                                                            
Legislature must  grant final approval before contract  negotiations                                                            
are finalized.                                                                                                                  
                                                                                                                                
Senator Taylor  agreed. He reminded the Committee  that were similar                                                            
qualifiers in place when  the Territory of Alaska decided "to permit                                                            
and allow"  the Alaska Railroad  to be constructed,  it might  never                                                            
have  been  finished,  as  he  continued,  before  the  project  was                                                            
finished,  the  original  builder  went  bankrupt  and  the  federal                                                            
government completed  the project. He declared that  were qualifiers                                                            
in place then, the State  would not have a railroad today. He opined                                                            
that rather than  the State determining who is qualified,  a company                                                            
should determine whether to undertake a project.                                                                                
                                                                                                                                
Amendment  #1: This  amendment deletes  the qualifying  language  on                                                            
page 2,  from line 29 through  page 3, line  13 so that the  amended                                                            
language reads as follows.                                                                                                      
                                                                                                                                
     Sec. 3. AS 43.82.110 is amended to read:                                                                                   
          Sec. 43.82.110. Qualified sponsor or qualified sponsor                                                                
     group. The commissioner may determine that a person or group                                                               
     is a qualified sponsor.                                                                                                    
                                                                                                                                
Senator Taylor moved for adoption of conceptual Amendment #1.                                                                   
                                                                                                                                
Co-Chair Green objected.                                                                                                        
                                                                                                                                
Representative   Fate   voiced  that   removing   these   qualifying                                                            
guidelines "would be a  delaying mechanism" as it would result in an                                                            
increase in  the number of applications,  and thereby, increase  the                                                            
Commissioner's  workload.  He commented  that,  while  he would  not                                                            
object to expanding  the exploration  guidelines, he voiced  concern                                                            
regarding the  "unintended consequences of opening  it up too wide."                                                            
                                                                                                                                
Co-Chair Wilken expressed  that this language is intended "to filter                                                            
out  companies or  entities"  who  would not  "have  the ability  to                                                            
develop a field."                                                                                                               
                                                                                                                                
Senator Taylor  argued in support of the amendment  by voicing that,                                                            
Anadarko Petroleum  Corporation, which he attested  is considered by                                                            
its peers  "to be  one of the  largest independents  in the  world,"                                                            
would be required to purchase  the State's "in-kind royalty gas at a                                                            
premium price  solely for the purpose of being allowed  to" meet the                                                            
qualifying criteria in  this legislation. However, he continued, the                                                            
sale of the  in-kind royalty gas has,  of yet, not been approved  by                                                            
the State, and  he continued, that were it not approved,  one of the                                                            
largest  companies  in  the  United States  would  have  to  qualify                                                            
through  another qualifier.  He  stated that  the  removal of  these                                                            
qualifiers would  permit the Commissioner to decide  which companies                                                            
would qualify.                                                                                                                  
                                                                                                                                
Senator Ogan  commented that several  entities, including  Foothills                                                            
Pipeline  Company,  have  removed  themselves  from  the  joint  gas                                                            
pipeline  sponsor group "perhaps"  due to,  he noted, the fact  that                                                            
"the guys  with the gas  make the rule."  He informed the  Committee                                                            
that in  other parts of  the country, it  is gas pipeline  companies                                                            
rather  than producers  who generally  transport  the gas. While  he                                                            
professed  no  position  on  the  amendment,  he  voiced  that  this                                                            
amendment  would remove  "the ownership  and possibly  opens up  the                                                            
ability  of" other entities  to build  a pipeline  to transport  the                                                            
gas.                                                                                                                            
                                                                                                                                
Co-Chair  Green  asked whether  Section  3(2)(C)  addresses  Senator                                                            
Taylor's concern,  as it specifies that an entity  "has the right to                                                            
acquire" rather than "will acquire."                                                                                            
                                                                                                                                
     (C) has the right to acquire, control, or market at least 10                                                               
     percent of the stranded gas proposed to be developed by a                                                                  
     qualified project.                                                                                                         
                                                                                                                                
Senator Taylor  responded that while this section  specifies that an                                                            
entity would have the right  to apply, it does not give the right to                                                            
actually acquire  the gas after a  contract is signed. He  asked why                                                            
the  State "should  even care"  about  these qualifiers  if  someone                                                            
wants to build  a pipeline. He stated  that rather than benefit  the                                                            
people  of Alaska,  the  qualifiers  "significantly  benefit"  those                                                            
entities that wish "to  exclude who gets to play in the poker game."                                                            
                                                                                                                                
Senator Olson  deemed this language  to be necessary to protect  the                                                            
State from  being responsible  for  cleaning up  a project, were  an                                                            
entity to go bankrupt.  He asked whether the industry  could testify                                                            
as to their position on the qualifiers.                                                                                         
                                                                                                                                
Co-chair  Wilken noted  that no  representatives  from the  industry                                                            
were present to testify.                                                                                                        
                                                                                                                                
Senator  B.  Stevens  observed  that  the  lack  of  any  discussion                                                            
regarding  the  qualifiers  from the  industry  appears  to  signify                                                            
acceptance  of the qualifiers. Furthermore,  he noted, the  industry                                                            
was  involved  in,  and  agreed  with,  the  qualifying   percentage                                                            
reductions  as specified in the bill.  He asserted that requiring  a                                                            
demonstration  of "financial capacity" is routine  and important. He                                                            
announced his opposition to the amendment.                                                                                      
                                                                                                                                
Senator  Taylor  insisted that  "significant  discussion"  with  the                                                            
industry  did occur during  deliberations  regarding the  percentage                                                            
reduction  changes  in  the  House  of  Representatives,   and  that                                                            
initially  the sponsor intended  lower percentages  to be  included,                                                            
but they  "got negotiated  back up." He voiced  that this  amendment                                                            
would  benefit the  intent of  the bill.  He agreed  that  financial                                                            
responsibility is important,  however, he stated that such things as                                                            
the environmental  clean-up bond requirements  imposed by  the State                                                            
are so  restrictive that  it limits the number  of entities  who are                                                            
willing  "to come  up  here and  punch  a hole  in the  ground."  He                                                            
declared  that he  has yet  to be  convinced that  these  qualifiers                                                            
would benefit  the State. He avowed,  "it is a good thing  the State                                                            
does not" impose  these types of qualifiers  on other industries  in                                                            
the State.                                                                                                                      
                                                                                                                                
A roll call was taken on the motion.                                                                                            
                                                                                                                                
IN FAVOR: Senator Taylor                                                                                                        
                                                                                                                                
OPPOSED: Senator Olson,  Senator Bunde, Senator B. Stevens, Co-chair                                                            
Green, Co-chair Wilken                                                                                                          
                                                                                                                                
ABSENT: Senator Hoffman                                                                                                         
                                                                                                                                
The motion FAILED (5-1-1).                                                                                                      
                                                                                                                                
Amendment #1 FAILED to be adopted.                                                                                              
                                                                                                                                
Senator  Taylor  voiced  that,  while he  would  not  be  presenting                                                            
another  conceptual amendment,  he  had considered  one that  "would                                                            
have removed the  500 billion cubic feet requirement  over a twenty-                                                            
year period"  to signify  that the Legislature  would encourage  the                                                            
development  of smaller  gas projects.  However,  he expressed,  the                                                            
Legislature  is apparently "not in  the business of encouraging  the                                                            
development of anything smaller than a $20 billion pipeline."                                                                   
                                                                                                                                
Senator Bunde  moved to report CS  for HB #16(FIN)am from  Committee                                                            
with personal recommendations and accompanying fiscal notes.                                                                    
                                                                                                                                
Senator  Taylor  objected  due to  the restrictions  that  the  bill                                                            
places on applicants.                                                                                                           
                                                                                                                                
A roll call was taken on the motion.                                                                                            
                                                                                                                                
IN FAVOR: Senator Olson, Senator Bunde, Senator B. Stevens, Co-                                                                 
chair Green, Co-chair Wilken                                                                                                    
                                                                                                                                
OPPOSED: Senator Taylor                                                                                                         
                                                                                                                                
ABSENT: Senator Hoffman                                                                                                         
                                                                                                                                
The motion PASSED (5-1-1)                                                                                                       
                                                                                                                                
CS HB 16(FIN)am  REPORTED from Committee  with zero fiscal  note #1,                                                            
from  the Department  of  Community  and  Economic  Development  and                                                            
fiscal  note #4 in  the amount of  $871,500 from  the Department  of                                                            
Revenue.                                                                                                                        
                                                                                                                                
ADJOURNMENT                                                                                                                 
                                                                                                                                
Co-Chair Gary Wilken adjourned the meeting at 10:27 AM                                                                          

Document Name Date/Time Subjects