Legislature(1997 - 1998)
04/30/1998 02:17 PM Senate L&C
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* first hearing in first committee of referral
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+ teleconferenced
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SENATE LABOR AND COMMERCE COMMITTEE
April 30, 1998
2:17 p.m.
MEMBERS PRESENT
Senator Loren Leman, Chairman
Senator Jerry Mackie, Vice Chairman
Senator Tim Kelly
Senator Lyman Hoffman
MEMBERS ABSENT
Senator Mike Miller
COMMITTEE CALENDAR
CONFIRMATION HEARING - OCCUPATIONAL SAFETY AND HEALTH REVIEW BOARD:
Dennis Davidson, Anchorage
CS FOR HOUSE BILL NO. 393(RES)
"An Act relating to contracts with the state establishing payments
in lieu of other taxes by a qualified sponsor or qualified sponsor
group for projects to develop stranded gas resources in the state;
providing for the inclusion in the contracts of terms making
certain adjustments regarding royalty value and the timing and
notice of the state's right to take royalty in kind or in value
from projects to develop stranded gas resources in the state;
relating to the effect of the contracts on municipal taxation; and
providing for an effective date."
- MOVED CSHB 393(RES) OUT OF COMMITTEE
PREVIOUS SENATE COMMITTEE ACTION
HB 393 - No previous action to record.
WITNESS REGISTER
Representative Mark Hodgins
State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Presented overview on CSHB 393(RES)
Commissioner Wilson L. Condon
Department of Revenue
P.O. Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Testified in support of CSHB 393(RES)
Mike Macy
750 W. 2nd Ave., #104
Anchorage, AK 99501
POSITION STATEMENT: Testified in support of CSHB 393(RES)
Jim Sykes, Executive Director
Oil Watch Alaska
P.O. Box 1553
Anchorage, AK 99510
POSITION STATEMENT: Outlined concerns with CSHB 393(RES)
Dr. Jack Kearing
University of Alaska Fairbanks
Wood Center
Fairbanks, AK 99775-6640
POSITION STATEMENT: Related information on CSHB 393(RES)
George Findling
ARCO Alaska
700 G St.
Anchorage, AK 99501
POSITION STATEMENT: Testified in support of CSHB 393(RES)
David Brooks
BP Exploration (Alaska) Inc.
900 E Benson Blvd.
Anchorage, AK 99501
POSITION STATEMENT: Testified in support of CSHB 393(RES)
Ms. Beverly Mentzer
Exxon USA
3301 C St.
Anchorage, AK 99501
POSITION STATEMENT: Testified in support of CSHB 393(RES)
Paul Fuhs
Yukon Pacific Corporation
1049 W. 5th Ave.
Anchorage, AK 99501
POSITION STATEMENT: Testified in support of CSHB 393(RES)
Ms. Pam LaBolle, President
Alaska State Chamber of Commerce
217 2nd St.
Juneau, AK 99801
POSITION STATEMENT: Testified in support of CSHB 393(RES)
ACTION NARRATIVE
TAPE 98-26, SIDE A
Number 001
CHAIRMAN LEMAN called the Senate Labor and Commerce Committee
meeting to order at 2:17 p.m. and stated the first order of
business would be a confirmation hearing on Dennis Davidson's
appointment to the Occupational Safety and Health Review Board.
DENNIS DAVIDSON, testifying via teleconference from Anchorage,
stated he has lived in Anchorage most of his life. His prior work
history has involved occupational safety issues, working with
contractors, labor unions, Alaska Native tribal entities and
organizations in putting employment and training packages together
on construction projects and other projects. For the past year he
has been working as a private consultant, and prior to that he was
employed by Cook Inlet Tribal Council. He also was the compliance
officer on the Alaska Native Medical Center project, working with
over 24 contractors, over 12 unions, and approximately 15 to 20
Native organizations on some very difficult issues relating to the
employment and training of workers. He believes his background in
consensus building in the employment and training area will be very
useful for serving on the board.
CHAIRMAN LEMAN asked Mr. Davidson if he had any comments on SB 205,
which deals with health and safety self audits to improve safety in
the workplace. MR. DAVIDSON said he was not familiar enough with
the legislation to have an opinion on it either way.
SENATOR KELLY moved that the name of Dennis Davidson to the
Occupational Safety and Health Review Board be forwarded to a joint
session on confirmations, and this was not an indication of the
members' intent to vote for or against the nominee.
Number 095
CSHB 393(RES) - DEVELOP STRANDED GAS RESOURCES
CHAIRMAN LEMAN brought CSHB 393(RES) before the committee.
REPRESENTATIVE MARK HODGINS, Chair, House Special Committee on Oil
and Gas, explained HB 393 is enabling legislation to allow a
structure for payments in lieu of taxes. The idea is to form a
sponsor group from among the industry and have them come up with
the necessary engineering to develop some costs, as well as
develope a time line on when this project can go forward. The cost
of the pipeline has been estimated at approximately $15 billion,
but to make the project competitive with the international market,
it would have to be brought down to approximately $12 billion.
REPRESENTATIVE HODGINS related that there would be approximately
$12.6 billion worth of state and local taxes brought in over the
life of the project, which could be anywhere from 30 to 50 years,
depending upon the amount of gas that is used and discovered on the
North Slope. The federal take for the same period of time would be
approximately $26 billion. It is hoped that a solution can be
found that will allow some payment in lieu of taxes for the front
end construction of the project, and apply those payments later on
in the project once the gas starts flowing down the pipeline.
REPRESENTATIVE HODGINS said the $15 billion price tag is an
estimate, and it would include the pipeline, the liquification
plant to transform the gas into LNG, and the ships to haul LNG.
LNG is a little bit different than oil; it is not sold on spot
markets. There are generally contracts that are in-hand before a
project of this size goes forward. Right now there's approximately
35 trillion cubic feet of natural gas on the North Slope. Natural
gas to this point on the North Slope has basically been used to
pressurize the oil fields.
REPRESENTATIVE HODGINS related that Phillips Petroleum testified
before the House Oil and Gas Committee that they thought the
project could start with the Point Thompson gas, and thus not
impact the removal of black oil from the North Slope for a few
years.
REPRESENTATIVE HODGINS outlined three changes from the original
legislation: (1) a ratification by the Legislature; (2) two percent
local taxation, which would net the state of Alaska approximately
$12.3 billion; and (3) removal of the gas to liquids language.
REPRESENTATIVE HODGINS said the most important step after the
passage of this legislation would be the formation of a sponsor
group. Once that happens, it is the intent of the House Special
Committee on Oil and Gas to get involved with local requirements
for training for what is going to be required of the labor force,
which they believe would be the best possible solution for local
hire.
REPRESENTATIVE HODGINS urged passage of HB 393.
Number 219
CHAIRMAN LEMAN said his reading of the bill does not preclude a gas
to liquids consideration, and he would hope that technology would
continue to be advanced. REPRESENTATIVE HODGINS agreed that it
would not preclude it, and once there was an economic analysis done
on the gas to liquids, he thought legislation, if necessary, could
be drafted to assist in that.
CHAIRMAN LEMAN asked if anyone identified any of the barriers to
cost reduction of the project that may be government inspired.
REPRESENTATIVE HODGINS responded that the topic had not come up
specifically in dollars and cents. At this point, they are
basically looking at enabling legislation to try to get the project
within the ballpark to see if it is going to be profitable. He
added that Dr. Pedro Van Meurs suggested that there is
approximately $150 billion worth of revenue on the North Slope in
the form of natural gas in proven reserves, and suggested that
somebody would be very interested in getting that to tidewater.
The trick is that the state must compete with other LNG plants
throughout the world.
Number 286
WILL CONDON, Commissioner, Department of Revenue, said the
legislation was developed by the Executive Branch as instructed by
House Bill 250, which was passed by the Legislature in 1997. It
also followed on the heels of two resolutions that were passed by
successive legislatures, as well as consulting work done by Dr.
Pedro Van Meurs. It was put together jointly with the House
Special Committee on Oil and Gas, the producers, Yukon Pacific and
other interested parties. Extensive hearings were held by the
House committee and they made some important changes in the bill.
COMMISSIONER CONDON explained HB 393 would establish a framework
for developing specific proposals and for presenting those
proposals to the Legislature for consideration. Under the bill,
would-be developers of stranded gas can apply for modification to
the state's fiscal system to make it possible to develop the
resource for the mutual benefit of the state and the developer.
Gas in remote areas of Alaska is different from oil for a couple of
reasons. First, it costs about four times as much as oil to move
gas to market on an energy equivalent basis. Consequently, the
economics of gas development projects are much more sensitive to
the state's tax and royalty system. There are two important
considerations in terms of application of the state's fiscal system
to a potential gas project: the economics of the project itself,
and the competitiveness of an LNG project.
COMMISSIONER CONDON said the administration believes that the
state's current fiscal system is inappropriate for gas development
in remote areas of Alaska for two reasons. First is the way the
taxes and royalties are applied in a combined basis. They are
front-end loaded, meaning that the state and local governments
that are imposing those fiscal provisions are getting their revenue
at the front end of the project. Secondly, the systems are
regressive in nature, meaning that the state and local governments
continue to take a significant share of the gross revenue from the
project, even when the project itself is losing money.
The basic concept embodied in HB 393 is a procedure for developing
a contract that would provide for payments in lieu of some or all
taxes that would otherwise be imposed on the project as a
consequence of the projects' construction. It is hoped that the
result would be a fiscal system applicable to the project that is
customized to the particulars of the project. Under the contract,
a portion of the payments that would be made in lieu of taxes would
also be shared with affected communities. The contract itself
would only become effective if the Legislature gives the Executive
Branch the authority to execute the contract after the Legislature
has had an opportunity to review it. The legislation provides a
procedure for developing a proposal, bringing the proposal before
the Legislature, and the Legislature would have to provide specific
authority to the Executive Branch to execute the contract or it
simply would never go into effect.
COMMISSIONER CONDON then reviewed the findings, intent, and purpose
provision sections of the bill, as well as a flow chart on HB 393.
Number 500
SENATOR HOFFMAN asked Commissioner Condon how he perceived the
provision providing gas to Alaskan communities to take place.
COMMISSIONER CONDON responded it depends on where the project is
constructed and what communities it passes. It is believed that
whoever has got the responsibility for negotiating this contract is
going to insist that some kind of reasonable arrangement be made
for providing gas to any community that the project is reasonably
near to and where it would make economic sense to make the gas
available to the community.
CHAIRMAN LEMAN asked Commissioner Condon his read on this bill and
the direction from the Legislature as it is written now regarding
gas to liquids technology. COMMISSIONER CONDON replied the bill
provides, in general, for a means for developing stranded gas, and
if a group put together a proposal that meets the requirements of
this bill, then he thinks the Commissioner of Revenue and the
Commissioner of Natural Resources would have to look at that
proposal.
CHAIRMAN LEMAN thanked Commissioner Condon for appearing before the
committee and then opened the meeting to public comment.
TAPE 98-26, SIDE B
Number 585
MIKE MACY, Coordinator for the Trans-Alaska Gas System
Environmental Review Committee, testifying via teleconference from
Anchorage, said the committee believes the project is economic,
that the cost more likely will be about $12 billion and not $15
billion, and that it can be built within the existing regulatory
structures.
MR. MACY said a missing component in the legislation is recognition
of the important public involvement in the planning, construction,
and operation of a North Slope gas export project. He suggested
the Legislature, the administration, and industry should start
thinking about formalized citizen oversight for the gas pipeline
project. He said one talks about partnership, but it is not true
partnership if the public is excluded. It is true partnership when
citizens have access to basic information and an opportunity to
participate in decision making while the decisions are still being
made.
Number 555
JIM SYKES, Executive Director, Oil Watch Alaska, said there seems
to be a lot of optimism for the gas line project; however, there
has been almost no discussion about the downside risks and the
effects that a project could impose on the state.
MR. SYKES said that in the current version of HB 393, there is no
legal assurance that a negotiated contract by the administration
will, in fact, fairly compensate the people of the state of Alaska.
One of the major objections to the legislation is the payment in
lieu of taxes fee which is risky in several ways. Another concern
is how to ensure a competitive environment for development of gas
resources that is free from the kind of antitrust concerns that
have recently come to life regarding the Trans-Alaska oil pipeline.
He said Commissioner Condon's constant theme of altering the
fiscal regime to make gas more competitive is very uncomfortable to
him, and he questioned how the state will benefit when altering the
fiscal regime. He added that Dr. Van Meurs has admitted there is
a downside risk that a long low price of gas could make this very
unprofitable for the state.
MR. SYKES stated the bill effectively contracts out the state's
duty of taxation by a contract to a private company. The major
producers, ARCO, BP & Exxon, have been dragging their feet on this,
and one of the reasons that these producers might want to drag
their feet is they, at some future date, might want to benefit from
the same kind of private contract that this affords the gas line.
He said the reason this is being proposed is the people who want to
build the gas line say that they need a tax holiday so that they
can get it built, but this happens at the same time when the
municipalities, who are most affected, need the resources. This
allows the commissioner to negotiate some sort of payment directly
to the communities, but it is not really clear how the payments to
the communities are going to equal the needs of the communities
which would otherwise be taxed.
DR. JACK KEARING, University of Alaska Fairbanks, testifying from
Fairbanks, said the University's petroleum engineering department
will be participating in a grant beginning in June to begin
discussion on transportation of liquid after gas conversion. The
University is also cooperating with Air Products of Ohio to look at
the feasibility of such processes. Also, the state's oil industry
has contributed some monies to the school to basically look at how
gas displacement can lead in the combination to restore oil that is
not recoverable under other means.
GEORGE FINDLING, Business Development Advisor for the Gas
Commercialization Group, ARCO Alaska, testifying in support of HB
393, said in previous testimony on the legislation, he has
described ARCO's gas commercialization plans and how HB 393 could
support those plans, and that testimony is still generally
applicable today.
MR. FINDLING said HB 393 recognizes that the state needs to modify
its fiscal system to be competitive in developing stranded gas
projects. A critical point is that HB 393 does not, in and of
itself, authorize modification of the state's fiscal system; that
power remains with the Legislature. From ARCO's perspective,
framework legislation can help advance gas commercialization in
Alaska, and it is a signal that the state wants to proceed down the
development road in partnership with private parties.
Number 445
DAVID BROOKS, Manager of Alaska Gas, BP Exploration, testifying in
support of HB 393, said it has been proven that Prudhoe Bay holds
approximately 25 trillion cubic feet of gas, and the U.S.
Geological Survey suggests that there could be in excess of another
100 trillion cubic feet yet to be found on the North Slope. BP is
taking the issue of commercialization of those gas resources very
seriously, and continues to dedicate resources to exploring routes
for its commercialization.
MR. BROOKS said HB 393 encourages the creation of options to unlock
the value in its vast resources of stranded gas. However, as the
bill is currently written, the bill focuses on only one option, LNG
on the gas pipeline. While BP believes LNG is a very important
option, there are other options, and they are concerned that
legislators seem to wish to exclude those options from
consideration in the bill. BP believes that gas to liquids is also
a key option, and BP has work programs in progress to drive down
the costs of the process and make it competitive. He emphasized
that the options of LNG and gas to liquids are not mutually
exclusive, and vast quantities of gas already proven on the North
Slope means that both an LNG project and a gas to liquids project
could be done.
Addressing the sunset clause in the legislation, MR. BROOKS said by
having a cutoff date, BP believes the state is further potentially
reducing its options and possibly even giving a negative message to
the potential developments of technology and stranded gas
resources.
BP views HB 393 as enabling legislation, not committing the state
to anything and provides a positive signal to industry and to
developers of stranded gas that the state is prepared to discuss
any fiscal impediments that there may be in the way of a stranded
gas development project. BP believes that signal could be
strengthened and the option for the state widened by inclusion in
the bill of reference of gas to liquids and the removal of the
sunset clause.
CHAIRMAN LEMAN pointed out that Commissioner Condon testified that
the bill does not preclude the consideration of gas to liquids. He
added that he shares Mr. Brooks concern about the sunset date.
Number 380
BEVERLY MENTZER, Alaska Gas Commercialization Manager, Exxon USA,
stated Exxon continues to have a keen interest in commercializing
Alaska's North Slope gas as it represents over half of Exxon's gas
resources. To help reduce fiscal risk, HB 393 provides reasonable
guidelines and boundaries for development of a fiscal contract. A
key objective of the bill is to keep options open for the state of
Alaska to maximize the value of its gas resources. However,
regarding when this process may be initiated, there are only three
years to apply for a fiscal contract, and three years is a short
time frame to keep these options open for a project of this
magnitude.
MS. MENTZER said Exxon has a work program planned for LNG and also
wants to perform some further GTL studies for Alaska. Since no
option is currently economic, Exxon will work on every method that
has a potential to commercialize Alaska's gas. Exxon believes gas
to liquids conversion is an option worthy of Alaska's serious
consideration today. She said the issue is not whether the
technology is ready, from Exxon's perspective it is, but the issue
is whether or not the technology is economic for Alaska.
MS. MENTZER said HB 393 is necessary in the process of developing
appropriate fiscal terms that could be specified for the life of
the project. Such a fiscal contract could increase the
competitiveness of an Alaska gas project while meeting the long-
term fiscal interests of the state.
Number 346
CHAIRMAN LEMAN asked Ms. Mentzer if, with all the research that
Exxon has going on, is there anything that would preclude Exxon
from cooperating with the University of Alaska in any research that
may help advance some of these projects. MS. MENTZER responded
that there is nothing specific to preclude it. However, she added
that there is a lot of proprietary research going on by many
different companies; it's a very competitive area.
SENATOR MACKIE asked Ms. Mentzer if she could foresee the major oil
companies in Alaska ever joining forces and sharing some of the
technology. MS. MENTZER answered that it was very possible.
Number 296
PAUL FUHS, representing Yukon Pacific Corporation and testifying in
support of HB 393, said Yukon Pacific thinks the most important
part of the bill is that it creates incentive for formation of a
project sponsor group, which is the issue that has held this
project back.
MR. FUHS said Yukon Pacific has the permits for the project, and it
took about 10 years to get them at a cost of about $100 million.
These permits take the pipeline to Valdez. He pointed out the
environmental impact statement not only says that Valdez is the
preferred route, it specifically rejects all other routes. Yukon
Pacific is prepared to bring the permits to a project sponsor group
and believes the 2001 date in the bill helps hold that incentive
for people to come together earlier than later. He said the Asian
market is just waiting for a project sponsor group to come forward
that has the critical elements they see for the project, which is
available gas, willingness to commit to the project, and the
permits for the project.
Addressing the gas to liquids issue, MR. FUHS said Yukon Pacific's
only concern is that a proposal would come forward that would have
time lines so far in the future that it would take away from the
current opportunity, which is the LNG project. Gas to liquid
production consumes about 40 percent in making the rest of the
product, and as far as the markets that Yukon Pacific has talked
to, the world is awash in crude oil products. What the market
wants is LNG because they've set up their systems for natural gas.
In his closing comments, MR. FUHS urged keeping the 2001 sunset
date in the legislation.
CHAIRMAN LEMAN asked if there is an expiration date on any of Yukon
Pacific's permits. MR. FUHS replied that most of their permits are
not expiring types of permits.
Number 192
PAM LABOLLE, President, Alaska State Chamber of Commerce, stated
that development of the stranded Alaska North Slope gas is a
priority of the Alaska State Chamber. They believe the commercial
development of the gas and the construction of the associated
facilities will greatly benefit the economic future health of
Alaska. A resolution adopted by the Chamber urges that the
Legislature takes those steps to provide a stable and appropriate
fiscal and regulatory environment which will give an Alaska
stranded gas project the best opportunity to become commercially
viable, thus enabling the earliest possible development of the
resource.
Number 170
There being no further testimony on HB 393, CHAIRMAN LEMAN closed
the public hearing, and asked if there were any proposed amendments
on the bill.
SENATOR KELLY voiced concern that the section dealing with who will
pay for the independent contractor is somewhat vague, and he
suggested the language be changed to indicate that an applicant
will pay the cost of the independent contractor, and that it is not
discretionary on the part of the commissioner. However, he said he
would possibly pursue such an amendment in the committee of next
referral.
CHAIRMAN LEMAN stated Senator Kelly's suggested amendment would be
forwarded to the Senate Resources Committee. He added that he had
prepared an amendment relating to research by the University of
Alaska that he may offer in the Senate Resources Committee as well.
He then requested a motion on the legislation.
SENATOR MACKIE moved CSHB 393(RES) and the accompanying fiscal
notes be passed out of committee with individual recommendations.
Hearing no objection, it was so ordered.
There being no further business to come before the committee, the
meeting adjourned at 3:50 p.m
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