Legislature(2005 - 2006)Fairbanks
07/06/2006 09:00 AM Senate SPECIAL COMMITTEE ON NATURAL GAS DEV
| Audio | Topic |
|---|---|
| Start | |
| Roundtable Question and Answer Session - Legislators, Consultants, Producers, Administration | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE SPECIAL COMMITTEE ON NATURAL GAS DEVELOPMENT
Fairbanks, Alaska
July 6, 2006
8:56 a.m.
MEMBERS PRESENT
Senator Ralph Seekins, Chair
Senator Bert Stedman
Senator Donny Olson
Senator Ben Stevens
Senator Kim Elton
MEMBERS ABSENT
Senator Lyda Green
Senator Gary Wilken
Senator Fred Dyson
Senator Lyman Hoffman
Senator Thomas Wagoner
Senator Con Bunde
Senator Albert Kookesh
OTHER LEGISLATORS PRESENT
Representative Jay Ramras
Representative David Guttenberg
Representative Michael Kelly
COMMITTEE CALENDAR
Roundtable Question and Answer Session - Legislators,
Consultants, Producers, Administration
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
UNITED STATES SENATOR LISA MURKOWSKI
th
709 W 9 St., Rm 971
Juneau AK 99801
POSITION STATEMENT: Addressed the Senate Special Committee on
Natural Gas Development
JIM CLARK, Chief Negotiator
Office of the Governor
PO Box 110001
Juneau, AK 99811-0001
POSITION STATEMENT: Participated in the round table discussion
ROGER MARKS, Economist
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Participated in the round table discussion
WENDY KING, Director Of External Strategies
ANS Gas Development Team
ConocoPhillips Alaska, Inc.
PO Box 100360
Anchorage, AK 99510
POSITION STATEMENT: Participated in the round table discussion
BOB LOEFFLER
Morrison & Foerster
Counsel to the Governor
Office of the Governor
PO Box 110001
Juneau, AK 99811-0001
POSITION STATEMENT: Participated in the round table discussion
DAN DICKINSON, CPA
Consultant to the Governor
Office of the Governor
PO Box 110001
Juneau, AK 99811-0001
POSITION STATEMENT: Participated in the round table discussion
S.A. (BILL) MCMAHON JR., Commercial Manager
Alaska Gas Development
ExxonMobil Production Company
Houston, TX
POSITION STATEMENT: Participated in the round table discussion
DAVID VAN TUYL, Commercial Manager
Alaska Gas Group
BP Alaska
Anchorage, AK
POSITION STATEMENT: Participated in the round table discussion
JIM EASON, Consultant
Legislative Budget and Audit Committee
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Participated in the round table discussion
DON SHEPLER
Greenberg Traurig, LLP
Consultant to the Legislative Budget and Audit Committee
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Participated in the round table discussion
PHILLIP GILDAN
Greenberg Traurig, LLP
Consultant to the Legislative Budget and Audit Committee
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Participated in the round table discussion
RICK HARPER
Econ One Research, Inc
Consultant to the Legislature
333 Clay Street
Houston, TX 77002
POSITION STATEMENT: Participated in the round table discussion
GREG O'CLARAY, Commissioner
Department of Labor & Workforce
Development
PO Box 21149
Juneau, AK 99802-1149
POSITION STATEMENT: Participated in the round table discussion
JIM LITHY, Business Manager
Plumbers and Pipefitters Local 375
No address provided
POSITION STATEMENT: Presented concerns over the lack of a
project labor agreement
JIM SAMPSON, President
Alaska AFL-CIO
No address provided
POSITION STATEMENT: Encouraged committee members to incorporate
a project labor agreement into the contract
ACTION NARRATIVE
CHAIR RALPH SEEKINS called the Senate Special Committee on
Natural Gas Development meeting to order at 9:13:04 AM. Present
at the call to order were Senators Kim Elton, Ben Stevens, Bert
Stedman, Donny Olson and Representatives Michael Kelly, Jay
Ramras, David Guttenberg, John Coghill, and Chair Ralph Seekins.
^Roundtable Question and Answer Session - Legislators,
Consultants, Producers, Administration
9:13:04 AM
CHAIR RALPH SEEKINS announced the committee would continue its
roundtable discussion among legislators, consultants, producers
and the administration. He recognized Roger Marks, Jim Clark,
Bill McMahon, Wendy King and Dave Van Tuyl at the table.
9:14:36 AM
CHAIR SEEKINS announced the agenda for the meeting. United
States Senator Lisa Murkowski will address the committee at
approximately 1:30 PM via teleconference. United States Senator
Ted Stevens will attend the next committee meeting.
9:16:05 AM
JIM CLARK, Chief Negotiator, thanked the committee for holding
the meetings and advised them that the governor's staff prepared
handouts for the members, which address the important points of
the contract. The document is intended to append to the fiscal
contract. He asked committee members to add their suggestions.
He advised that Mr. Marks would speak about the reason the State
decided to take its gas in-kind.
9:18:45 AM
ROGER MARKS, Economist, advised he would give an overview
consisting of three different issues: How the State sees the
project, the roll of the Stranded Gas Development Act (SGDA),
and the structure of the contract.
The astronomical size of the contract tends to magnify all of
the risks, the two main risks being price and cost. Prices are
"utterly unknowable," and in fact six years ago the State
forecasted oil prices to be at $17.22 in 2006. Yesterday it
closed at more than $71 dollars. In the future though, prices
could fall to $2 a barrel. Clean coal is becoming increasingly
economic as well as natural gas. Global warming could cause a
"throttling back" in the use of hydrocarbons. Somebody could
perfect nuclear fusion, causing the end of hydrocarbons. All of
these things could contribute to the end of high oil prices, he
said.
9:21:24 AM
Mega projects are very complicated and there tends to be a
snowball effect when things go wrong. Large cost overruns are
not unusual and cause huge problems. Depending how cost and
price turns out, this project could turn out to be very good or
very bad, he continued. Mr. Marks offered a hypothetical example
of a family whose annual income was $50,000. If offered a chance
to roll the dice for double or nothing, most people would
decline the bet. That is the reason that investors look at risks
asymmetrically. The downside would be far worse than the upside
would be good. Because of the high cost and long construction
period the project is a low rate of return project compared to
other investment opportunities that investors have around the
world.
9:24:07 AM
The Stranded Gas Development Act (SGDA) was intended to do two
things. It was meant to custom tailor the fiscal system to suit
the particular project as it came about and it was meant to give
the producers fiscal stability so there is a proper balance of
risk and potential. The contract does both of those things, he
advised. It gives fiscal stability and is custom tailored to the
economics. The contract increases the rate of return to the
project. The project itself presents a relatively low rate of
return and because of the unique risks it will need a higher
rate of return to be feasible.
Hurdle rate is the rate of return that a company needs in order
to pay off capital and investors. The hurdle rate of this
project will be fairly high due to the risks involved so the
State's philosophy is to increase the rate of return, which will
make the project more viable. The main instrument used in the
contract was taking the gas in-kind. Under the status quo where
the State takes taxes in royalty and value, the State really
pays for its share of the gas over time slowly through the
tariff deduction. Taking the gas in kind essentially makes a
firm transportation (FT) commitment to the producers, which is
seen by them as an asset. It works as if the State is paying the
20 percent up front. In other words, under the status quo the
producers are laying out the money up front for the State's 20
percent of the gas and because of the net present value that is
a depressant on the rate of return. By Alaska making the FT
commitment up front, financially that is the same as if Alaska
were paying the 20 percent up front and it increases the rate of
return, he stated.
9:28:41 AM
MR. MARKS continued the State estimates that by doing so it gets
2 to 2.5 percent of the rate of return on the project, which is
rather large. That rate of return is the same as what the rate
would increase to under the status quo if Alaska relinquished
all of the taxes, but by taking the gas in kind Alaska gives up
nothing. The State gets the exact same amount of revenue but yet
increases the rate of return considerably. The amount of the
increase of the rate of return is equal to $1.20 per million Btu
for 50 trillion cubic feet or equivalent to decreasing the
capital cost by $4 billion dollars.
By taking the gas in kind and making the FT commitment,
financially that is the same as ownership and so the State
decided to do just that. By taking ownership, the State aligns
itself with the producers and gets a seat and a voice at the
table. There are many risks involved but the Administration
believes the risks are not "incredibly hazardous." In return for
the risks Alaska gets a gas line, which is a great thing. By the
State taking its gas in kind it has the opportunity to decide as
a matter of policy the terms and the price and who to sell the
gas to. The State will have more than enough gas to supply in-
state needs.
9:32:11 AM
Currently the prices in Chicago are approximately $6 dollars
with the added mileage-based tariff, and so for example
Fairbanks would have the cheapest gas in the country.
9:32:29 AM
CHAIR SEEKINS interrupted Mr. Marks to say he understood in the
contract the tariff for in-state gas was proportional. He asked
whether there was a penalty if the State takes gas off in
Fairbanks instead of sending it to the Lower 48.
MR. MARKS posed a hypothetical example where the price of gas in
Chicago was $6. The State has the choice of selling it to
Chicago for $6 and paying $2.50 to get it there or to just sell
it at the wellhead for $3.50.
SENATOR KIM ELTON interjected the State, as equity owner of the
pipeline, would be paying the $2.50 tariff partially to itself.
MR. MARKS said that is exactly right but if the State chose to
sell 100 percent of its 20 percent piece at the wellhead, it
wouldn't have to invest downstream.
SENATOR ELTON countered it was not that simple. In order to
realize the same return the State would have to sell the gas in
Fairbanks at a higher price in order to realize the same return
because at a 20 percent ownership the State would get 20 percent
of that $2.50 transportation cost.
MR. MARKS responded if the State puts out $4 billion dollars to
the project and pays itself a tariff on that money, the State
would come out neutral. "It's a wash," he said.
MR. CLARK added the Administration is developing the policies
that back up the in-state use of gas and it is a complicated
endeavor. He asked Chair Seekins whether Bob Loeffler could
comment on the complexities associated with the policies and
answer Senator Elton's question.
CHAIR SEEKINS announced a recess at 9:36:19 AM.
9:42:55 AM
CHAIR SEEKINS called the meeting back to order.
BOB LOEFFLER, Counsel to Governor Frank Murkowski, said the
Administration has been listening to the concerns of the public
in regards to serving in-state needs. He assured members that
they were developing a policy for use of some of the State's
gas. The State's share will exceed all potential uses of the gas
in state. The bidding opportunities will be made available
before the federal mainline open season so that it is timed
precisely. The State must decide what best serves the citizens
of Alaska in terms of pricing. In a bidding opportunity people
might bid more than netback price because they may be looking at
the heating value equivalent to the very expensive oil.
9:48:08 AM
The State must decide who would be responsible for the capacity
for in-state use. The State must also be sure that the amount of
gas that is being taken off in state does not negatively affect
the amount that needs to flow through the "big line." There has
to be an opportunity for in-state users to bid for gas and the
State must set the pricing.
MR. CLARK added the Administration is developing policies to
attach to the fiscal contract. The contract does not speak to
how the State of Alaska would use its own gas. That would be
developed over time.
9:51:21 AM
REPRESENTATIVE JOHN COGHILL asked Mr. Loeffler to clarify
whether the Administration was developing both an economic
policy and a structural policy to determine who would get
pipeline capacity from Alaska on.
MR. LOEFFLER said that was right. "We hope to develop a policy
that will satisfy reasonable in-state use and not undermine the
economics by taking the full 20 percent," he said.
MR. CLARK advised the Administration believes the policy has to
be developed as soon as possible. They intend to do whatever it
takes to find out how much gas will be taken off prior to the
open season. The pipeline will be designed in the open season.
9:53:53 AM
MR. LOEFFLER added the contract requires that there be a study
of in-state use before the open season. "The pipeline has to do
that, not the State, so that the contract recognizes the timing
issue," he said.
DAVID VAN TUYL, Commercial Manager, BP Alaska, mentioned a study
to be done by the pipeline, which would evaluate potential for a
natural gas pipeline in Alaska and that would "stir into the
mix" about where gas was likely to be taken off. The contract
envisions in-state gas use and Article 10 provides for notice to
be given about the portion to be dedicated to in-state use.
There has been talk about a telescope design that starts in
Fairbanks but the size of the pipe has yet to be determined. BP
Alaska would prefer to sell to customers in Alaska than have to
transport it to Chicago, he said. He questioned how BP could
compete with the State since the State does not pay federal
income tax but added it "would like the opportunity to compete."
9:56:15 AM
MR. MARKS said there is no reason to believe there isn't enough
gas to go around. If the State takes a large amount of gas for
in-state use it would not necessarily be detrimental for
downstream economics.
REPRESENTATIVE COGHILL asked whether the State would still
anticipate a 20 percent FT commitment if it takes all its gas
for use in state.
MR. LOEFFLER said no. In the federal open season the State would
bid for what it needed in state and then subtract that from the
20 percent.
CHAIR SEEKINS asked how the State would handle the
infrastructure and time that it would take for a community of
90,000 people to switch from an oil to a gas economy.
MR. LOEFFLER replied that scenario would present itself as a
tremendous business opportunity. The price of heating oil is far
higher than natural gas will ever be, he stated.
MR. MARKS surmised 70 percent of the homes in Fairbanks use
heating oil and the price right now is about $2.50 per gallon. A
family could expect to save 80 percent by switching to natural
gas.
CHAIR SEEKINS offered with proportional tariff there is no state
subsidy to the consumer but it greatly reduces the cost of
heating a home in the interior of Alaska.
MR. MARKS added that also depends on how much the State decides
to sell the gas for.
MR. LOEFFLER advised the State could put the gas out for
competitive bid and there would be ample opportunity for
competing business.
10:01:26 AM
KEN GRIFFIN, Deputy Commissioner, Department of Natural
Resources (DNR), commented Alaska has distribution companies
that could provide the committee with good information of what
the expected penetration would be for different communities. He
suggested that question be submitted to people in the
distribution industry.
The north end of the pipeline will be the most expensive part to
build largely because of terrain. In addition, the
transportation lines are all incurred up north so it would be
incorrect to assume that Fairbanks would pay a quarter of the
$2.50 total tariff to Chicago. Fairbanks would pay the North
Slope line costs, the GTP costs and the northern quarter end of
the pipeline. Negotiated into the contract is the assurance that
Alaska users will not subsidize the line downstream.
MR. LOEFFLER interjected the likely tariff structure under the
Federal Energy Regulatory Commission (FERC) rules is that there
will be a separate tariff for the GTP and then a tariff for the
pipeline downward from the GTP. The tariff on the GTP might
logically be based on the volume of gas going through it without
regard for where it is going, he said, and then the rest of the
tariff is mileage sensitive.
SENATOR BEN STEVENS asked a few questions regarding the
forecasted volumes of in-state use. He queried the estimated
volume that the State would require in the initial open season.
He asked the frequency of future open seasons and also asked
whether any state-initiated expansion could be limited to in-
state volumes.
MR. LOEFFLER said the frequency of future open seasons is
unknown but would depend on additional gas becoming available.
The state-initiated expansion is designed for expansion in
state.
10:06:18 AM
SENATOR BEN STEVENS expressed concern that there will be a lack
of certainty of volume and demand shipped to South Central
Alaska. He said there would be no burden on long haul rates and
said it would be subject to the proportional rate on the main
line as well as the tariff set by the RCA.
MR. LOEFFLER agreed and said the State would have to acquire
enough gas to serve in-state needs.
10:07:34 AM
SENATOR BEN STEVENS said there is not enough proven reserves to
fill the gas line as it is. He asked whether it was anticipated
that exploration would meet in-state demand as it grows.
WENDY KING, ConocoPhillips, speculated continued exploration
would find enough gas to serve in-state needs. There is nothing
to preclude a voluntary expansion from happening at any given
time.
MR. VAN TUYL said BP Alaska believes the North Slope is a "gas
prospective area." The USGS, the NMFS and the State of Alaska
all have estimated future potential gas resources in the range
of 100-200 trillion cubic feet in addition to the 35 trillion
cubic feet known today. The producers want and need the
pipelines to be full for many decades to come.
SENATOR BEN STEVENS restated his concern that the State would
not be able to meet future commercial demands for the South
Central region of Alaska. He asked Mr. Clark to outline the
mitigated attempts in the contract that would meet the business
demands.
MR. CLARK said there are several things to keep in mind. First
the policies must be established before the first open season.
The pricing issue is unresolved and there are currently three
choices: the netback plus transportation, the netback plus
transportation plus a bidding premium, or price the gas at the
Henry Hub rate. The contract contemplates that the opportunity
to use the gas is the policy the Administration will follow.
There are three different ways that somebody can initiate an
expansion if they find gas. The Administration believes the
pressure will expand as the residents of Alaska begin using more
and more gas. The policies will be pro-exploration and the cost
of the gas is expected to be far cheaper than current heating
expenses so that will drive the expansion, he stated. The
opportunity is there because the State is taking its gas in
kind.
10:14:45 AM
CHAIR SEEKINS aired the communities in-state want access to the
gas, South Central depends on gas, and heating costs are a big
expense to the residents. He asked whether there was access to
the "liquid petrol chemical in-state without affecting the
downstream economics of the project."
MR. MARKS said Alaska would get 20 percent and that includes a
"lot of liquid." There will be a study done of the potential for
liquid petrol chemical industry in Alaska as well.
REPRESENTATIVE MICHAEL KELLY stated it was important to
recognize what the State was giving up. If it were to take the
gas in value initially, it would be able to take it at a rate
that would match the growth in state. He said it was important
to recognize that a lot of people were carefully watching and
they know what is being given up. Alaska is a young state
without a clue as to what it will be using for gas in a decade
and many residents will never have access to the pipe. He
suggested that by taking all the gas in kind Alaska would be
giving up a significant advantage. "Trying to do an open season
in Alaska with no infrastructure is a wild shot in the dark," he
commented.
10:19:14 AM
MR. CLARK responded the notion of giving up royalty in value is
not true. "If there is no gas line you're not giving up
anything," he stated. Taking the gas in kind is what made the
agreement occur. He suggested the contract would not have gone
through if Alaska had not taken the gas in kind. "You have to
have it before you can give it up," he said. He added the
Administration is looking at using the take-off point north of
the Yukon to see whether there is a possibility for the State to
take off some of the propane or butane and use the barge system
to reduce energy costs in rural Alaska. That would happen during
the first open season not down the line, he said.
10:21:59 AM
REPRESENTATIVE DAVID GUTTENBERG stated there was very little
economic benefit from proximity to the pipeline and noted that
the price at the gas pump in Alaska is top in the nation. He
said he was waiting to see whether the contract would give
consumers a reasonable price for gas once the distribution gets
to the household. At a hearing in Fairbanks last year a
gentleman spoke about conversion to gas and indicated it would
cost approximately $10,000 per household. That brings about the
question of whether a pipeline through town would economically
benefit the consumer. The gas will be available but the end
market price is unknown at this point. In rural Alaska the price
of energy is directly related to economic development, he
stated.
10:24:38 AM
CHAIR SEEKINS said the question that Representative Guttenberg
raised is not a question relative specifically to the project
but is a policy decision that has to be made outside of the
consideration of the project.
MR. CLARK agreed but advised the contract leaves the State the
flexibility to make policy decisions. The Administration is
committed to getting the policies made. The policies will be
accommodated in the pipeline study and that will be taken into
consideration when it is time for the first open season. The
Administration must be mindful of the difference between the oil
and the gas pipeline and how they both work.
CHAIR SEEKINS called a recess to repair the feed on the network.
10:37:43 AM
CHAIR SEEKINS called the meeting back to order.
MR. CLARK asked to address the issue of conversion as the
Department of Energy (DOE) addressed it. He said Mr. Loeffler
would speak about the difference between a gas and an oil
pipeline.
MR. LOEFFLER referred to the DOE study dated June 2006 and noted
page 42 says, "Estimated costs to converting 15 residential oil
burners to gas are $1400 when the burners can be changed out and
$3000 when the entire unit needs to be replaced." The conversion
cost seems reasonable and utilities sometimes offer financing
for the conversion.
MR. MARKS referred to people off the distribution system and
said the 4 billion cubic feet a day will have approximately
30,000 barrels a day of propane. Twenty percent of that is
250,000 gallons of propane a day that the State would have at
its disposal. That propane could be used for people off the
distribution system.
CHAIR SEEKINS asked whether that propane would be cheaper than
it is now.
MR. MARKS said it could be much cheaper.
SENATOR BERT STEDMAN commented his area of representation would
never have access to the gasline but for those that do, the
market would dictate what the price would be. He said it was a
legislative policy decision as to what kind of break others
would get. The value is in the energy itself.
10:42:20 AM
MR. CLARK said there are three very reasonable pricing choices
in front of the State. There is the Henry Hub price for
distribution, the netback plus transportation, or the netback
plus transportation and then putting it out to bid. Those would
be less than the prices today, he speculated.
MR. LOEFFLER advised there would be a robust discussion in the
Administration about the choices to ensure that the State uses
the maximum value of the product.
MR. CLARK interrupted to say the contract provides the
flexibility to make those policy decisions.
CHAIR SEEKINS asked Mr. Clark whether the State had a choice
between royalty in kind and royalty in value.
MR. CLARK deferred to Mr. Loeffler and said he would define the
difference between oil TAPS management and gas lines.
MR. LOEFFLER said the basic gas line world is financed using the
FT commitments.
10:45:05 AM
CHAIR SEEKINS asked for a definition of FT.
MR. LOEFFLER said FT stood for "firm transportation." It is
buying a ticket on the gas line for a long period of time and
committing to use that ticket to ship the gas. That is what
happens at the open season and is the core commitment of how a
gas line is structured. "Someone has to sign up for that big
capacity in the beginning and so if we take it in value we're
paying for someone else who is signing up for that capacity," he
said. The bank looks for financially responsible people who will
use the line and pay it off.
TAPS is a different scheme and a weird legal structure.
Originally there were eight pipelines in one pipeline, legally
speaking. Each pipeline company owned its own stakes. Each
company put out a tariff for its space. The notion of the State
paying itself is true on the TAPS line but this gas line is one
tariff and whatever proceeds are received go into one pot that
is divided among the owners of the LLC according to their
percentage interest.
In TAPS capacity is bid every thirty days. In the past shippers
guaranteed that agreement but now each remaining owner posts the
available capacity and people bid on it. It is short term and so
there is no huge FT commitment like the one that is essential to
the gas line. "It's a different world," he said.
10:48:34 AM
MR. MARKS said he would discuss how taking the gas in kind
increases the rate of return to the project. It is generally a
low rate of return project and the Administration is looking to
increase that rate of return. There are four states of the
world, he said. The first is status quo or in value, where
producers have 100 percent of the gas and pay 100 percent of the
costs. In value the State pays for its share of the pipeline
slowly over time through the tariff deduction on the royalties
and taxes. In that world, because of the time value of money and
the net present value, that suppresses the rate of return.
The second state of the world would be where the State owns 20
percent of the pipe and takes its gas in value. In that case the
State would insist on an FT commitment from the producers. That
is how the State would get its financing and the certificate
from FERC. In this world, financially the producers would see no
real difference and they would see no improvement in the rate of
return.
The third state of the world would be where Alaska takes its gas
in kind but does not take ownership. In this case the producers
would insist on an FT commitment from the State. In that case
the producers would only pay 80 percent up front and that would
increase their rate of return. The State decided that
financially an FT commitment is similar to ownership and along
with ownership the State gets a seat at the table.
The contract evolved to the fourth state of the world where the
State takes the gas in kind and also takes ownership. Taking the
gas in kind made the contract doable. It increases the rate of
return for all and adds benefits for the State.
10:52:38 AM
MR. LOEFFLER asked the committee to think about in-state users
in the Cook Inlet area. Those needs are much more identifiable
than petrol chemical use and so it is possible that someone
could commit in the open season for a volume of gas from the
State for commercial purposes. That could easily happen and so
it is not fair to say that nobody in Alaska will be ready in
time for the open season.
The pipeline would probably be built five years after the
initial open season and so people will have plenty of time to
prepare a commercial enterprise without having to pay on the
commitment right away.
CHAIR SEEKINS asked how long it would be after approval of the
contract to the first open season.
MR. LOEFFLER speculated it would be one to two years.
10:54:42 AM
CHAIR SEEKINS noted it would be six to eight years before the
first payment would be due on the FT commitment.
MR. CLARK said Mr. Loeffler misspoke on one point. If Alaska did
not take the gas in kind the producers would end up with 100
percent of the cost but 80 percent of the gas. That is where the
economics suffer. Alaska chose to take 20 percent of the gas and
also pay 20 percent of the costs so that sealed the alignment.
Looking at the capacity article, Alaska would be "riding the
coattails of the producers" in regards to the capacity
management. The State has the producers doing the processing.
Alaska also has an advantage because the State does not pay
federal taxes.
10:57:41 AM
SENATOR BEN STEVENS asked Mr. Dickinson to respond to his next
question. It was his understanding that under the distribution
of revenues under the State's system with oil, the revenue
received from royalty is equal to the revenue received from tax
oil. He asked whether that was accurate.
DAN DICKINSON, Consultant to the Governor, introduced himself as
the former director of the tax division and said due to the ELF,
the collections from the severance taxes fall below. If you add
together severance tax and income and property tax that is about
the same as the royalty. The severance tax went from being
higher than the royalties to being lower.
SENATOR BEN STEVENS said he wanted to differentiate from what
the State gives up and what it potentially would gain.
Specifically the package is put together so that the State takes
20 percent ownership and 20 percent capacity. The 12.5 percent
royalty in value is a policy call and the 7.5 percent tax gas is
a policy call. He asked for an explanation of the risks and
benefits associated with taking the tax gas in value. He said
the way he sees it, Alaska captures all the upside on the
severance gas and then loses on the downside because when the
value of the gas falls, the tax revenue falls. "We lose the
upside if we take it in kind but yet we hold the downside when
we take it in kind," he said. In contrast to having a discussion
about what is lost by taking the gas in kind, he said he wanted
to talk about what Alaska gains by taking the gas in kind.
11:01:01 AM
MR. DICKINSON observed that when an entity increases the total
amount taken in kind, it puts that entity in a different
position as a marketer. The larger the volume the more effective
marketing a company can employ. "The amount of gas that we
increase as takes, our upside also increases," he said. The
State is still getting considerable cash flows from the PILT
that replaces the income tax and the property tax so the State
is getting significant cash flows from the payments in lieu of
tax.
SENATOR BEN STEVENS opined the royalty piece was a policy call
to take the gas in value or in kind. However there is more
upside on taking severance production in kind than in value.
MR. MARKS responded financially the results are the same. The
"magic of the contract when taking the gas in kind" is Alaska
increases the rate of return and doesn't give up a thing. One
advantage of taking the gas in kind is that Alaska has the
option of what to do with the gas within the state.
MR. CLARK added the Mineral Management Service (MMS), a federal
agency, is taking its gas in kind more and more and they are
making money. It's turning out to be a one to two percent
increase over taking the gas in value.
MR. GRIFFIN agreed and said the MMS has been taking their gas in
kind for several years, yet theirs is a different world than
what Alaska is talking about. In their world they are not making
capacity commitments.
11:06:44 AM
MR. VAN TUYL, Commercial Manager, Alaska Gas Group BP, said the
earliest reference (to taking gas in kind) in the MMS newsletter
goes back to 1998. In April 2004 its national presentation
indicated they experienced many benefits from that decision.
Some benefits include conflict avoidance with the industry,
reduced administrative costs, earlier revenue receipts, and
increased responsiveness to government energy programs. In April
2006 they issued a financial report, which indicated their
program performance far out-paced the program goals.
Administrative costs continued to decrease, revenues continued
to increase and conflict with producers was non-existent.
11:09:28 AM
SENATOR BEN STEVENS asked for distribution of the newsletter. He
asked for an estimate of the volume that the MMS was talking
about.
MR. VAN TUYL said that volume was cited in their fiscal report
but he didn't have that number at present.
MR. LOEFFLER advised that the reports were all available on the
MMS website.
MR. CLARK observed that the person currently in charge of the
MMS program is a former commissioner of the Department of
Revenue in Wyoming and might be somebody worth talking to.
11:10:32 AM
MR. VAN TUYL advised the volume was converted to barrels of oil
equivalent and was 82,364,035 taken in kind and sold during
FY05.
MS. KING quoted from the MMS newsletter of April 3, 2006 and
said the federal lease in the Gulf of Mexico is projected to
provide delivery of 118 bcf of gas over a 7-12 month term. That
equates to approximately 510 million Btu per day. They had a
record number of bids for the gas.
SENATOR BEN STEVENS asked whether that meant they were
oversubscribed.
MS. KING replied there was "quite a bit of interest."
MR. GRIFFIN addressed Senator Stevens' question and said the
cost of marketing is included in the bottom line and is similar
to the RIV world. The MMS information indicates that Alaska was
conservative in estimating the cost of administering and
marketing the gas. The legal costs over valuations will most
likely go away and that was not addressed in the economics. The
State also did not put any value on the marketing burden.
Fundamentally the benefit of Alaska taking its gas in kind is
"moving the pipeline forward and getting it going." The value of
royalty switching is nonexistent in the gas transportation
world, he said. Practically speaking that opportunity will not
present itself. Alaska will have 800 million cubic feet a day to
market. It will be delivered into the center of one of the
largest markets in North America and that will give Alaska
significant leverage, whether it decides to partner or contract
or move ahead as an independent marketing entity.
11:15:03 AM
MR. GRIFFIN continued along that line - were Alaska to take its
gas in value, it would be dependent upon the oil companies to
market and pay the royalties. Each company has a different
strategy and Alaska would be captive to that. Some companies are
aggressive risk-takers and some are conservative marketers.
Those would be choices that the State would be bound to, he
stated.
11:17:06 AM
MR. GRIFFIN added in-state policies would be met and that is an
outflow of taking the gas in kind. In conclusion, he said, do
not underestimate the importance of eliminating valuation
disputes. Most valuation disputes are good faith disputes but
they are deep-seeded and hard fought. They create friction
between companies and make it difficult to function effectively
as partners.
11:18:28 AM
SENATOR STEDMAN asked whether major producers were excluded from
marketing for Alaska if the State chose to go with the 20
percent.
MR. CLARK replied no. The matter was discussed internally and
the Administration wants to come up with an in-state team with
expertise similar to the Permanent Fund. The State would attempt
to manage a group of marketers, some from the producers and some
from outside the industry. The State would compare results to
determine the most effective campaign and drop the others. In
short, it would be competitive and the State would do
comparative shopping.
SENATOR STEDMAN referred to efficiency in scale when teaming up
with a producer and asked whether that potential value was
considered.
MR. CLARK said Alaska would have enough gas to "split it out and
make it work."
MR. GRIFFIN added there are a number of ways to organize a state
marketing organization. All of them have overhead and risks. The
DNR is studying them and making contact with other entities and
looking at various alternatives. He said he could not tell the
committee how Alaska plans to market the gas because "we're not
there yet."
11:21:01 AM
MR. GRIFFIN continued if Alaska were to turn the gas back over
to the producers it would be difficult to avoid the valuation
issues that they currently have. He questioned the advantage of
doing so. There are many effective gas marketers throughout the
United States and North America and many of them do not have
their own gas supply. They contract for it and re-sell it.
11:22:49 AM
SENATOR STEDMAN asked whether the State could control more of
the market with just shear volume.
MR. VAN TUYL commented on the volume relationship and said they
looked at aggregators like they were buying a mutual fund. There
are marketing organizations that will take gas supplies from
various sellers and pool it together for a market price. They
quote their fees for the service on a website. Today's quotes
range from a fraction of a cent per million Btu to five cents.
The primary differentiator on the fee is the volume.
MS. KING offered to follow up on a point made by Senator Ben
Stevens. The question regarded options created by taking tax gas
in lieu of cash payment. As an explorer, she said, she could
envision a scenario where more and more gas could come from
federal lands rather than state lands. The contract sets up a
mechanism by which the State elected to take the tax gas in lieu
of cash payment so in the future if gas production moves to
federal lands, the State will still be preserving the option of
having some gas in kind from the tax gas. That gas would be used
to fill in-state needs.
MS. KING added the ownership would last for as long as the State
desires to maintain the 20 percent ownership beyond the life of
the fiscal contract. So if gas moves more and more to federal
lands there is a source of revenue through the ownership that
the State will be receiving from that gas. The State doesn't
necessarily have to own that gas for the life of the pipe. It
can still receive the distribution. Those are two new
opportunities set up by the contract, she said.
11:26:07 AM
SENATOR DONNY OLSON noted perception of the general public is
that marketing of the royalty oil has not gone very well. He
asked Mr. Clark how to stay out of the pitfalls.
MR. CLARK deferred to Mr. Griffin.
MR. GRIFFIN said the quick answer is the State has taken a
significant amount of state oil and sold it in kind. In these
commitments sometimes you win and sometimes you lose, he said.
In the latest in kind contract, Alaska is receiving a
significant premium over what it would be receiving in value.
The difference is when there is a limited amount and the State
has a limited number of contracts. "Each contract depends on the
crystal ball you're using that particular day," he said. He
referred to the estimated volume of gas and said the risk
management strategies and the opportunities to diversify the
portfolio go way up. He expected the performance to be much less
spotty. The State has been more successful than the public
portrays, he said. He added the Permanent Fund is managing a
large portfolio and that is parallel to what the State will be
doing with the gas portfolio.
11:29:29 AM
MR. DICKINSON responded to Senator Olson's question and said he
did an expert report on that very question ten years ago. Alaska
tried to get a good financial return, but the residents were
disappointed because they felt there should have been some non-
financial benefits as well. The current contracts have premiums
built in so the State is doing better.
MR. LOEFFLER said speaking as a lawyer when one thinks about the
comparison between in kind and in value, the State engaged in
huge amounts of litigation to achieve the result in value and
every case has been settled on the royalty side.
MR. CLARK said in short when negotiating in any oil situation
the Administration looked back and the State always gave up
value in order to get a settlement and move on. That won't be an
issue if Alaska takes the gas in kind.
CHAIR SEEKINS advised the committee Don Shepler, Jim Eason, and
Phillip Gildan were on line if anyone needed to question them.
He referred to Flint Hills and asked Mr. Clark whether those
people would pay a premium for royalty oil.
MR. CLARK said yes. As he recalled it was between a $6 million
and $8 million premium. Mr. Griffin would know, he said.
CHAIR SEEKINS said the reason for the premium is due to the
residents of Alaska who won't see the gas but still should gain
some value from it.
MR. CLARK said the Legislative Branch and the Executive Branch
must decide the policy on in-state sales. The contract leaves
all the policy choices available.
CHAIR SEEKINS commented that policy might be settled in court
due to constitutional interpretation of maximum value.
11:34:58 AM
REPRESENTATIVE KELLY said the mileage-sensitive rate would
provide a tremendous benefit for residents in Fairbanks and
other areas of Alaska. He asked why the State would want to
delve into ownership of the pipeline if Alaskans were going to
be able to use the entire State's share of the gas and he asked
whether Alaska would benefit more by using all of the gas in
state.
MR. CLARK said the short answer is it's a policy call. The State
wants the pipeline built and the gas sold. There are tax issues
beyond the gas in kind. The State also wants to encourage
exploration on the North Slope. If the State takes all of its
gas it could undermine the economics of going all the way to the
major North American markets, he said. The State needs to take
enough gas to fill in-state needs but there is a point where the
State needs to ensure that there is enough gas going down the
pipeline to finance the whole deal.
From a risk standpoint the State has to look at the possibility
of delivering gas as far away as the New England market and take
advantage of all the diverse economics from the West Coast to
the East Coast of North America.
REPRESENTATIVE KELLY referred to earlier conversation of what it
would take to ensure that Alaska gets the pipeline built and
said his point was if Alaska did not need the line for subsidy
in making the deal more attractive for the producers then the
State would not want ownership on a mileage-sensitive rate.
11:40:11 AM
MR. CLARK responded it's a question of putting up 100 percent of
the cost up and getting only 80 percent of the gas. He posed a
hypothetical example:
Let's say that the petrochemical ferry arrives in
Delta and we have now the ability to take off 850
million cubic feet per day in Delta and run it there.
So what we would do is still take our gas in kind and
we'd take it to Delta. From there, just think about
what's happening. The line would be smaller because if
we were taking off 850 million they're going to
telescope the line and the cost would be from Delta
forward. They would pay 100 percent of the cost from
there but they get 100 percent of the gas. So there
would be that match up that we don't have now. And
it's because we don't have the match up, when they're
forced to pay 100 percent of the cost but only get 80
percent of the gas, that's where the mis-alignment
occurs and what we fixed was to make it that they're
going to pay 80 percent of the cost and get 80 percent
of the gas. In your example, we would still have that
perfect alignment because we would pay our 20 percent
share to Delta but the line would be smaller, the cost
would be less going forward to take the gas to market
and they would get 100 percent of the gas for 100
percent of the cost. So the alignment is still there.
It's those terms in which we need to think of it.
That's where from the analysis that Dr. Pedro van
Muers and Roger [Marks] did at the time was why it
makes the deal because it creates that alignment of
cost and revenues.
MR. LOEFFLER submitted he had trouble with that hypothetical
because it references a sliding scale. He said he didn't see how
that works. "You can't have a sliding scale pipeline," he said.
REPRESENTATIVE KELLY replied, "Remember that we had the option
to slide the scale."
MR. LOEFFLER responded, "The pipeline has to be designed to do
something consistent. It can't be designed to do 4.5 one day and
3.8 in three years." "Who's making the FT commitment," he asked.
11:43:00 AM
SENATOR BEN STEVENS asked Representative Kelly whether he was
talking about ownership of the pipe or bidding on FT commitment.
REPRESENTATIVE KELLY said, "Strictly the equity ownership of the
pipe."
MR. LOEFFLER apologized and said he thought Representative Kelly
was talking about ownership of the gas.
SENATOR BEN STEVENS said he wanted to clarify the initial
question. He queried, "The initial question was if we do take
off in state why would we want to have ownership of the pipe all
the way to market?"
REPRESENTATIVE KELLY agreed. Assuming a mileage-sensitive rate
and assuming Alaska ramped into full use of its share of the
gas, why would the State want to own the pipe, he asked.
SENATOR BEN STEVENS stated that was easy since it would be a 14
percent return rate of return with no risk.
REPRESENTATIVE KELLY said it presents a case that addresses the
fact that Alaska loses flexibility. If the State ramps into in
state use then there will be capacity south of Fairbanks that
will only be able to be filled through looping on the northern
section.
MR. LOEFFLER said if the State wants options then it has to pay
for it. The project needs the basic FT commitment in order to
get built. If the State wants the option to take all of its gas
for use in Alaska it will have to pay for that option.
11:45:29 AM
MR. CLARK said the logic of the deal is because of the way in
which the State would take the gas, it would only be one more
step to get to ownership. The reverse isn't true. The State will
not be able to negotiate an arrangement whereby it could own the
pipeline yet not take gas in kind. That would not be something
the State would be able to negotiate and so the ticket to
ownership in the pipeline is the willingness to take the gas in
kind. The reality is given the fact that Alaska will have to
ramp up state ownership over time, the timing of the open season
is something the State will have to deal with. As a policy
matter the State will have to get as many potential users ready
as it possibly can.
BILL McMAHON, Commercial Manager, ExxonMobil Corporation, said
as the open seasons occur and as in-state demand grows, the
State will have the option of continuing to own 20 percent or it
could sell down.
MR. MARKS added the important thing is alignment of the gas
interest and the ownership interest. If down the line the two
are mis-aligned then shifting of ownership could be done.
11:48:51 AM
CHAIR SEEKINS opined if any party decides it wants to sell down
the options lie with the other LLC members. He called a recess
for lunch.
1:29:58 PM
CHAIR SEEKINS called the meeting back to order and announced
that United States Senator Lisa Murkowski would address the
group shortly. After that the committee would continue the
earlier meeting.
1:31:45 PM
UNITED STATES SENATOR LISA MURKOWSKI thanked the committee for
holding the public meetings. The congressional delegation has
worked very hard on the federal financial incentives toward the
pipeline deal and hopes that this work will bring about a speedy
agreement on the contract.
1:36:18 PM
US SENATOR MURKOWSKI thanked the committee for the opportunity
to speak. She said this is the most important project that
Alaska has in front of it today. The congressional delegation
spent many hours working on the financial incentives and getting
the permitting approved. The committee was successful in
obtaining the federal loan guarantee and tax deductions for the
North Slope conditioning plant, which will help tremendously
toward saving pipeline sponsors considerable dollars. The
expedited permitting and other aspects of federal incentives
including Alaskan job training are very important federal
incentives that are now in place. In 2005 the delegation
encouraged FERC to issue its open season rulings, guaranteeing
that Alaskans would have the right to take gas off the line for
in-state use. The delegation encouraged the federal agencies to
work out a memorandum of understanding that will unite the
agencies and coordinate speeding the gas line along. Last week
the White House formally nominated former Alaska State Senate
President Drue Pearce[MSOffice1] to the position of pipeline
coordinator for the project.
US SENATOR MURKOWSKI continued the project is important not only
to Alaska but to the United States. Last week both the State
Senate and House members received a letter from Vice President
Dick Cheney speaking of the importance of the project. Time is
of the essence to get the project underway, she stated. If the
Alaska project is not approved quickly, energy companies might
re-deploy their resources, which would result in significant
delay of an Alaska project.
Residents of Alaska tend to think that there will always be a
market for North Slope gas but that is not the case. Currently
the United States receives 4 billion cubic feet of gas from LNG
imports. Economists estimate that by the year 2010 LNG imports
will reach 12 bcf a day and by the year 2030 imports will
increase five fold.
US SENATOR MURKOWSKI advised the committee she met the chairman
of the FERC on June 15 and they spoke about the import situation
and about what is happening within the US to deal with increased
demand. The Chairman indicated on that very day the FERC
approved expansion of two of the nation's five existing LNG
receiving terminals and approved construction of three new
terminals. These are primarily in the Louisiana area with one in
New Jersey and one in Washington D.C. The five terminals are
projected to increase capacity by 8.2 bcf a day. Essentially in
one day's regulatory action the FERC brought on capacity by
nearly twice what is expected of the Alaska Natural Gas
Pipeline. On top of that the FERC has another 18 LNG project
permits pending approval. The Chairman spoke about the Energy
Policy Act of 2005 and advised within that Act provisions were
inserted to speed up the permitting and approval process for
many of the terminals.
There are 6,000 trillion cubic feet of stranded natural gas in
the world, much of it with lift costs that are vastly lower than
those in Alaska. One of them can produce natural gas for a
nickel per thousand cubic feet. Alaska's 35 trillion cubic feet
of known reserves seems insignificant compared to all the gas
that is out there.
1:41:21 PM
US SENATOR MURKOWSKI continued FERC is required under the
federal legislation to report every six months on what is
happening with the gas line project. If the Alaska project is
delayed even for a year it could drastically affect the chance
to sell its gas. There are projects underway now to produce gas
for the US market and so if Alaska is not aggressively involved
in building the pipeline, it risks the gas remaining stranded
for decades. "There is no time for Alaska to wait in advancing
our natural gas project. If the project isn't approved quickly,
Alaskans will be left out in the cold and shut out of the
hundred billion dollars the State likely will receive from the
current contract," she stated.
1:43:44 PM
SENATOR MURKOWSKI explained Alan Greenspan, former US Federal
Reserve Chairman, believes it is more economic for the nation to
buy LNG overseas than to build the pipeline. That viewpoint
exists in Washington D.C. and people with great credibility are
taking that perspective. If Alaska delays the project, it
creates a chance for the other view to move forward. She urged
legislators to renew their energy for moving the project
forward.
Alaska expects to provide 9,000 total construction jobs just on
the 730 miles of mainline pipe in the state. There are
additional possibilities of construction of spur lines in South
Central. The gas is there and Alaska needs to proceed without
delay because America needs Alaska's gas, she stated.
CHAIR SEEKINS asked US Senator Murkowski the precise expectation
that Washington D.C. has of the Alaska Legislature.
US SENATOR MURKOWSKI replied the delegation worked hard in 2003
and 2004 to secure the federal incentives. "There is a general
expectation among the members of Congress that Alaska's gas is
on its way to the United States," she reported. There are
approximately five senators each week that ask about the gas
line. Whenever the topic of where America's energy is coming
from arises, the chart is brought up that shows supply and
demand of oil and another chart is brought up that shows supply
and demand for natural gas. Alaska's gas shows as coming on line
by 2014. The expectation is that Alaska will provide 4.5 bcf a
day by then. Senator Murkowski said when she tells people that
the contract is still in negotiation they are surprised. People
want to know what the problem is with Alaska. If Alaska does not
get its gas to market soon, it will not be competitive, she
stated.
1:51:55 PM
CHAIR SEEKINS commented some Alaskans think that an over-the-top
route is still being considered. He asked US Senator Murkowski
to explain the attitude in Congress on that issue.
US SENATOR MURKOWSKI replied federal legislation clearly states
there can be no over-the-top route and there can be no secret
about it.
CHAIR SEEKINS asked whether the US Congress would allow a
pipeline route to be built through the Alaska National Wildlife
Reserve (ANWR).
US SENATOR MURKOWSKI said she was not willing to mix the gas
line and ANWR issues right now. She said that might be one way
to approach it though.
CHAIR SEEKINS asked her to comment on the possibility that the
federal government would build the pipeline if Alaska didn't.
1:54:16 PM
US SENATOR MURKOWSKI stated the idea that the federal government
is the best entity to build a pipeline is not realistic. The
federal government serves best in an oversight capacity.
SENATOR OLSON asked whether Mr. Greenspan thought it was
significantly cheaper to import gas than to build the pipeline.
He asked whether Mr. Greenspan was actively trying to discourage
the building of the pipeline.
US SENATOR MURKOWSKI responded Mr. Greenspan was speaking from
the perspective that gas could be bought more cheaply on the
open market and that diversification of a variety of sources was
important so that the nation was not overly dependent on one
area over another. She agrees that diversity of sources is
imperative as Hurricane Katrina proved it is not smart to have
all the nation's energy sources in one area. She pointed out the
issue is not only about where to buy the cheapest gas; there is
economic cost to energy vulnerability, which is where the US
finds itself now. "Even if you do not like Hugo Chavez, you need
Venezuela's oil," she stated.
CHAIR SEEKINS thanked US Senator Lisa Murkowski for speaking to
the committee. He asked for comments from the producers on the
topic of royalty in kind.
2:00:22 PM
MR. VAN TUYL said BP Alaska supports state participation in the
pipeline. The model reduces overall risks in the project and
eliminates the requirement for industry to pay capital up front
and to take up FT obligations up front for gas that it doesn't
directly own. The model is used and has been proven to work by
other entities around the globe. It situates all of the parties
in a commercially equivalent manner and creates alignment. That
commercial alignment will allow participants to focus their
collective energies on making the project succeed.
Another benefit for the State is that ownership provides a
steady stream of tariff revenues for Alaska. The provisions in
the contract mitigate the risks that Alaska would have by
getting into the business of natural gas. The State would be
embarking on the project with three very successful corporations
and that also reduces risks for Alaska, he stated.
2:06:03 PM
MS. KING echoed the comments by Mr. Van Tuyl and added the
contract is woven with the capacity commitment model.
ConocoPhillips supports the model because it enhances the
economics of the project and creates commercial alignments. For
example, ConocoPhillips will take custody of its gas at the
exact same spot that Alaska will. She said valuation
methodologies have been argued in the past, but the State would
be able to make commercial decisions from an ownership position
and retain the ability to either increase or decrease equity
ownership over time.
2:07:24 PM
MR. McMAHON aired state ownership was the breakthrough to
getting the agreement on the contract. Many times issues were
traded while recognizing that certain things were of utmost
importance to one party or another. State ownership solved many
of the issues that came up during negotiations. Producers were
looking for enhancements to make the low rate of return more
attractive. The State was looking for a way to value gas for the
payment of royalty and the production tax in a way that would
reduce disputes. So when the State tabled the idea of gas in
kind and tax gas it was able to address many of the concerns and
allowed producers to drop the request of reduced state take.
"Indeed state ownership, state capacity, state gas in kind does
improve our economics," he stated. State ownership also solved
the valuation problems the negotiations were facing since the
State, rather than dispute the price, would be able to take and
sell the gas itself. He expressed great support for the
contract.
2:10:45 PM
JIM EASON, Legislative Consultant, stated it was a truism that
if a person gives up his rights, he will never have to defend
them again. "That seems to be the position that the
Administration has taken regarding switching to in kind to avoid
disputes over in value," he asserted. He said a fair amount of
the discussion seems to be intended to cast a bad light on the
in value taking since that has caused disputes in the past.
Those disputes have arisen when the producers have not paid
their obligations. In every case the disputes resulted
ultimately in the producers having to pay a substantial amount
of money to the State because they didn't pay correctly the
first time. There has been much discussion on avoiding disputes
and it's important to remember that disputes are not bad if they
return hundreds of millions of dollars owed to the State.
MR. EASON continued a great deal of time has been spent talking
about the core decision to move to in kind taking. Most of the
benefits that have been cited are as benefits that come only
from the in kind provision in the contract. "In fact the State
has those benefits now," he said. But it also has other options
of switching to in value. The State now controls whom it wants
to sell oil to and also controls the price. In the contract, the
State has agreed to give up a number of valuable provisions that
the State currently has in its leases and its unit agreements;
some of which represent hundreds and hundreds of millions of
dollars. It is not true that the in kind benefits that are being
cited today arise only from being taken in kind under the
circumstances that the producers are proposing under the
contract, he stated.
2:13:44 PM.
MR. EASON offered an example: If IRR is really a concern; the
State could have approached it from a different way without
absorbing or creating additional costs. Under the existing unit
agreements, the State and the producers can negotiate the in
kind taking point to be any point of their choosing.
Historically it has been at the entrance to the oil pipeline for
oil, but nothing says that has to happen. The State could have
given the same IRR boost to the project by negotiating and
agreeing to take its gas in kind at the Alberta Hub. In exchange
the State would be fully responsible for the FT. This would
present the same result but would drastically reduce additional
costs to the State. These examples deserve more than just an
hour of discussion, he asserted. The contract is made to sound
like a very good deal, but it will result in significant
implications to the State of Alaska.
DON SHEPLER, Legislative Consultant, observed the three
producers at the table currently hold substantial firm capacity
on existing pipelines in the Lower 48. A study done earlier in
the year suggests it equates to 8.5 bcf a day on 25 pipelines.
In those instances there is a different business model at work
and so the question begs to be asked about the necessity of in
kind taking and the holding of capacity when in the Lower 48
pipes the producers do not have the state upstream royalty
owners and taxing authorities holding FT capacity.
PHILLIP GILDAN, Legislative Consultant, declined to comment.
2:18:52 PM
RICK HARPER, Legislative Consultant, pointed out he has not seen
the LLC agreement, which is key to his personal assessment. He
reiterated earlier comments that ownership in FT and ownership
of the pipeline are two different issues. He said he differed
with Mr. Marks on that subject. Normally an independent company
does not take an FT commitment on it's own pipeline and so Mr.
Shepler's comment about the different business model definitely
applies. He said he remained very concerned about basin control
and said he would like to reiterate his concerns at a later time
and with a stronger point. Mr. Marks indicated the agreement
would give the State a seat at the table and operating and
development decisions in the field, he noted. He offered that
the State would be excluded from discussions revolving around
development and exploration activities as well as other
important discussions.
The hurdle rate was described earlier as a rate by which the
producers recover their cost of capital and Mr. Harper stated a
different opinion from that. A hurdle rate is simply an internal
rate that is used as guidance within the company for projects
within the company. In theory any project that clears the
corporate hurdle rates will be done on executive committees of
independent and major producers. Hurdle rates for exploration
projects are normally much different than hurdle rates for
development projects, particularly development projects where
the assets are already substantially in place or depreciated in
the field as in the case of Prudhoe Bay, he said.
2:22:48 PM
MR. HARPER referred to a point earlier that there can be no non-
voluntary initiation of expansion until after commencement of
pipeline operation. Certainly a voluntary expansion can occur or
begin to occur prior to commencement of pipeline operations but
contractually nothing can be forced prior to that time. He said
he remained concerned about relying on FERC litigation
strategies to solve problems related to expansion and basin
control.
SENATOR BEN STEVENS asked Mr. Eason whom the State had the
ability to sell its gas to right now.
MR. EASON replied the State has the right to take its gas and
sell to anyone it wants. Under its existing lease and unit
agreements, the State would have the option of selling its gas
in kind at a pricing provision it determines and to persons it
determines.
SENATOR BEN STEVENS retorted that was a hypothetical statement
since the project was not completed.
MR. EASON responded that the entire conversation was
hypothetical since the project was not built yet.
2:26:06 PM
SENATOR BEN STEVENS addressed Mr. Harper and said every
presentation he has given has been critical of the contract. He
asked Mr. Harper whether he had anything positive to say about
the contract and if so whether he could put it in writing and
present it to the committee.
MR. HARPER said he has mentioned the hard work that has been
done by Mr. Clark and Mr. Griffin and the others. He said he has
been very complimentary about that.
SENATOR BEN STEVENS asked Mr. Harper whether he has been
instructed to focus only on the negative aspect of the contract.
MR. HARPER stated he has not focused on the negative but has
remained independent.
SENATOR BEN STEVENS asked to see documentation that Mr. Harper
has presented something positive regarding the contract. "It
seems that yours is the only presentation that never brings into
any portion that this… it's only critical, Mr. Harper and I just
wonder if maybe you're the hired pit bull on this project and
whether you've had direction from the project manager to be
that," he accused.
MR. HARPER replied he has been asked to be independent of the
process. He has directed advice to Mr. Clark and his staff as
well as the Legislature and has been very complimentary of the
good work that has been done on the issue of capacity
management.
2:28:36 PM
MS. KING said she would like to refute statements that the State
has made all the concessions in the contract. "You've got to
flip the page and look at the full balance of the deal," she
said. She referred to Mr. Shepler's comment that the producers
hold substantial FT commitments and said it is established
practice to align ownership with basin-opening projects. To say
there is a precedent in the Lower 48 is not true. With respect
to upstream development, the State will take an ownership
position in the pipeline and not the upstream development but
there is a requirement in Article 10.7 that says the producer
has to provide any information about the subject to the State.
2:30:28 PM
MR. VAN TUYL reiterated points made by Ms. King. He added there
is a specific provision in AS 43.82.220(a) that says the
contract could be modified at any time. The reference made by
Mr. Shepler of 8 bcf a day in North America is like comparing
apples to oranges. One can't compare a mature basin with the
opening of a basin since there are unknown risks involved. The
whole notion of basin control is a dangerous term and is
inflammatory and inappropriate, he asserted. "Clearly the gas
pipeline industry in North America is very actively regulated,"
he said. The pipeline will be an open access pipeline and anyone
that satisfies the requirements of the open season will have
access to the pipe or access off of the pipe.
2:34:17 PM
MR. MARKS referred to the issue of Alaska's rights to take its
gas in kind and said under current law the State cannot take
taxes in kind. If the State were to take its gas in kind and not
the give the FT commitment the project would clearly suffer that
additional boost and might not even get built. Regarding the
question of avoiding valuation disputes, he said, the State has
not given up any money by going to the in kind system. On that
point a concern was raised that by taking its gas at the lease
boundary the State would incur additional upstream costs. This
is not a concession, he said. There are agreements and the State
will get the exact same amount of money that it would get under
the status quo, he stated.
2:37:18 PM
The Lower 48 business model where producers have higher
ownerships on the pipelines is not a business model that would
convert to the Alaska situation. A project that carries gas from
Houston to Dallas is quite different from a project that carries
gas from Prudhoe Bay to Chicago. The Lower 48 project would have
a higher rate of return and a lower hurdle rate.
Hurdle rates represent the cost in capital and what the company
must repay to the investors, creditors and shareholders for the
use of their money. It is commensurate with the risks of the
project. Companies do not have a monolithic hurdle rate for
projects, he said. A company building a hotel in Las Vegas and
also building a hotel in Baghdad would have different hurdle
rates for the projects.
2:38:28 PM
SENATOR ELTON asked Mr. Marks to define what he means when he
talks about the "status quo." He asked whether he was referring
to the present day without a pipeline or talking about status
quo with a 20/20 gas line.
2:38:52 PM
MR. MARKS replied he was referring to current royalty
provisions, current lease provisions and tax laws, and what the
State would get if there were a gas pipeline today.
2:39:26 PM
SENATOR ELTON asked whether the status quo was just gas or gas
and oil combined under existing statutes.
MR. MARKS replied absent a change to the oil taxes there is no
difference to how much money the State would get for oil under
the contract versus status quo. With the PPT in the mix, any but
very low prices far exceed the status quo.
2:40:16 PM
SENATOR BEN STEVENS asked Mr. Shepler to provide the committee
with the FERC Order 2005 as well as 2004.
MR. LOEFFLER advised the two Orders are 2005 and 2005A and said
they reference the open season in Alaska. The statute is October
2004, he advised.
SENATOR BEN STEVENS asked for a synopsis of Order 636 from FERC.
MR. LOEFFLER asked Mr. Shepler whether his APCF was matched or
unmatched with the amount of gas the companies have.
CHAIR SEEKINS asked for a definition of APCF.
MR. SHEPLER said it was a listing of the customer indexes and
capacities that were shown on the FERC website sometime in early
2006. He does not have the data of whether the producers have
lower capacity than production shift, he said.
MR. LOEFFLER said the 636 series required an unbundling of the
pipeline function and the merchant function and non-
discrimination requirements so that a company is not allowed to
favor a subsidiary when offering capacity.
SENATOR BEN STEVENS clarified that an entity that owns a
pipeline but also owns a production facility is required under
FERC 636 to not favor its own company in the bid process.
MR. LOEFFLER added there is also a separation of functions so
the pipeline company offers only a transportation service and
not the bundled product of transportation and gas.
2:44:14 PM
SENATOR BEN STEVENS asked whether FERC Order 636 regulated that.
MR. LOEFFLER said it was established under the Natural Gas
Development Act implemented in Order 636 and is enforced by
FERC.
SENATOR BEN STEVENS said if there is a continual concern over
basin control, then he wanted documentation that Congressional
laws exists to address it.
2:48:03 PM
MR. CLARK interjected one could not have a fair reading of the
SGDA as amended in 2003 other than to instruct the Executive
Branch to attempt to negotiate a business arrangement. The SGDA
does not advise anyone to litigate and take gas away from the
producers. The negotiation of the contract is along the
instruction of the SGDA and that was the intent of the Act, he
said.
2:50:25 PM
MR. GRIFFIN referred to Mr. Eason's comments that the State's
arguments prevailed in each litigated case and said it was true
that the disputes were worthwhile but the State would argue that
they received no more than what they deserved. The in kind
system would ensure that the State gets its share of the gas
with very low prospect of litigation and the value will be very
near to the status quo. He referred to Mr. Eason's comments
about giving up the lease provisions and said there are
concessions from both sides in the contract. He said he
enumerated these in the fiscal findings and urged committee
members to look at all the payments in terms of the bottom line.
2:52:33 PM
MR. GRIFFIN referred to Mr. Harper's comment on the hurdle rate
and said normally it is the case that they are higher for an
exploratory project and the reason is because the failure rate
is much larger. The largest risk is the reserves risk but in the
Alaska project the reserves risk is minimal although there are
many other risks, such as fiscal risk and price risk. Because of
that set of risks this project should be looked at more similar
to an exploratory project than a developmental opportunity, he
stated.
CHAIR SEEKINS announced the committee would take a brief recess
at 2:54:03 PM.
3:05:49 PM
CHAIR SEEKINS called the meeting back to order and announced the
topics would be Alaska hire and Alaska purchase.
GREG [MSOffice2]O'CLARAY, Commissioner, Department of Labor and
Workforce Development (DOLWD), advised the committee that
provisions in Article 6 of the contract would ensure that Alaska
workers and Alaska businesses will be fully utilized and the
State would see the added benefits of those dollars staying in
Alaska. With respect to federal constitutional constraints, the
Alaska hire provision could not be so strong as to be challenged
in court as unconstitutional. The touchstone of success in terms
of use of Alaska workers has to do with the preparation and
training and availability of Alaska workers and businesses to
perform when the project comes on line.
The department tends to concentrate on the 9,000 jobs in direct
construction and the work would begin in 90 days of contract
approval but there is so much work involved in the pre-design
that perhaps the State has missed the total picture in terms of
economic benefit to Alaska. The investment goes beyond just the
construction; it includes the operation. If the State had the
same commitment in TAPS there would be more Alaskans working on
the North Slope today than there are. His vision is to have over
90 percent of Alaskans working in every category of the industry
and that is a tremendous opportunity for the young people of the
state. He advised the committee that he is committed to making
Alaska hire a great success.
CHAIR SEEKINS said he lived through the construction of the
Trans Alaska Pipeline where recruiters strongly urged Alaska
workers to leave their jobs and join the pipeline. It created a
huge disruption in the workplace and when the construction was
done these people were left unemployed and unable to return to
their old jobs. He asked whether the Alaska hire provisions
would create the same problems all over again.
COMMISSIONER O'CLARAY advised he has adopted an economy-wide
approach and cautioned members not to think of just the
construction part of the project. When the DOLWD goes into the
schools they talk about more than just construction jobs. "The
State cannot afford to be so myopic in its view that they're
only going to train pipeline workers," he stated. The millions
of dollars that flow through the department must support all of
the jobs in Alaska. Employers who want to keep their workers
figure out benefit structures that do exactly that, such as
pensions and profit sharing.
3:15:49 PM
SENATOR ELTON asked Commissioner O'Claray to comment on language
in Article 6.2(b) in the contract that speaks about "qualified
Alaskans."
COMMISSIONER O'CLARAY deferred the question to Mr. Loeffler.
MR. LOEFFLER pointed out the language in Article 6.2(b) comes
from the SGDA. He said the language was not intended to import
$2.50 an hour workers to the detriment of Alaska workers. The
Administration hopes to amend the SGDA and the contract with
language that will correct that interpretation.
MR. CLARK noted one of the benefits of the roundtable discussion
was to bring up constructive points such as the one Senator
Elton brought up. He asked for input to help correct the matter.
CHAIR SEEKINS recognized Mr. Sampson and Mr. Lithy.
3:18:50 PM
JIM [MSOffice3]LITHY, Business Manager, Plumbers and Pipefitters
Local 375, expressed concern over a lack of provision in the
contract that would ensure Alaska workers would have the
opportunity to work on the project. There does not appear to be
substantial assurance in the contract. In order to maximize the
opportunity for Alaska craft workers there must be some
assurance of access for the jobs other than just entry-level
positions. He suggested the committee consider using a project
labor agreement.
3:20:35 PM
JIM SAMPSON, President, Alaska AFL-CIO, suggested the State must
insist on a project labor agreement. A project labor agreement
would provide predictable labor costs, establish uniform wages
and benefits, guarantee labor peace and secure a stable supply
of skilled Alaska workers through the duration of the project. A
labor agreement would also provide a legally defensive way of
ensuring Alaska hire. Efforts to successfully prepare the
workforce should be made early on.
3:24:21 PM
Currently the contract has language in it that is harmful to
Alaskan workers and Alaska businesses, he asserted. He urged
committee members to reach out to the contract industry for
language input. The State and its sponsors need to understand
the labor costs and be able to secure qualified workers. Alaska
must have appropriate labor protections for its workers and this
will happen by working together. Current language in the
contract drives down wage protections that Alaska families rely
on. The union has questions regarding wage protection since the
State is considering entering into ownership. Not only will the
State become a market participant but will also remain a
regulator. He questioned whether Davis-Bacon rates would apply
to the project. He encouraged legislators to include legislation
for needed training funding to help the effort.
3:27:08 PM
MR. SAMPSON referred to the "TAPS experience" and said the
workforce was different now. A number of Alaska contractors were
used in the project but perhaps not enough were used
appropriately. He listed many of the projects associated with
the project. He advised the committee to dispense with the
language in Article 6.2(b) and proposed using language from the
National Labor Relations Act along with a project labor
agreement since that has held up in court.
3:33:14 PM
MR. SAMPSON summarized the SGDA should be amended to include
language on labor agreements. Labor costs should go into the
findings and into the contract but not necessarily into Article
6.2.
3:36:54 PM
MR. CLARK responded Mr. Sampson's suggestions have not occurred
to the Administration. The issue is in the sequence of events
and so the absence of a project labor agreement in the contract
does not mean that they are proceeding without a project labor
agreement, he stated. The Administration is currently putting
together the fiscal contract so as to set the fiscal terms for
the State's involvement with the producers. Once that happens
the parties will move on to the next phase. Within 90 days after
signature the permitting and design engineering happens and that
is the step where involvement would occur and labor negotiations
would begin.
3:42:04 PM
CHAIR SEEKINS cited language from Section 230(a) of the SGDA and
said the commissioner shall also include in the contract under
AS 43.82.020 a term that requires the qualified sponsor or
qualified sponsor group and contractors of the qualified sponsor
or qualified sponsor group to employ Alaska residents and to
contract with Alaska businesses to work in the state on the
approved qualified project to the extent the residents and
businesses are available, competitively priced and qualified.
COMMISSIONER O'CLARAY replied that was correct and that there
was expansion of the language that follows in the contract. He
said it was important to emphasize that labor must play a role
in the project.
3:44:43 PM
CHAIR SEEKINS said he had difficulty with the definition of
"competitively priced."
MR. SAMPSON commented the union has a solid understanding of
what it takes to get workers adequately trained. They spend
millions of dollars each year on apprenticeship programs and
have been training construction workers for 50 years. Alaska
contractors privately fund all of the programs. The record
should be clear on the union's commitment to training but to
suggest that $5 million dollars on a $25 billion dollar project
is sufficient is unreal, he stated.
3:46:50 PM
MR. CLARK interrupted to say that $5 million dollars is well
spent according to language in the contract. It will look to
internal training and that is an important distinction because
internal training will ensure top to bottom organization. The
Administration has no intention of dropping Article 6.2(b) but
they are committed to improving the language for better
protection.
3:48:33 PM
CHAIR SEEKINS said he could not find a definition for
"competitively priced" but there is a difference between
construction worker's wages in Alaska and the Lower 48.
MR. SAMPSON agreed and said Alaska wages were slightly lower but
competitively priced. The project agreement for TAPS was too
high because once the project was finished the state was flooded
with unemployed workers with a wage package that was too high to
compete with. Lawyers wrote Article 6.2 and it reads to say that
contractors can come up to Alaska and bring their crews with
them, he cautioned. In contrast, Alaska contractors usually hire
Alaska people.
3:53:57 PM
MR. CLARK interjected the reality is that the terms and wages
would be negotiated in the labor agreement.
MR. SAMPSON responded labor would like to know what the
Administration's position is as it relates to the applicability
to Title 36 of the project. He questioned whether the State, as
equity owner, was subject to Title 36.
MR. CLARK said that issue becomes moot in the project labor
agreement.
CHAIR SEEKINS suggested the committee get a preliminary opinion
regarding the equity ownership issue and Davis-Bacon wages on
the project. He asked Mr. Clark to gather some information on
the subject.
3:56:27 PM
MR. CLARK agreed and noted there should be more discussion on
the subject. He invited Mr. Sampson to the Governor's mansion to
talk about his concerns.
REPRESENTATIVE KELLY commented everyone comes to the table with
"a list that they want taken care of." He advised the committee
to be careful not to promise too much just because it was an
election year. The project's largest risk is cost over runs and
negotiating too high of wages could compromise the entire deal.
Project labor agreements have a place but if the end deal has
imposed work rules that make no sense, such as paying somebody 4
hours minimum to "come out and plug in a Honda" it will be a big
mistake. The natural tension between labor and business must
remain, he said.
MR. CLARK advised the economic terms with labor would be another
step in the project. The State ownership in the pipeline would
be beneficial to all the citizens of Alaska. Cost over runs and
low gas prices are the two things that could hurt the most,
which is why things have to be ironed out sequentially.
4:02:36 PM
MR. CLARK continued the reason the labor agreement is not in the
contract is because it must be worked out in a sequential,
organized, systematic fashion. Governor Murkowski feels that the
next step in the sequence will not occur until after the signing
of the fiscal contract.
CHAIR SEEKINS countered Section 230(a) in the SGDA states the
State must include the terms within the constraint of law.
MR. CLARK said the Administration is still dealing with economic
commitments that must be made in order to "figure out the fiscal
terms." The actual cost of labor is the next step and must be
calculated with the actual design of the project. A project
labor agreement is not easily added and there might be more than
one labor agreement. There are many specific issues associated
with putting together a project labor agreement and "it's a big
deal," he said.
4:06:48 PM
SENATOR ELTON said he sees the fiscal contract as providing
certainty toward getting the pipeline built. One of the things
that should be nailed down in the fiscal contract is a well-
trained workforce rather worrying about a sequential progress
toward a decision on whether or not there will be a project
labor agreement. He said the sequencing approach is bothersome
and does not seem to bring people together. Article 6.2 doesn't
have a thing to do with training, he added.
CHAIR SEEKINS invited Mr. Sampson and Mr. Lithy to attend the
special session so that the issue could be further addressed.
4:10:05 PM
MR. VAN TUYL responded to Senator Elton and said he was correct
in that Article 6.2 does not contain language that details the
obligations that the midstream entity would have to provide the
training. It references the money and the programs as well as
complications with the DOLWD. Article 6.4 contains the training
language. Regarding the project labor agreement, the contract
itself defines the relationship between the State of Alaska and
the producers, he said. The labor agreement would be a matter
between whoever is executing the project and labor. The project,
given its scope and scale, is projected to tax the entire North
American labor market, he asserted.
4:15:16 PM
MS. KING advised the committee that AS 43.82.030 was clearly the
landscape given to the producers when discussing the Alaska hire
provision. She spoke with several committees on the topic and
remembered the intent language tabled by Representative Harris
at the time. She emphasized that ConocoPhillips is committed to
Alaska hire buy and build. However, they remain concerned that
there will be a huge demand for labor on the project. One of the
key provisions in the contract is work on the planning phase.
The landscape in things such as labor and steel has changed
since the 2002 study. That is the reason they stipulated that
they would not come to the table with labor until after the
project planning phase.
4:17:38 PM
CHAIR SEEKINS asked Ms. King whether cost estimates in the study
included labor costs of prevailing Alaska wages.
MS. KING said she did not know.
SENATOR ELTON aired as the costs of materials and labor and
permits are reviewed adjustments are made through the qualified
project plan. He stated his concern was the forum in which the
producers are running the qualified project plan. That plan can
be changed over the objections of the State and so the State
might not have the leverage needed to ensure the producers are
hiring Alaska workers.
4:19:21 PM
MS. KING responded that was an advantage the producers saw with
state ownership. The qualified project plan requires that the
mainline entity is the party that provides the public document.
The LLC will be formed to own that and the State will be a 20
percent owner.
MR. VAN TUYL said, "Ditto." The midstream entity is the one that
has the obligation under the contract to generate the qualified
project plan. The State will be a 20 percent owner in the entity
and will absolutely have a voice. Regarding the entire topic of
Alaska hire, BP is committed to the concept and stands by its
record on the matter.
4:22:30 PM
CHAIR SEEKINS asked Mr. Clark to address the fiscal certainty
issue in synopsis.
MR. CLARK deferred to Mr. Dickinson.
MR. DICKINSON offered a rough approximation of the fiscal
certainly on oil. He focused on the period between 1973-1981 and
called it the period when the State's fiscal system transited
from focusing on Cook Inlet to the North Slope oil industry. In
that period the State started out by passing an oil and gas
property tax - a special statewide tax on oil and gas property.
They went to the production tax in 1977 and raised the marginal
rate from 8 percent to 12.25 percent. Four years later it went
up to 15 percent. In 1978 the State switched the income tax to
separate accounting and then in 1981 switched back to modified
apportionment. This affected how people thought about the fiscal
system. There was a fundamental shift in both the mechanism of
how taxes were collected from the oil industry as well as what
the State based their entire fiscal system on. That is important
when talking about the next thirty years.
A thirty-year fiscal stability period makes sense because it
covers the two initial phases of the project. That is the period
in which the project will get built and where the initial
financial terms will be ironed out and met. Arguably, stability
is imperative for that phase. Fiscal stability is where the
money is, he stated. Nobody wants to do "back door
renegotiations." The three entities are the three largest
taxpayers in the State and they cover approximately 65 percent
of the general fund budget. Fundamentally the first thirty years
will be a period where oil is still a significant but declining
portion of state's revenues.
4:27:16 PM
MR. DICKINSON continued "compounding interest" was cited by
Albert Einstein as one of the most powerful forces in the
universe. There are a number of PILTS, which are driven by
inflation. These PILTS have replaced the property and right now
there is depreciation and inflation in the cost of new
construction. The volumes being produced and inflation are the
two things that drive the PILTS. He said:
Quite [MSOffice4]frankly, if you look at what happens to
inflation over 15 or 30 years, we were following the
commandments of the SGDA, we were back end loading
certain aspects of the fiscal regime and quite frankly
the tensions there run the other way. The folks that
will be recipients of the PILTS should [want] those to
be for the longest period of time possible. In fact
one of the problems that we acknowledged for some of
the assets is that at the end of that 30 years, there
could well be a cliff because when folks come in again
and ask the percent utilization, those assets may fall
dramatically in value at the end of this
contract[MSOffice5].
MR. DICKINSON urged the committee to look at what generally
happens over time and to consider inflation when doing so. A
small dispute when not resolved can turn into huge amounts of
money when the issue finally comes to resolution. With State
ownership conflicts will certainly be less and this will
contribute to fiscal stability in relation to the project.
4:32:03 PM
MR DICKINSON advised the committee that he would speak on how an
amendment to the SGDA puts conditions on oil fiscal certainty.
He said the current contract would not meet the conditions and
since the Administration believes that the current contract
works, that presents a problem. The Administration is committed
to looking at the terms and figuring out how to incorporate them
into the contract. In relation to production tax, the Senate
Bill provides no fiscal stability on oil. Things remain status
quo and conflicts would go to court. People are concerned that
there will be a revision of the production tax and mistakes
might have been made with no period in which to fix the
mistakes.
4:35:09 PM
In the middle period of the contract the amendment would cause a
switch to a different type of concept of fiscal stability. The
reason the contract is so long is due to all the situations that
might arise that must be addressed and procedures must be laid
out to deal with them. Right now the contract offers a period of
fiscal stability for the three major taxes but the Senate Bill
takes one of the taxes and breaks it into three pieces and
proposes two different concepts of fiscal stability; one for the
critical period of construction and one for the remainder
period. The State needs 30 years of fiscal stability, he said.
The arbitration factor could cause much litigation and
renegotiation of the contract.
4:39:38 PM
REPRESENTATIVE KELLY asked Mr. Dickinson whether the State would
be able to change the tax structure if the economics change in
the future.
MR. DICKINSON said he had no idea. Senator Stevens introduced
the bill and it does not say. It would all depend on the
language in the contract, interpretation of the SGDA, and the
situations taken into account.
CHAIR SEEKINS advised the committee of the agenda for the
following meeting. He thanked the members, producers,
consultants and the general public for their attendance. He
adjourned the meeting at 4:45:32 PM.
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