Legislature(1997 - 1998)

04/30/1998 02:17 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
         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                                                             
                       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                 
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               
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                   
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               
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             
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                      
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                    
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                 
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               
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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