Legislature(2005 - 2006)SENATE FINANCE 532

07/26/2006 09:00 AM SPECIAL COMMITTEE ON NATURAL GAS DEV


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09:19:34 AM Start
09:24:11 AM SB3001 || SB3002
09:27:47 AM Jim Clark, Chief Negotiator, Office of the Governor
09:38:00 AM Dr. Pedro Van Meurs, Consultant to the Governor
12:03:29 PM Bob Loeffler, Morrison & Foerster, Counsel to the Governor
02:08:38 PM Roger Marks, Economist, Department of Revenue
02:22:29 PM Bill Corbus, Commissioner, Department of Revenue
03:51:47 PM David Van Tuyl, Bp
04:09:13 PM Wendy King, Conocophillips
04:19:52 PM Bill Mcmahon, Exxonmobil
04:35:07 PM Patrick Coughlin, Senior Counsel, Bp
04:41:48 PM David W. Márquez, Attorney General
05:15:03 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB3001 OIL/GAS PROD. TAX TELECONFERENCED
Heard & Held
+= SB3002 STRANDED GAS AMENDMENTS TELECONFERENCED
Heard & Held
                    ALASKA STATE LEGISLATURE                                                                                  
      SENATE SPECIAL COMMITTEE ON NATURAL GAS DEVELOPMENT                                                                     
                         July 26, 2006                                                                                          
                           9:19 a.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Ralph Seekins, Chair                                                                                                    
Senator Lyda Green                                                                                                              
Senator Gary Wilken                                                                                                             
Senator Con Bunde                                                                                                               
Senator Fred Dyson                                                                                                              
Senator Bert Stedman                                                                                                            
Senator Lyman Hoffman                                                                                                           
Senator Donny Olson                                                                                                             
Senator Thomas Wagoner                                                                                                          
Senator Ben Stevens                                                                                                             
Senator Kim Elton                                                                                                               
Senator Albert Kookesh                                                                                                          
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Senator Gary Stevens                                                                                                            
Senator Hollis French                                                                                                           
Senator Charlie Huggins                                                                                                         
Representative Max Gruenberg                                                                                                    
Representative Ralph Samuels                                                                                                    
Representative Kurt Olson                                                                                                       
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE BILL NO. 3001                                                                                                            
"An Act  relating to  the production  tax on oil  and gas  and to                                                               
conservation surcharges  on oil;  relating to  criminal penalties                                                               
for  violating   conditions  governing  access  to   and  use  of                                                               
confidential   information  relating   to  the   production  tax;                                                               
amending the  definition of 'gas'  as that definition  applies in                                                               
the  Alaska  Stranded  Gas  Development  Act;  making  conforming                                                               
amendments; and providing for an effective date."                                                                               
     HEARD AND HELD                                                                                                             
                                                                                                                                
SENATE BILL NO. 3002                                                                                                            
"An  Act relating  to the  Alaska Stranded  Gas Development  Act;                                                               
relating to municipal impact money  received under the terms of a                                                               
stranded gas  fiscal contract; relating to  determination of full                                                               
and  true  value  of  property  and  required  contributions  for                                                               
education  in  municipalities  affected by  stranded  gas  fiscal                                                               
contracts; and providing for an effective date."                                                                                
     HEARD AND HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB3001                                                                                                                  
SHORT TITLE: OIL/GAS PROD. TAX                                                                                                  
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
07/12/06       (S)       READ THE FIRST TIME - REFERRALS                                                                        
07/12/06       (S)       NGD                                                                                                    
07/13/06       (S)       NGD AT 9:00 AM SENATE FINANCE 532                                                                      
07/13/06       (S)       Heard & Held                                                                                           
07/13/06       (S)       MINUTE(NGD)                                                                                            
07/14/06       (S)       NGD AT 9:00 AM SENATE FINANCE 532                                                                      
07/14/06       (S)       Heard & Held                                                                                           
07/14/06       (S)       MINUTE(NGD)                                                                                            
07/24/06       (S)       NGD AT 1:30 PM SENATE FINANCE 532                                                                      
07/24/06       (S)       Scheduled But Not Heard                                                                                
07/25/06       (S)       NGD AT 9:00 AM SENATE FINANCE 532                                                                      
07/25/06       (S)       Heard & Held                                                                                           
07/25/06       (S)       MINUTE(NGD)                                                                                            
07/26/06       (S)       NGD AT 9:00 AM SENATE FINANCE 532                                                                      
                                                                                                                                
BILL: SB3002                                                                                                                  
SHORT TITLE: STRANDED GAS AMENDMENTS                                                                                            
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
07/12/06       (S)       READ THE FIRST TIME - REFERRALS                                                                        
07/12/06       (S)       NGD                                                                                                    
07/13/06       (S)       NGD AT 9:00 AM SENATE FINANCE 532                                                                      
07/13/06       (S)       Heard & Held                                                                                           
07/13/06       (S)       MINUTE(NGD)                                                                                            
07/14/06       (S)       NGD AT 9:00 AM SENATE FINANCE 532                                                                      
07/14/06       (S)       Heard & Held                                                                                           
07/14/06       (S)       MINUTE(NGD)                                                                                            
07/24/06       (S)       NGD AT 1:30 PM SENATE FINANCE 532                                                                      
07/24/06       (S)       Heard & Held                                                                                           
07/24/06       (S)       MINUTE(NGD)                                                                                            
07/25/06       (S)       NGD AT 9:00 AM SENATE FINANCE 532                                                                      
07/25/06       (S)       Heard & Held                                                                                           
07/25/06       (S)       MINUTE(NGD)                                                                                            
07/26/06       (S)       NGD AT 9:00 AM SENATE FINANCE 532                                                                      
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
JIM CLARK, Chief Negotiator                                                                                                     
Office of the Governor                                                                                                          
PO Box 110001                                                                                                                   
Juneau, AK  99811-0001                                                                                                          
POSITION STATEMENT:  Discussed fiscal certainty and answered                                                                  
questions during the hearing on SB 3001 and SB 3002.                                                                            
                                                                                                                                
DR. PEDRO VAN MEURS                                                                                                             
Consultant to the Governor                                                                                                      
Office of the Governor                                                                                                          
PO Box 110001                                                                                                                   
Juneau, AK  00911-0001                                                                                                          
POSITION STATEMENT:  Discussed fiscal certainty and answered                                                                  
questions during the hearing on SB 3001 and SB 3002.                                                                            
                                                                                                                                
BOB LOEFFLER                                                                                                                    
Morrison & Foerster LLP                                                                                                         
Counsel to the Governor                                                                                                         
Office of the Governor                                                                                                          
PO Box 110001                                                                                                                   
Juneau, AK  99811-0001                                                                                                          
POSITION STATEMENT:  Answered questions during the hearing on                                                                 
SB 3001 and SB 3002.                                                                                                            
                                                                                                                                
ROGER MARKS, Economist                                                                                                          
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION STATEMENT:  Answered questions during the hearing on                                                                 
SB 3001 and SB 3002.                                                                                                            
                                                                                                                                
WILLIAM A. CORBUS, Commissioner                                                                                                 
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION STATEMENT:  Answered questions during the hearing on                                                                 
SB 3001 and SB 3002.                                                                                                            
                                                                                                                                
DAVID VAN TUYL, Commercial Manager                                                                                              
Alaska Gas Group                                                                                                                
BP Alaska                                                                                                                       
Anchorage, AK                                                                                                                   
POSITION STATEMENT:  Discussed the  need for fiscal certainty and                                                             
answered questions during the hearing on SB 3001 and SB 3002.                                                                   
                                                                                                                                
WENDY KING, Director of External Strategies                                                                                     
ANS Gas Development Team                                                                                                        
ConocoPhillips Alaska, Inc.                                                                                                     
PO Box 100360                                                                                                                   
Anchorage, AK  99510                                                                                                            
POSITION  STATEMENT:   Testified on  fiscal certainty  during the                                                             
hearing on SB 3001 and SB 3002.                                                                                                 
                                                                                                                                
S.A. (BILL) McMAHON JR., Commercial Manager                                                                                     
Alaska Gas Development                                                                                                          
ExxonMobil Production Company                                                                                                   
Houston, TX                                                                                                                     
POSITION  STATEMENT:   Spoke about  fiscal  certainty during  the                                                             
hearing on SB 3001 and SB 3002.                                                                                                 
                                                                                                                                
PATRICK COUGHLIN, Senior Counsel                                                                                                
BP                                                                                                                              
Anchorage, AK                                                                                                                   
POSITION  STATEMENT:   Answered questions  during the  hearing on                                                             
SB 3001 and SB 3002.                                                                                                            
                                                                                                                                
DAVID W. MÁRQUEZ, Attorney General                                                                                              
Department of Law                                                                                                               
PO Box 110300                                                                                                                   
Juneau, AK  99811-0300                                                                                                          
POSITION STATEMENT:   Gave a presentation  and answered questions                                                             
during the hearing on SB 3001 and SB 3002.                                                                                      
                                                                                                                                
SENATOR HOLLIS FRENCH                                                                                                           
Alaska State Legislature                                                                                                        
Alaska State Capitol                                                                                                            
Juneau, AK  99801-1182                                                                                                          
POSITION  STATEMENT:   Asked and  answered  questions during  the                                                             
hearing on SB 3001 and SB 3002.                                                                                                 
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR  RALPH  SEEKINS  called the  Senate  Special  Committee  on                                                             
Natural Gas Development meeting to  order at 9:19:34 AM.  Present                                                             
at  the call  to order  were Senators  Fred Dyson,  Bert Stedman,                                                               
Gary Wilken,  Lyda Green,  Ben Stevens,  Con Bunde,  Donny Olson,                                                               
Kim Elton, Lyman Hoffman and  Chair Ralph Seekins; Senator Thomas                                                               
Wagoner arrived  shortly thereafter,  and Senator  Albert Kookesh                                                               
arrived as the meeting was in  progress.  Also in attendance were                                                               
Senators  Gary Stevens,  Hollis French  and Charlie  Huggins, and                                                               
Representatives Max Gruenberg, Ralph Samuels and Kurt Olson.                                                                    
                                                                                                                                
                   SB 3001-OIL/GAS PROD. TAX                                                                                
                SB 3002-STRANDED GAS AMENDMENTS                                                                             
                                                                                                                                
CHAIR SEEKINS opened  the hearing on SB 3001 and  SB 3002, noting                                                               
today's topic would be fiscal certainty.                                                                                        
                                                                                                                                
9:24:11 AM                                                                                                                    
^Jim Clark, Chief Negotiator, Office of the Governor                                                                            
JIM  CLARK, Chief  Negotiator,  Office of  the  Governor, gave  a                                                               
brief history.   After  the 2003  legislature amended  the Alaska                                                               
Stranded   Gas  Development   Act  ("Stranded   Gas  Act"),   the                                                               
administration  began working  on how  to approach  the producers                                                               
and structure  the gas  line agreement.   In  mid-2004, Dr. Pedro                                                               
van  Meurs,  longtime  consultant  to the  state,  met  with  the                                                               
governor to  discuss the basic  proposal, which was  submitted to                                                               
the producers in October 2004.  The  state was to get a gas line,                                                               
with its economic benefits, and would:   1) take its gas in kind,                                                               
2) take ownership in the gas  line and 3) grant fiscal certainty.                                                               
Mr. Clark  emphasized  the  goal  of  making  Alaska  competitive                                                               
worldwide.  He turned the discussion over to Dr. van Meurs.                                                                     
                                                                                                                                
SENATOR  DYSON  asked  to  hear,  at some  point,  a  summary  of                                                               
yesterday's discussions  in the  House about the  relative merits                                                               
of a gross  tax versus a net-profits tax, in  which Dr. van Meurs                                                               
had participated.                                                                                                               
                                                                                                                                
CHAIR SEEKINS  agreed, noting Senator  Wagoner had  indicated his                                                               
own draft proposal would be ready today.                                                                                        
                                                                                                                                
9:27:47 AM                                                                                                                    
SENATOR  BUNDE   highlighted  conflicting  legal   opinions,  and                                                               
reported  that  mail  he  has received  indicates  the  issue  of                                                               
certainty  is  the most  difficult  for  the  public.   He  asked                                                               
Mr. Clark whether  any new information  would raise  the public's                                                               
comfort level  or allay his  concern that the supreme  court will                                                               
reject this, making the legislature's efforts a waste of time.                                                                  
                                                                                                                                
MR. CLARK  surmised two  basic questions  will appear  before the                                                               
supreme court.   First, what does  Article IX, Section 4,  of the                                                               
state constitution  mean by granting  exemptions to Section  1 of                                                               
that article,  which says  the taxing  power cannot  be alienated                                                               
except  as provided  in  this  article?   Mr.  Clark opined  that                                                               
Section 4 provides a  way to do that.  Second,  even if the power                                                               
exists, does  exercising it for 30  years in the case  of oil, or                                                               
45 years  in the case  of gas, go  beyond a reasonable  period to                                                               
exercise the power in Article IX, Section 4?                                                                                    
                                                                                                                                
He indicated  while the first  issue is for the  attorney general                                                               
(AG), Dr.  van Meurs  would explain  what the  administration has                                                               
done.  Mr.  Clark expressed openness and hope that  there will be                                                               
dialogue  with this  committee and  the Senate  as a  whole, with                                                               
this being a vehicle for reaching a satisfactory resolution.                                                                    
                                                                                                                                
SENATOR BUNDE  acknowledged Mr. Clark's  answer as one  he'd been                                                               
looking for.                                                                                                                    
                                                                                                                                
9:31:53 AM                                                                                                                    
^Dr. Pedro van Meurs, Consultant to the Governor                                                                                
DR.  PEDRO VAN  MEURS,  Consultant to  the  Governor, provided  a                                                               
handout,   "Aspects   of   Fiscal  Certainty,   May   16,   2006,                                                               
Presentation  to The  Alaska Legislature."   He  reminded members                                                               
that   the  legislature,   with   the  Stranded   Gas  Act,   had                                                               
crystallized the  concept that perhaps  Alaska's gas  couldn't be                                                               
developed  without  providing  a   degree  of  fiscal  certainty.                                                               
Having  participated   in  developing   that  Act,   he  recalled                                                               
discussion  of a  liquefied natural  gas (LNG)  project to  Asia,                                                               
where low  gas prices and high  costs would result in  a marginal                                                               
project  but the  reverse would  yield a  highly profitable  one;                                                               
investors would have  to balance the downside  with the certainty                                                               
that the balance would be maintained if there were an upside.                                                                   
                                                                                                                                
He explained  that fiscal  certainty wasn't  put in  the Stranded                                                               
Gas Act  for this  particular project,  but was  included because                                                               
Alaska's  resource is  so far  from  the market,  with such  high                                                               
transportation  costs,  that it  is  inherently  risky; he  still                                                               
thinks it was a good decision  by the legislature.  Dr. van Meurs                                                               
said  when  he  went  to  the governor  to  propose  the  current                                                               
package, therefore, fiscal certainty was an essential component.                                                                
                                                                                                                                
He noted  two things are  a little  unusual here.   First, fiscal                                                               
certainty  through   a  contractual   relationship  is   rare  in                                                               
Organisation  for Economic  Co-operation  and Development  (OECD)                                                               
nations, though  common in developing  countries, and  applied by                                                               
OECD nations in the past  and when there are large infrastructure                                                               
projects.   Dr.  van  Meurs  cited the  example  of Hudson's  Bay                                                               
Company, where  contractual certainty was beneficial  when Canada                                                               
wanted  to develop  its frontier  and granted  extensive resource                                                               
and transit  rights.   He acknowledged  the concern  of providing                                                               
fiscal certainty  in Alaska  when Britain  and Norway  don't have                                                               
it.   Second, it is  unusual to  start with fiscal  certainty for                                                               
gas and then  add it for oil,  where it hasn't existed.   Dr. van                                                               
Meurs indicated he hoped to address these concerns.                                                                             
                                                                                                                                
9:38:00 AM                                                                                                                    
DR.  VAN   MEURS  specified  that   fiscal-certainty  contractual                                                               
arrangements  typically occur  in  the world  if:   1)  investors                                                               
don't trust the political stability  of the governments involved,                                                               
as seen  in Angola, or 2)  the risk profile of  the investment is                                                               
so dramatic that  there must be absolute  certainty when weighing                                                               
positive conditions against negative  ones, as illustrated by the                                                               
aforementioned Hudson's Bay Company example.                                                                                    
                                                                                                                                
He pointed  out that  the contemplated  project has  an immensely                                                               
unusual risk  profile:   If costs  were high  and prices  low, it                                                               
would be  the worst in the  world in terms of  net present value;                                                               
if the  reverse were true,  however, the net present  value would                                                               
be more than for  any other project in the world.   Dr. van Meurs                                                               
emphasized the  difficulty for an  investor to weigh  now whether                                                               
to  actually start  construction in  a  few years.   Because  the                                                               
outcome is unknown, the justification  for putting so much on the                                                               
line is to really benefit from a positive scenario.                                                                             
                                                                                                                                
He highlighted cost escalation,  noting Alberta, Canada, is under                                                               
enormous stress from this.  Dr.  van Meurs said Shell announced a                                                               
week  ago that  it is  postponing its  oil-sands project  because                                                               
costs have risen 50 percent in  just one year, and cost estimates                                                               
for the  Mackenzie Valley  project have gone  up 50  percent over                                                               
the last three years.  This escalation poses a huge risk.                                                                       
                                                                                                                                
9:44:01 AM                                                                                                                    
DR. VAN  MEURS pointed out  changes in  oil and gas  prices since                                                               
his presentation two months ago.   He said gas prices in relation                                                               
to  oil are  lower today  than  ever in  the U.S.   However,  oil                                                               
prices on  an energy-equivalent basis  are 14 times the  price of                                                               
gas; typically,  they're 6  times higher  because, on  an energy-                                                               
equivalent basis, they compete.  If  gas prices stay low in North                                                               
America   relative  to   oil,  it   makes  this   project  highly                                                               
unattractive  on  an international  scale,  since  gas prices  in                                                               
Europe and  the Far East  are holding up  far better in  the last                                                               
few months.                                                                                                                     
                                                                                                                                
He  told members  that  the  volatility of  these  factors is  an                                                               
immense risk to investment.   If investors can benefit from large                                                               
profits, however, they  are willing to risk  escalating costs and                                                               
prices  that  continue to  slip  relative  to  crude oil.    This                                                               
project  will  go  forward  only   if  investors  can  positively                                                               
evaluate this balance, Dr. van Meurs predicted.                                                                                 
                                                                                                                                
He  noted  reasonable legislators  could  differ  by as  much  as                                                               
10 percent  on  what the  government  take  should be.    Without                                                               
fiscal stability,  a future  legislature could  decide to  add 10                                                               
percent to the  government take, another billion  dollars a year.                                                               
If oil  prices then  collapsed and  costs increased,  the project                                                               
would be  a disaster.  Dr.  van Meurs said these  are reasons for                                                               
fiscal stability.                                                                                                               
                                                                                                                                
9:51:51 AM                                                                                                                    
DR.  VAN  MEURS  explained  four  methods  for  providing  fiscal                                                               
stability around  the world:  1)  an exemption system such  as in                                                               
Malaysia or Egypt, where a  law exempts the investor from certain                                                               
taxes  and then  other taxes  are agreed  to contractually;  2) a                                                               
guarantee system in which a  nation passes a law guaranteeing the                                                               
terms of the  contract; 3) the "pay on behalf"  system in which a                                                               
national  oil  company  and  a  private oil  company  do  a  deal                                                               
together, with the former agreeing to  pay taxes on behalf of the                                                               
latter  if   conditions  change,  and  guaranteeing   the  fiscal                                                               
structure will  stay the same;  and 4) the fiscal  balance system                                                               
wherein a country  says, in the contract, that the  deal is based                                                               
on  today's conditions  for oil  and  gas, and  if any  condition                                                               
changes, there will be renegotiation.                                                                                           
                                                                                                                                
He  pointed  out that  Alaska's  proposed  contract combines  the                                                               
exemption system  with a "pay  on behalf"  system.  If  there are                                                               
tax overpayments, there will be a refund to investors.                                                                          
                                                                                                                                
9:55:37 AM                                                                                                                    
DR. VAN MEURS asked:  If the  investment is in gas, why is fiscal                                                               
stability  needed  for  oil?     He  answered  that,  first,  the                                                               
legislature could decide  to take another billion  dollars on oil                                                               
because of being unhappy with the  gas contract, for example.  In                                                               
response,  companies likely  would  refuse  to reinvest;  because                                                               
there is no work  commitment for oil, they'd be free  to do so in                                                               
order to  minimize the  extra government take  on oil,  as they'd                                                               
perceive it.  Second, oil and  gas are found together in most new                                                               
exploration.  If  terms aren't known for both,  it isn't possible                                                               
to make  an investment.   If there is  a guarantee on  the fiscal                                                               
system  for  gas  but  not   oil,  then  the  economics  of  that                                                               
exploration venture are discounted because of the risk on oil.                                                                  
                                                                                                                                
10:00:52 AM                                                                                                                   
DR. VAN  MEURS asked:   Why is it  so beneficial for  Alaska that                                                               
companies  have the  maximum incentive  to explore  for gas?   He                                                               
answered  that gas  almost  invariably  contains condensates  and                                                               
large volumes of liquids at  the same time; typically, 50 barrels                                                               
of condensates  occur with every million  cubic feet of gas.   So                                                               
far, there is only enough gas  to fill this line for 18-20 years.                                                               
If the  line can be filled  for 40 or 50  years instead, Alaskans                                                               
will be the big beneficiaries, along with the investors.                                                                        
                                                                                                                                
He noted  the current sponsors  might not  even be the  owners of                                                               
the  extra gas.   Dr.  van Meurs  said fiscal  stability for  oil                                                               
isn't a one-way  street, given to satisfy investors.   It is also                                                               
fundamental to  an exploration  strategy to  fill this  line with                                                               
gas for decades to come - for two generations of Alaskans.                                                                      
                                                                                                                                
He discussed  how long  fiscal stability is  needed.   Looking at                                                               
international exploration  contracts that have  fiscal stability,                                                               
and  having analyzed  about 46  countries that  do that,  Dr. van                                                               
Meurs reported that 35 years is  the average or typical time that                                                               
companies  receive fiscal  stability for  oil  and gas.   Why  45                                                               
years  for gas?   In  many countries  it is  customary to  give a                                                               
longer period of  fiscal stability for gas than oil,  by 5, 10 or                                                               
15 years.   Even  if gas  is found,  governments realize  that an                                                               
infrastructure  must be  put  in place,  that  customers must  be                                                               
found and  that the gas  must be marketed.   This can take  10 or                                                               
15 years.                                                                                                                       
                                                                                                                                
10:06:35 AM                                                                                                                   
DR.  VAN  MEURS  addressed  why this  is  essential  for  Alaska.                                                               
Emphasizing the  desire to have  the pipeline full for  50 years,                                                               
he  suggested thinking  of  a  new explorer  that  must find  gas                                                               
before the first  open season or first expansion.   This could be                                                               
soon.  He asked whether someone  would commit tens of millions of                                                               
dollars to explore without knowing  whether it is possible to get                                                               
in the pipeline, or with a  concern that fiscal stability will be                                                               
taken away before first gas.                                                                                                    
                                                                                                                                
He offered  that the least  the state  can do, for  new explorers                                                               
for gas, is to say if they  take a double risk - exploration risk                                                               
plus the chance  the pipe might not be available  if gas is found                                                               
- then they'll get the same  fiscal stability as those that built                                                               
the gas  line.  Dr.  van Meurs suggested this  shows appreciation                                                               
for new explorers, who'll fill  that line if Alaska is fortunate.                                                               
The  periods  exist to  satisfy  basic  concerns about  risk  and                                                               
reward, but the concepts are also  good for Alaska.  Thus fiscal-                                                               
stability provisions are in the contract.                                                                                       
                                                                                                                                
10:09:16 AM                                                                                                                   
SENATOR  BUNDE  agreed  that  encouraging  exploration  and  more                                                               
investment  is   essential  for  Alaska's   economic  well-being.                                                               
Acknowledging  the need  of investors  and  the corporations  for                                                               
fiscal certainty, he requested a  reaction from Dr. van Meurs and                                                               
Mr. Clark about a notion discussed  in the House:  indexing taxes                                                               
to investment so the state can have some certainty as well.                                                                     
                                                                                                                                
MR.  CLARK responded  that if  there  is no  decision to  invest,                                                               
there won't  be 30  years of  fiscal certainty  on oil,  and thus                                                               
there is  a linkage between  investment and  the fiscal-certainty                                                               
period.   The  contemplated contract  has two  periods of  fiscal                                                               
certainty.   The  first,  about  4 years,  is  from  the date  of                                                               
signing the proposed gas contract  until project sanctioning.  If                                                               
the decision is not to build  the project, there'd no longer be a                                                               
contract  or fiscal  certainty on  oil.   When  talking about  30                                                               
years or 45 years, it assumes success in moving forward.                                                                        
                                                                                                                                
DR.  VAN MEURS  added  that  international governments  typically                                                               
don't link  fiscal systems to  levels of investment.   They focus                                                               
more  on  the  level  of  production   of  oil  and  gas.    Some                                                               
differentiate   between    base   production    and   incremental                                                               
production, and  some have  sliding scales  and better  deals for                                                               
marginal fields.                                                                                                                
                                                                                                                                
SENATOR  BUNDE  said  he'd  been   led  to  believe  there  is  a                                                               
relationship  between  investment  and  production.    He  asked:                                                               
Because  of  the  45-year  certainty for  gas,  would  the  state                                                               
benefit with  respect to certainty if  there were a index  on gas                                                               
taxes that had an escalator as prices rose?                                                                                     
                                                                                                                                
DR.  VAN MEURS  replied  that,  internationally, there  typically                                                               
isn't indexing of  gas fiscal terms to oil prices  or vice versa;                                                               
he couldn't  think of  any such example.   The  prices themselves                                                               
seem  to  accommodate for  escalation  and  inflation over  time.                                                               
Today's higher  prices for oil  and gas,  for the most  part, are                                                               
due to escalation  and inflation; for instance,  gas prices today                                                               
aren't much higher than in 1922 if looked at in 1922 dollars.                                                                   
                                                                                                                                
He added although some governments  link gas prices to oil prices                                                               
in order  to establish  a local market  price, the  fiscal system                                                               
isn't  indexed, but  the  gas  price itself  is;  this occurs  in                                                               
nations where prices  are controlled.  Dr. van  Meurs referred to                                                               
previous  discussion  of   progressive  and  regressive  systems,                                                               
noting that the indexing of systems  to a number of variables can                                                               
occur in that way.                                                                                                              
                                                                                                                                
10:21:01 AM                                                                                                                   
SENATOR BUNDE  clarified that  he wants to  ensure for  the state                                                               
that there will be some  progressivity for gas through the period                                                               
of tax  certainty, much as  progressivity is being  discussed for                                                               
oil.    He  suggested  he'd  perhaps  used  the  term  "indexing"                                                               
inaccurately.                                                                                                                   
                                                                                                                                
MR. CLARK  pointed out that  oil is treated differently  than gas                                                               
in the proposed  contract.  The state is taking  its gas in kind.                                                               
Thus the  contract specifies the  split, which is  what continues                                                               
for 45 years.  As the value  of gas escalates, the state will get                                                               
increased value  in the marketplace.   For  oil, there will  be a                                                               
tax.  There are two different systems, though interrelated.                                                                     
                                                                                                                                
10:23:02 AM                                                                                                                   
DR.  VAN MEURS  emphasized  that progressivity  for  gas and  oil                                                               
internationally  are  entirely  different.   For  oil,  it  means                                                               
grabbing an  extra share for  the state if conditions  are better                                                               
than expected.   For gas,  it means lowering the  government take                                                               
if  conditions  are less  than  expected.    He referred  to  his                                                               
previous comments on this matter,  reminding members that he is a                                                               
proponent of  progressive systems and  had advocated for  such in                                                               
the original Stranded Gas Act.                                                                                                  
                                                                                                                                
He   acknowledged  some   countries  have   "take/take"  systems.                                                               
Dr. van  Meurs cited  Canada's Mackenzie  Valley  pipeline as  an                                                               
example  where there  is a  progressive system  based on  profit.                                                               
However, the purpose  there isn't to grab an  additional share of                                                               
gas  revenues  if conditions  are  favorable;  rather, it  is  to                                                               
ensure that the government take  is less if conditions are worse.                                                               
Australia and Russia did likewise.   For large-distance exporters                                                               
of gas,  analyzing the  contracts on  a price-sensitive  basis as                                                               
he'd shown  previously in  graphs, Dr. van  Meurs said  all these                                                               
systems  go  pretty flat  when  the  price  goes over  a  certain                                                               
minimum price  of $2 per  million Btu  at the wellhead;  he cited                                                               
Qatar as a further example.                                                                                                     
                                                                                                                                
He highlighted  the difference between  the bargaining  power the                                                               
State of Alaska  has for oil versus gas.   Dr. van Meurs said oil                                                               
is becoming scarce,  as reflected in the prices;  hence Alaska is                                                               
establishing  strong   incentives  for  new  development   and  a                                                               
progressive  system.   For  gas, however,  there  are 150  "North                                                               
Slopes"  and people  willing to  sell  at a  discount, either  in                                                               
price or  in fiscal terms; thus  the state is securing  a massive                                                               
new development that  will have only very  slight progressivity -                                                               
not doing what  Canada and Australia did, but saying  that if the                                                               
price of gas goes down, there won't be a better deal.                                                                           
                                                                                                                                
He explained that  Alaska's system will be flat if  the gas price                                                               
goes either  down or up.   The state benefits when  there are low                                                               
prices,  although the  companies have  a tough  time.   But under                                                               
high  prices  there   will  be  an  attractive   profit  for  the                                                               
companies.    Dr.  van  Meurs   concluded  by  saying  Alaska  is                                                               
maximizing its bargaining power,  being somewhat careful with gas                                                               
and  somewhat  more   progressive  on  oil;  this   is  the  best                                                               
combination for Alaska's future.                                                                                                
                                                                                                                                
10:28:37 AM                                                                                                                   
SENATOR ELTON  asked how many countries  provide fiscal certainty                                                               
on oil for a gas project, or vice versa.                                                                                        
                                                                                                                                
DR. VAN  MEURS replied that the  normal practice internationally,                                                               
in all  46 contracts he'd  analyzed, is that fiscal  stability is                                                               
granted for  oil and gas  together.  He  cited Qatar as  the best                                                               
example   of  a   country  that   successfully  exports   massive                                                               
quantities of  gas, with  a "pay on  behalf" system  to guarantee                                                               
tax stability  on oil  as well  as gas  for a  typical gas-export                                                               
deal;  the 50  barrels a  day  of condensates  make the  projects                                                               
attractive,  and  Qatar is  becoming  an  important oil  exporter                                                               
because of them.   He reiterated that Alaska  is somewhat unusual                                                               
in granting stability  on oil where none existed  before, for the                                                               
reasons he'd explained.                                                                                                         
                                                                                                                                
10:31:14 AM                                                                                                                   
SENATOR  STEDMAN asked  about pages  16  and 17  of the  handout,                                                               
relating to how net present value  changes over time as a project                                                               
nears  development.    Comparing  it  with  the  fiscal  interest                                                               
findings on  page 73 of the  proposed contract, he said  it shows                                                               
there is  more value to the  state in oil  than in gas.   He also                                                               
said tax  policies in  the state  haven't been  erratic, changing                                                               
every few years.   He asked:   With the value to  the state being                                                               
in oil in today's dollars,  especially at higher prices, why give                                                               
away  the sovereign  right  to modify  the oil  tax  for such  an                                                               
extended period, instead of keeping some flexibility?                                                                           
                                                                                                                                
DR.  VAN MEURS  acknowledged the  validity of  that concern,  but                                                               
explained   that  states   which   enter  into   fiscal-stability                                                               
contracts don't  perceive it as giving  away sovereignty; rather,                                                               
they  see  it  as  exercising sovereignty  to  achieve  the  best                                                               
benefit.                                                                                                                        
                                                                                                                                
He noted the graphs in his  handout show that the fundamentals of                                                               
the  proposed project  are extremely  sensitive to  the timeline.                                                               
Dr. van  Meurs said the profitability  increases enormously after                                                               
this contract  is begun and  the first couple of  billion dollars                                                               
are spent, providing  more certainty of moving  forward.  Without                                                               
fiscal  stability, however,  reasonable legislators  in 10  years                                                               
would more  likely want  to increase taxes  if prices  were high;                                                               
this is  the concern of investors.   If only gas  were locked up,                                                               
the tendency  would be to  take an extra  billion from oil.   And                                                               
while the legislature has been  equally stable in its handling of                                                               
taxes  when  compared with  Western  countries,  the opinions  of                                                               
legislators differ as to what is reasonable, justifiably so.                                                                    
                                                                                                                                
10:36:23 AM                                                                                                                   
SENATOR STEDMAN  asked:   If fiscal certainty  is given  for both                                                               
oil  and gas,  how does  the state  protect itself  from negative                                                               
economic changes in 15-25 years, until  there is an "opener"?  He                                                               
suggested the state  would go to the aid of  the industry in that                                                               
instance, since the state depends on its revenues.                                                                              
                                                                                                                                
DR. VAN MEURS acknowledged that  concern, noting similar ones are                                                               
expressed worldwide  when a  contract of  this nature  is entered                                                               
into.   As mentioned previously  and in his  petroleum production                                                               
tax (PPT) report, Dr. van Meurs  said he sees the government take                                                               
rising worldwide  for oil.  Companies  are increasingly concerned                                                               
about  booking reserves.   With  the change  in oil  prices, many                                                               
governments  are  reassessing  their rightful  share  from  their                                                               
resources, which  he reported as  one consideration  in designing                                                               
the  PPT.   Whether there  is a  similar trend  for gas  isn't so                                                               
clear, however.                                                                                                                 
                                                                                                                                
He surmised  20-30 years  from now there'll  be a  very different                                                               
oil  and gas  industry.   Giving some  personal history,  Dr. van                                                               
Meurs noted  he began as a  geologist in 1970, when  theories and                                                               
technology were quite different.                                                                                                
                                                                                                                                
10:41:04 AM                                                                                                                   
DR.  VAN  MEURS stressed  how  critical  it  is that  Alaska  put                                                               
everything  in place  to have  the  gas project  go forward  this                                                               
time.   He emphasized  immense resources  of stranded  gas around                                                               
the  world.    Small  political   changes  could  unlock  massive                                                               
resources.    For  example,  Russia  appears  to  be  sitting  on                                                               
40 percent of the  world's gas resources, perhaps equal  to 40 or                                                               
50 North  Slopes, although the world  has room for only  1 more a                                                               
year.   He gave other examples.   Predicting a 30  percent chance                                                               
that  this  gas  project  might  not  go  forward,  even  with  a                                                               
contract, he  suggested focusing unconditionally on  getting this                                                               
project.  Otherwise, it could be lost for a long time.                                                                          
                                                                                                                                
He reiterated concern about the low  price of gas relative to oil                                                               
today, warning  that Alaska  could be in  dire straits  without a                                                               
gas  project for  the next  decade.   Dr. van  Meurs acknowledged                                                               
that hindsight  in the future  may show  there could have  been a                                                               
better deal, but highlighted the need  to put an extra $2 billion                                                               
to $6 billion a year into  Alaska's economy and to secure it now,                                                               
while companies are interested in developing gas in Alaska.                                                                     
                                                                                                                                
10:45:07 AM                                                                                                                   
SENATOR STEDMAN  requested further  discussion of  Alberta, where                                                               
he  recalled incentives  for  the industry  were  followed by  an                                                               
economic  boom, which  the government  wants to  slow because  of                                                               
housing and labor  challenges and so forth.  He  asked whether it                                                               
is overstimulated there.                                                                                                        
                                                                                                                                
DR. VAN  MEURS explained  that Alberta did  what is  proposed for                                                               
the  PPT.   Alberta's  oil  sands  and  heavy oil  deposits  were                                                               
developed using a profit-based system.   Over the last 20 years -                                                               
particularly the last 3 or 4,  with high oil prices - success has                                                               
led  to an  immense escalation  of costs.   They  cannot get  the                                                               
workers, and  municipalities cannot accommodate more  people.  He                                                               
agreed it is a sign of overstimulation.   The hope had been to go                                                               
to $2.5 million barrels  a day 10 years from now,  and to add the                                                               
Mackenzie line.   Now it is all  in doubt.  If  costs increase so                                                               
much  with this  overstimulation of  the economy,  then everybody                                                               
starts to reassess investments, Dr. van Meurs noted.                                                                            
                                                                                                                                
He  pointed out  that what  makes  this proposed  gas project  so                                                               
risky  is its  target market,  Alberta,  which is  almost out  of                                                               
control  economically  now.    Dr.  van  Meurs  said  Alberta  is                                                               
pleading  with   Canada's  federal   government  to   allow  more                                                               
immigration  so  that more  people  coming  to the  province  can                                                               
develop  the   resources.    Agreeing  that   these  are  serious                                                               
problems,  Dr.  van  Meurs  suggested  this  could  well  be  the                                                               
Achilles' heel of the Alaska gas project.                                                                                       
                                                                                                                                
10:48:52 AM                                                                                                                   
SENATOR  STEDMAN remarked  that  he  hopes to  see  the day  when                                                               
Alaska has  an overheated economy  and the problems  Alberta has,                                                               
trying to help communities expand their infrastructure.                                                                         
                                                                                                                                
SENATOR DYSON  offered his sense  that people are  concerned that                                                               
the  State  of  Alaska  will  perhaps  enter  into  a  suboptimal                                                               
agreement,  with no  chance to  fix it  later.   He recalled  the                                                               
perception  in the  1970s with  the Trans-Alaska  Pipeline System                                                               
(TAPS) that the state, in its  inexperience, got the short end of                                                               
the stick  and could  have done  much better  if advice  had been                                                               
received from experts like Dr. van Meurs.                                                                                       
                                                                                                                                
He  surmised  fiscal  certainty  will   be  a  major  concern  of                                                               
investors.   Senator Dyson  asked if  there is  some way  to have                                                               
certainty for a  significant period that gets  investors past the                                                               
permitting  process and  politically  affected issues,  including                                                               
those in  Canada, and  through the  construction period  and some                                                               
time during which there could be  a good shot at recovering major                                                               
portions  of the  investment,  thereby  diminishing risk  without                                                               
going all the way out to 45 years.                                                                                              
                                                                                                                                
10:52:05 AM                                                                                                                   
DR. VAN MEURS replied that  the international practice is to have                                                               
fiscal stability for the term of  the contract.  That is also how                                                               
the stranded  gas contract is being  structured.  As for  doing a                                                               
suboptimal  deal, Dr.  van Meurs  said  he has  the same  concern                                                               
whenever there is a deal,  and also understands concern about the                                                               
duration of  fiscal certainty.   He pointed  out that  the longer                                                               
there is  fiscal certainty,  the more  secure investors  feel and                                                               
vice versa.                                                                                                                     
                                                                                                                                
He  explained  that  fiscal certainty  is  about  ensuring  extra                                                               
profits - well  over a reasonable rate of return  - to compensate                                                               
for the  enormous risk.   Dr. van Meurs  noted it is  a difficult                                                               
equation  and agreed,  from an  Alaskan  point of  view, that  it                                                               
would be  more desirable  to shorten  that period,  creating more                                                               
flexibility for the  future.  The problem is,  it doesn't address                                                               
the  risk issue.   For  that reason,  contracts that  have fiscal                                                               
stability always do it for the term of the contract.                                                                            
                                                                                                                                
10:56:20 AM                                                                                                                   
SENATOR DYSON  said that was  a helpful  and frank response.   He                                                               
asked  Mr.  Clark  what  the  administration  is  considering  to                                                               
mitigate concerns about locking in the tax structure.                                                                           
                                                                                                                                
MR. CLARK called  it a work in  progress.  He said  the risks are                                                               
asymmetrical:   the  downside risk  of high  costs/low prices  is                                                               
much  bigger  on  the  downside  for  these  companies  than  the                                                               
benefits of low costs/high prices,  which gives the extra profits                                                               
Dr. van Meurs discussed.  Mr.  Clark indicated the desire to find                                                               
a way to attend to Alaskans'  concerns about this issue and still                                                               
address the risk,  dealt with in the contract by  giving 30 years                                                               
of certainty for oil  and 45 years for gas.  "We  know we need to                                                               
do something," he added.                                                                                                        
                                                                                                                                
10:58:52 AM                                                                                                                   
SENATOR  DYSON asked  whether,  once the  capital  risk has  been                                                               
recovered,  this   will  give  a   guaranteed  cash   return  for                                                               
investors.                                                                                                                      
                                                                                                                                
DR.  VAN  MEURS answered  that  there  is an  immense  difference                                                               
between  the midstream  and upstream.   As  soon as  the industry                                                               
makes  the shipping  commitments  -  the core  risk  element -  a                                                               
pipeline company can construct a  line and have a relatively low-                                                               
risk, long-term,  regulated existence.  However,  these pipelines                                                               
cannot be  built without  a $60  billion or  $40 billion shipping                                                               
commitment,  which  "upstreamers" must  make  to  ship their  gas                                                               
through a  pipeline.   The extra reward  is not  for constructing                                                               
the pipeline  and getting a  reasonable rate of return;  once the                                                               
shipping commitment  is in place,  many parties could do  that if                                                               
they  offered  the  lowest-cost-possible  transportation  system.                                                               
Instead, the risk is in making that immense shipping commitment.                                                                
                                                                                                                                
He noted this  risk goes against the upstream,  not the pipeline.                                                               
The  producer, which  has ship-or-pay  commitments, is  immensely                                                               
exposed if  gas prices fall  and regulated pipeline  tariff costs                                                               
rise.    Dr. van  Meurs  agreed  with Mr. Clark  that  it  is  an                                                               
asymmetrical risk.  If everything  is negative, the company would                                                               
be stuck, performing badly in  terms of the typical earning power                                                               
of an  international company;  this would  be received  poorly by                                                               
shareholders.  On  the other hand, this must  be balanced against                                                               
the  extra profits  discussed  previously.   Dr.  van Meurs  said                                                               
guaranteeing  the shipping  commitments for  a midstream  project                                                               
isn't a regulated activity; it is a high-risk venture.                                                                          
                                                                                                                                
11:02:50 AM                                                                                                                   
SENATOR  DYSON  requested  confirmation   that  once  those  firm                                                               
transportation (FT)  commitments are  obtained, the risk  for the                                                               
upstream  folks,  the producers,  is  that  prices will  fall  or                                                               
transportation costs will go up.   He surmised there is also some                                                               
risk of not having the  anticipated volume that was committed to,                                                               
as well as risk related to market prices.                                                                                       
                                                                                                                                
DR. VAN MEURS affirmed that.                                                                                                    
                                                                                                                                
MR.  CLARK added  that  a tremendous  upside  potential could  be                                                               
captured after the  period of the contract  if the infrastructure                                                               
exists.  The key is  getting the infrastructure in place, because                                                               
information indicates there could  be 100-200 trillion cubic feet                                                               
(Tcf)  of gas  on the  North  Slope, not  counting potential  gas                                                               
hydrates.    Currently,  there  is   36  Tcf  of  gas,  with  the                                                               
expectation of  more.  He stated  the desire to run  the pipeline                                                               
at 6 billion cubic feet (Bcf)  a day, which means finding another                                                               
35 Tcf to  put in  the line, and  then to go  beyond the  life of                                                               
this contract.  He likened it  to the 1862 Pacific Railway Act in                                                               
its effect.                                                                                                                     
                                                                                                                                
11:05:16 AM                                                                                                                   
CHAIR  SEEKINS brought  attention to  Alberta's high  real estate                                                               
prices and manpower problems, including  that they are looking to                                                               
immigration  to fill  positions during  peak construction  of the                                                               
Mackenzie Valley  pipeline, which anticipates first  gas down the                                                               
pipeline in perhaps 2012.                                                                                                       
                                                                                                                                
SENATOR  BUNDE  remarked  that  what  goes  up  must  come  down.                                                               
Referring to Senator  Stedman's previous comment, he  told how in                                                               
1985, in  Anchorage, neighbors lost businesses  and homes because                                                               
of the overheated economy there.                                                                                                
                                                                                                                                
CHAIR SEEKINS  recalled that  after the  oil pipeline  was built,                                                               
Fairbanks had more than 30 percent unemployment.                                                                                
                                                                                                                                
SENATOR STEDMAN  clarified that the  issue isn't to  overheat the                                                               
economy and then  tank it, but to have an  "earnings trap" on the                                                               
oil revenue  to stimulate exploration  and growth; this  will put                                                               
the  state  in  the  position  of  managing  a  growing  economy.                                                               
Alluding to  SB 3001,  he suggested  that is  the purpose  of the                                                               
20 percent credit in the proposed oil tax.                                                                                      
                                                                                                                                
The committee took an at-ease from 11:10:19 AM to 11:30:21 AM.                                                              
                                                                                                                                
SENATOR WILKEN reported hearing from  hundreds of people over the                                                               
last few  months who are concerned  there will be a  30-year lock                                                               
on oil  prices, with a gas  pipeline in return, through  a "trust                                                               
me"  model.   While recognizing  the work  of Dr.  van Meurs  and                                                               
Mr. Clark, he emphasized the need  to avoid having a reserves tax                                                               
rammed  down  people's throats,  in  particular.   He  urged  the                                                               
administration, with  its consultants; the legislature,  with its                                                               
consultants; and  the producers  to come  together to  figure out                                                               
how to answer the question, "How  do you know?"  He expressed his                                                               
belief that it will be such a team that fixes this.                                                                             
                                                                                                                                
11:35:30 AM                                                                                                                   
MR.   CLARK   accepted   the   challenge   on   behalf   of   the                                                               
administration,  relating his  opinion that  the producers  would                                                               
agree  as well.    However, he  emphasized that  this  is in  two                                                               
parts.  The "how do you know"  question isn't for 30 years, but 4                                                               
or 5 years, the  time to get to project sanction  and make a yes-                                                               
or-no decision.   Any certainty for that period is  a putative 20                                                               
percent split  if the gas pipeline  is built.  If  the investment                                                               
decision  is  affirmative,  it continues  through  the  remaining                                                               
period.   If  not, nothing  has been  done with  respect to  gas.                                                               
With respect to oil, under  what the administration has proposed,                                                               
for  4 or  5  years there'd  be a  locked-in  rate, whatever  the                                                               
legislature decides is an appropriate tax.                                                                                      
                                                                                                                                
Mr.  Clark acknowledged  that the  administration hasn't  clearly                                                               
communicated to  the public  why the  contract doesn't  contain a                                                               
firm schedule.   He clarified that  this contract is a  step, not                                                               
the whole project.  Just  as fiscal and administrative terms were                                                               
worked out at  the federal level, this contract  works out fiscal                                                               
terms.  There  is still a need to go  before federal agencies for                                                               
permitting  to  see what  additions  will  affect the  economics;                                                               
other  items affecting  the project  include  the Canadian  link.                                                               
While $4 billion has been talked  about as the state's 20 percent                                                               
interest, it is based on data  several years old and will change.                                                               
Acknowledging  that  the legislature  won't  want  to go  forward                                                               
without knowing details, Mr. Clark  emphasized that what is being                                                               
discussed is a progression leading to an answer in 4 or 5 years.                                                                
                                                                                                                                
He opined that the contract  will move this forward significantly                                                               
because the  economics are  nailed down.   Fiscal  certainty will                                                               
attract capital  and make the  leases held by the  producers more                                                               
valuable, giving  them incentive to  invest.  As to  whether this                                                               
deal is suboptimal,  Mr. Clark said they all  wondered whether it                                                               
was the best deal they could  have gotten for the state.  Calling                                                               
these fair  questions, Mr. Clark reiterated  the administration's                                                               
preparedness to sit down with the legislature and the producers.                                                                
                                                                                                                                
11:40:36 AM                                                                                                                   
SENATOR WILKEN  related his belief  that Alaskans  aren't looking                                                               
for finite, discrete steps, but  are looking for broad benchmarks                                                               
that  show  the  state,  with   its  resources,  is  holding  the                                                               
producers to their  promise, given a signed contract,  to build a                                                               
gas  pipeline.   He suggested  the need  to provide  some comfort                                                               
level for  the voters.   Senator  Wilken added  that he  would do                                                               
what he could to help move it along.                                                                                            
                                                                                                                                
SENATOR   DYSON  said   he  shared   that   concern.     Although                                                               
acknowledging the difficulty of  firm deadlines, he reported that                                                               
some people  with vast experience  in the pipeline  business have                                                               
suggested  there  could be  fairly  firm  deadlines in  the  work                                                               
commitment, including  filing of  the application  and submitting                                                               
the environmental impact statement (EIS),  and a firm date on the                                                               
open  season  and  Federal Energy  Regulatory  Commission  (FERC)                                                               
certificate.     He  noted  that   this  is  provided   that  the                                                               
commissioner  of the  Department of  Natural Resources  (DNR), or                                                               
whoever  is   appropriate,  could  allow  relief   based  upon  a                                                               
presentation of cause.                                                                                                          
                                                                                                                                
He suggested  those firm  dates could  be included  with somewhat                                                               
draconian "clubs"  in the contract  - losing protection  from the                                                               
reserves tax,  for instance,  or losing  Point Thomson  or fiscal                                                               
certainty.  Senator  Dyson requested a response on  the merits of                                                               
the aforementioned strategy.                                                                                                    
                                                                                                                                
11:43:28 AM                                                                                                                   
MR.  CLARK replied  that what  exists isn't  dissimilar.   In the                                                               
summary of  the Qualified Project  Plan is a Gantt  chart setting                                                               
out a time period for each  item mentioned by Senator Dyson.  The                                                               
producers can change  that chart by changing "x" to  "y" in terms                                                               
of time.   The state can  file a notice of  dispute and terminate                                                               
the  contract if  something  doesn't wash,  based  on a  two-part                                                               
standard:   Advance the project  diligently, as is  prudent under                                                               
the circumstances.   Mr. Clark  noted the latter part  relates to                                                               
the  prudent man  rule, which  ties  in with  the two-phase  FERC                                                               
process,  presenting a  tariff  in  order to  get  into the  open                                                               
season and doing standardized preapplication work with FERC.                                                                    
                                                                                                                                
He emphasized this  is a clear, step-by-step process.   The state                                                               
will know  whether it is being  advanced as is prudent  under the                                                               
circumstances,  using the  prudent  man rule,  which  is akin  to                                                               
common law.   Mr. Clark explained that an  arbitrator would apply                                                               
those standards to the facts  and circumstances that exist when a                                                               
notice of  dispute is brought  because of dissatisfaction.   When                                                               
the  pieces  are  put  together  with respect  to  what  will  be                                                               
confronted  on  the  ground,  he  said it  is  tighter  than  the                                                               
administration has been able to communicate well to the public.                                                                 
                                                                                                                                
11:46:35 AM                                                                                                                   
SENATOR DYSON  asked:  If  the state  files a notice  of dispute,                                                               
with whom would it be filed?                                                                                                    
                                                                                                                                
MR. CLARK answered  that under the system put  together, it would                                                               
be  with the  arbitration  tribunal.   During the  preapplication                                                               
phase, for example, when there  should be advancement to the open                                                               
season,  the producers  might  stop their  progress.   The  state                                                               
would file a notice of dispute.   The arbitrator could agree that                                                               
the project wasn't being advanced  as diligently as prudent under                                                               
the  circumstances,  and the  contract  would  terminate.   There                                                               
would be  $1 billion of  project-design and permitting  work into                                                               
it, and the  producers would lose that and  the fiscal certainty.                                                               
If a reserves  tax has been passed in November,  that would enter                                                               
into it.  There would be a lot to lose.                                                                                         
                                                                                                                                
11:48:11 AM                                                                                                                   
SENATOR DYSON  asked about  having firm dates  that "x"  will get                                                               
filed 24 months after the contract  is signed by all parties, for                                                               
instance, making it  incumbent upon the producers  to explain why                                                               
they  cannot reasonably  do it  if the  deadline isn't  met.   He                                                               
agreed with Senator  Wilken that having something  firm will give                                                               
Alaskans  more  comfort.    Senator   Dyson  noted  it  has  been                                                               
represented  to  him  that  this arbitration  process  is  a  bit                                                               
unusual, weighted against the state.   He asked Dr. van Meurs how                                                               
other sovereign entities deal with such issues.                                                                                 
                                                                                                                                
DR. VAN MEURS answered that  internationally there is an enormous                                                               
distinction between upstream contracts  and mega-projects of this                                                               
type.   The former  involve a contract  just to  explore, develop                                                               
and produce, whereas the latter  have both upstream and midstream                                                               
components.    It  is a  normal  practice  in  production-sharing                                                               
contracts  or  concession  contracts  to have  firm  periods  for                                                               
exploration,  and   they  often  include  certain   minimum  work                                                               
obligations with deadlines.                                                                                                     
                                                                                                                                
SENATOR DYSON asked about the midstream.                                                                                        
                                                                                                                                
DR. VAN MEURS clarified that  he agreed with testimony that these                                                               
deadlines and  work commitments  are common  internationally, but                                                               
only if  restricted to  exploration, development  and production.                                                               
For  comprehensive international  projects that  include upstream                                                               
and midstream  components - all  of which  he'd looked at  - that                                                               
philosophy isn't  found.   Rather, there is  a far  more flexible                                                               
approach  because  governments  realize these  projects  are  too                                                               
complex, with too many facets, to guarantee deadlines.                                                                          
                                                                                                                                
He opined that Alaska's proposed  contract is quite good compared                                                               
with  other large  upstream-midstream contracts.   Dr.  van Meurs                                                               
cited  examples   such  as  Sakhalin,   noting  there   are  firm                                                               
commitments  for   certain  upstream  components,  but   no  firm                                                               
commitments for the  large projects.  For  instance, Sakhalin has                                                               
no  Qualified Project  Plan to  move  it forward,  and the  large                                                               
projects   don't  have   a  10-year   schedule  or   a  diligence                                                               
requirement, with termination ability if there is no diligence.                                                                 
                                                                                                                                
11:54:33 AM                                                                                                                   
SENATOR DYSON asked whether there  is a provision for incremental                                                               
penalties that don't throw the producers off the playing field.                                                                 
                                                                                                                                
MR.  CLARK  asked  Mr.  Loeffler  to  join  in  with  respect  to                                                               
arbitration.   Mr.  Clark  then emphasized  the  desire for  good                                                               
progress.    If  there  is termination,  the  contract  gives  an                                                               
ability to cure  it; this is for  the time up until  it is built.                                                               
The  state  will look  at  facts  and circumstances,  wanting  to                                                               
resolve problems and not rush  to judgment because of a timeline.                                                               
Although  it isn't  a penalty  for failure  to perform,  it is  a                                                               
wake-up call,  and the producers  would have to explain  to their                                                               
board of directors and, he surmised,  would want to come back in.                                                               
He  elaborated, suggesting  it is  perhaps equivalent  to, though                                                               
not the same as, what Senator Dyson was talking about.                                                                          
                                                                                                                                
SENATOR DYSON expressed  doubt that it is equivalent  in any way.                                                               
He  asked  Dr.   van  Meurs  whether  any   North  Sea  midstream                                                               
development rises to the level of a mega-project.                                                                               
                                                                                                                                
DR. VAN  MEURS replied  some do;  he mentioned  Ormen Lange.   In                                                               
further response,  he explained  that all North  Sea developments                                                               
aren't  contractual.   There are  licenses whereby  producers can                                                               
have a large  amount of freedom to go forward.   From an upstream                                                               
perspective, there are  certain deadlines in these  licenses.  As                                                               
in Alaska, if oil or gas  isn't discovered in 10 years, the lease                                                               
expires.   Similar provisions  are in the  British and  North Sea                                                               
licenses.  However, Norway won't  put a firm deadline on building                                                               
the gas  line from Ormen  Lange to Great  Britain.  So  there are                                                               
restrictions on the upstream side, but not on the total project.                                                                
                                                                                                                                
11:59:05 AM                                                                                                                   
^Bob Loeffler, Morrison & Foerster, Counsel to the Governor                                                                     
BOB LOEFFLER, Morrison  & Foerster LLP, Counsel  to the Governor,                                                               
recalled a fair  amount of commentary that the  state should have                                                               
applied a prudent operator standard.   Reporting that he'd looked                                                               
at that  standard, Mr.  Loeffler read  from Williams  and Meyers,                                                               
calling  it perhaps  the leading  treatise  on oil  and gas,  and                                                               
saying  what he  would  read,  from the  U.S.  Supreme Court,  is                                                               
similar to what was adopted.  He related it as follows:                                                                         
                                                                                                                                
     No breach  of the  prudent operator standard  can occur                                                                    
     save where  the absence of  such diligence ...  is both                                                                    
     certain  and substantial  - clear  and convincing  - in                                                                    
     view  of  the  actual  circumstances at  the  time,  as                                                                    
     distinguished  from mere  expectations on  the part  of                                                                    
     the  lessor  and  conjecture  on  the  part  of  mining                                                                    
     enthusiasts.                                                                                                               
                                                                                                                                
He  explained that  the prudent  operator  standard typically  is                                                               
applied to  leases, and  this is midstream.   Mr.  Loeffler said,                                                               
"We  were  aware  of  this  when  we  constructed  the  diligence                                                               
language that  Jim [Clark] has  read."   He added that  the tests                                                               
are remarkably  similar, but the prudent  operator standard looks                                                               
a  lot at  what a  hypothetical person  would have  done, whereas                                                               
this  looks  at  what  actually happened  and  also  what  didn't                                                               
happen.  Noting  that elsewhere the treatise says one  looks at a                                                               
wide variety of  factors, Mr. Loeffler remarked,  "We think we've                                                               
got  language  which  is  tantamount   to  the  prudent  operator                                                               
standard."                                                                                                                      
                                                                                                                                
He offered to provide the  quotations he'd referenced.  "It works                                                               
very, very  well," Mr. Loeffler  added.  He recalled  under then-                                                               
President  Carter,  in  about  1977,  a  deadline  for  TAPS  was                                                               
included:  winter season 1982, in  operation.  From 1980 to 1982,                                                               
a  collaborative design-and-engineering  board involving  perhaps                                                               
eight  or nine  pipelines, the  three largest  producers and  the                                                               
State  of Alaska  met monthly  to review  progress; however,  the                                                               
deadline  proved meaningless.    Noting this  current project  is                                                               
complex,  passing  through  two   countries  and  requiring  much                                                               
coordination,  Mr. Loeffler concluded,  "You  just  can't fix  it                                                               
into, we believe,  any better mode than what we  have in the work                                                               
commitments clause of the contract."                                                                                            
                                                                                                                                
MR. CLARK  suggested it  would be  useful for  Dr. van  Meurs and                                                               
Mr. Loeffler  to  talk  about arbitration  in  this  context,  to                                                               
address the point raised by Senator Dyson.                                                                                      
                                                                                                                                
SENATOR DYSON replied it wasn't necessary.                                                                                      
                                                                                                                                
12:03:29 PM                                                                                                                   
SENATOR BEN STEVENS  referred to comments by  Senators Wilken and                                                               
Dyson with respect  to what the public needs to  know, as well as                                                               
the  timing  requirements  in  place.   He  emphasized  that  the                                                               
certificate of  public convenience -  the authority to  build and                                                               
finance the  pipeline, as well as  authorization for expenditures                                                               
by  the sponsors  - is  issued by  FERC.   Thus decisions  by the                                                               
legislature  aren't  the  final   determination  of  whether  the                                                               
project will go forward.                                                                                                        
                                                                                                                                
He recalled  that Congress, in  October 2004, set out  a timeline                                                               
under which the  State of Alaska or any sponsor  had 18 months to                                                               
submit  an  application  to  FERC; it  expired  April  10,  2006.                                                               
Senator Ben Stevens  said FERC and Congress  also recognized that                                                               
any prospective  sponsor of a  project needed to be  in agreement                                                               
with the state  for the rights to the gas  and the upstream field                                                               
contracts.   He indicated  this project  is behind  schedule from                                                               
the congressional Act in terms of submitting an application.                                                                    
                                                                                                                                
He   said  Congress   has  timelines   under   which  FERC,   the                                                               
environmental  conservation agency,  the U.S.  Department of  the                                                               
Interior  and  the  Bureau  of   Land  Management  all  must  "do                                                               
diligence" and  have their determination  within 48  months after                                                               
submission of an application.   Senator Ben Stevens also recalled                                                               
a  vote by  this committee  in the  prior special  session on  an                                                               
amendment  crafted  by  members  that   said  if  there  isn't  a                                                               
pipeline,  none of  the  provisions on  fiscal  certainty in  the                                                               
contract will be in place.   However, the legislature is now back                                                               
to ground zero,  trying to explain to the public  about a 35-year                                                               
and 45-year time period.                                                                                                        
                                                                                                                                
He fully  agreed with  a prediction by  his father,  U.S. Senator                                                               
Ted Stevens:   If there is failure to act  this year, legislators                                                               
will be at this table in  June 2008 hashing over the same issues.                                                               
As for  the costs of delay,  Senator Ben Stevens noted  the House                                                               
analyzed what tax  rate must be imposed for each  year that there                                                               
isn't  a  project in  order  to  get the  same  net-present-value                                                               
return; he  said Representative  Samuels had  shown that  to him,                                                               
and  it  is  about  a  1  percent a  year  increase.    Thus  the                                                               
consequences of failure  to act are enormous,  not only affecting                                                               
benefits to the state, but also  affecting the people in terms of                                                               
jobs, opportunities for education and so forth.                                                                                 
                                                                                                                                
12:08:25 PM                                                                                                                   
CHAIR SEEKINS interpreted the concerns  of Senators Wilken, Dyson                                                               
and Ben  Stevens, as well as  some constituents, to be  this:  If                                                               
the  contract is  signed,  what  is being  agreed  to?   He  told                                                               
Mr. Clark  that  many people  don't  understand  that this  is  a                                                               
fiscal-terms  contract,  not  a   construction  contract  or  gas                                                               
pipeline contract.  People also don't want to be flimflammed.                                                                   
                                                                                                                                
He emphasized the  desire to build the  pipeline, and highlighted                                                               
the search  for another  remedy beyond  cancellation if  there is                                                               
lack of diligence.   Chair Seekins also noted  that people aren't                                                               
familiar  with the  burden of  proof, clear  and convincing,  and                                                               
only understand  it isn't  the highest burden  of proof  and thus                                                               
may  see it  as the  lowest; however,  it's a  middle level.   He                                                               
emphasized the need  for a prod to ensure that  the companies are                                                               
moving forward  with due  diligence; he  noted some  people think                                                               
that  can be  accomplished through  a reserves  tax as  a threat,                                                               
since  the only  other remedy  appears to  be termination  of the                                                               
contract, which nobody wants.                                                                                                   
                                                                                                                                
He  thanked  Mr. Loeffler  for  his  explanation of  the  prudent                                                               
operator standard.   Chair Seekins said he has run  into the same                                                               
thing  Senator  Wilken  has:   people  who  say  they  understand                                                               
certainty  if it's  mutual.   Chair Seekins  agreed with  Senator                                                               
Wilken that  most people want  a gas  pipeline built, but  not at                                                               
all  costs; they  want it  to be  fairly done  and to  represent,                                                               
under the Stranded  Gas Act, the maximum interests  of the people                                                               
of Alaska.  Chair Seekins  emphasized that this is a fiscal-terms                                                               
contract,  even though  everyone  wishes it  were  a contract  to                                                               
actually build a pipeline.                                                                                                      
                                                                                                                                
The committee took an at-ease from 12:13:55 PM to 1:51:39 PM.                                                               
                                                                                                                                
MR. CLARK  returned to Senator  Wilken's question of  what Alaska                                                               
gets in  return, informing listeners  that it had  been discussed                                                               
over the noon hour, with Mr. Loeffler taking notes.                                                                             
                                                                                                                                
1:52:19 PM                                                                                                                    
MR. LOEFFLER  alluded to previous  negotiations for  the proposed                                                               
contract, explaining that the state  got the companies to consent                                                               
to an  oil-tax increase  that should produce  about $1  billion a                                                               
year,  as part  of the  package  decided by  the chief  executive                                                               
officers  (CEOs)  and  the  governor.    He  acknowledged  it  is                                                               
controversial.                                                                                                                  
                                                                                                                                
He noted the list on pages  112-113 of the contract talks about a                                                               
number of  considerations for the deal,  including the following:                                                               
the right to own 20 percent  of the project; the work commitments                                                               
clause; clarity  on the agreements  on all the  monetary payments                                                               
in lieu  of taxes (PILTs), Articles  11-19 and 22, many  of which                                                               
are adjusted  for inflation under  the individual terms  of those                                                               
articles;  the  capacity  management provisions  in  Article  10,                                                               
which are  unprecedented and reduce  the state's risk  in getting                                                               
its gas  to market; the  right to  have production taxes  paid in                                                               
gas as opposed to cash, which  increases the amount of gas Alaska                                                               
has for  its use; and  a number  of individual items  on in-state                                                               
needs, including  timely studies  of in-state needs,  natural gas                                                               
liquids (NGL) processing in Alaska,  clarity on in-state mileage-                                                               
sensitive service  and a  labor clause.   Mr.  Loeffler suggested                                                               
Dr. van Meurs or Mr. Clark might want to add to this list.                                                                      
                                                                                                                                
MR. CLARK added the agreement to  move the project forward to the                                                               
sanctioning point, at  the expenditure of (indisc.)  dollars.  He                                                               
also  mentioned   the  $125  million   in  impact   payments  for                                                               
municipalities.                                                                                                                 
                                                                                                                                
1:55:24 PM                                                                                                                    
SENATOR  BUNDE  suggested two  of  the  aforementioned should  be                                                               
taken off  the list,  since to  his belief  they are  not state's                                                               
rights, but "gimmes" for the  companies, insisted on for the deal                                                               
and not  in the state's  best interest.   Those two  are Alaska's                                                               
taking its gas in kind and investing in the pipeline.                                                                           
                                                                                                                                
CHAIR SEEKINS asked how those two benefit the state.                                                                            
                                                                                                                                
MR. CLARK  answered that the federal  Minerals Management Service                                                               
(MMS) had  related its experience:   making more money  by taking                                                               
its gas  in kind than in  value, and lowering of  the transaction                                                               
costs  because  there  no longer  were  disputes  about  previous                                                               
valuations and  look-backs on valuations  - which Mr.  Clark said                                                               
the state  has had many times  over the years.   He reported that                                                               
both of those were seen as valuable to the State of Alaska.                                                                     
                                                                                                                                
DR. VAN  MEURS added  that in the  economic valuation,  the whole                                                               
deal was analyzed to protect  state revenues.  His field analysis                                                               
assumed  the  state's  marketing  costs   could  be  as  much  as                                                               
5.5 cents  per  million Btu.    Whereas  he'd  viewed that  as  a                                                               
negative, MMS  is experiencing it as  a positive.  Thus  he might                                                               
be underevaluating  the benefits  to the  state, on  a cumulative                                                               
basis, by as  much as $1 billion.   Dr. van Meurs  said he didn't                                                               
have much experience in North  American gas marketing, which some                                                               
DNR  experts have;  however,  he  has done  a  lot  of this  work                                                               
internationally.   He  related  his  experience that  transaction                                                               
costs on very large blocks of gas are quite low.                                                                                
                                                                                                                                
1:58:29 PM                                                                                                                    
CHAIR SEEKINS requested details about supplies for in-state use.                                                                
                                                                                                                                
DR. VAN MEURS pointed out that  Mr. Loeffler is far more familiar                                                               
with the  rates and decisions  on that.   He then  explained that                                                               
the  contract  provides for  four  offtake  points where  another                                                               
party can  tie in to  the pipeline.   These are  predetermined in                                                               
consultation with the  state, and there doesn't have  to be major                                                               
reconstruction  to add  or  tie in  a line.    This is  important                                                               
because any third party with  a commercial contract that wants to                                                               
get into the first open season has the ability to tie in.                                                                       
                                                                                                                                
He noted  some people have asked  why 1 Bcf of  gas isn't shipped                                                               
to  Valdez for  export  as LNG.    Dr. van  Meurs  said if  North                                                               
American  gas  prices  continue   to  decline  and  Asian  prices                                                               
strengthen, perhaps LNG to Asia will  be a good idea two years or                                                               
four  years  from  now.    At  that point,  if  a  person  has  a                                                               
commercial  contract to  sell LNG  to Asia  at 1  Bcf a  day, for                                                               
example, a spur  line can be built to Valdez  and the project can                                                               
be put  in place.   Nothing in this  contract prevents it.   Thus                                                               
the importance of these offtake  points is an enormous option for                                                               
any entrepreneur in Alaska to  secure gas resources in Alaska for                                                               
use in the state, for export or for any other use.                                                                              
                                                                                                                                
2:00:54 PM                                                                                                                    
CHAIR SEEKINS asked  about the intention of the  state to utilize                                                               
its gas  to satisfy in-state demand,  rather than ship it  to the                                                               
Midwest market.                                                                                                                 
                                                                                                                                
MR. CLARK  reported that  Governor Murkowski  announced yesterday                                                               
another effort  to look into that  more closely.  Mr.  Clark said                                                               
the contract  provides three things  that matter:  1)  taking gas                                                               
in  kind,  2) the  offtake  points  and 3) the  mileage-sensitive                                                               
rates.  Once the state has the  gas, it is the state that decides                                                               
how to use it.  One  barrier identified by the Alaska Natural Gas                                                               
Development  Authority  (ANGDA) is  that  the  first open  season                                                               
would come  within two years  under the summary of  the Qualified                                                               
Project Plan, as proposed now.                                                                                                  
                                                                                                                                
He explained  that there is some  concern that this is  too soon.                                                               
For  some potential  players, particularly  those  that might  be                                                               
distributors of  gas in  Anchorage, there  is also  concern about                                                               
gas  availability  too  late  on the  Kenai  Peninsula.    "We're                                                               
worried  about  both," Mr.  Clark  told  members, indicating  the                                                               
administration will try  to help prepare anyone who  wants to bid                                                               
in the  open season, and has  committed to using state  gas, once                                                               
it is obtained, to satisfy in-state needs.                                                                                      
                                                                                                                                
He  said an  inventory would  be  done to  find out  how much  is                                                               
needed, both  in the Anchorage  Bowl and on the  Kenai Peninsula;                                                               
the governor,  in his announcement, had  mentioned seeing whether                                                               
there is some way to speed up  getting gas to the latter in order                                                               
to keep  the plants there going.   Mr. Clark concluded  by saying                                                               
several plans and  ideas are afoot to ensure there  is a good way                                                               
to use  in-state gas.  That  will show up in  the fiscal interest                                                               
finding, currently being put into final form.                                                                                   
                                                                                                                                
2:03:10 PM                                                                                                                    
SENATOR  WAGONER  related  his  understanding  that  the  current                                                               
leases on  the North  Slope require the  producers -  whoever has                                                               
the lease - to market the state's  share of gas at no cost to the                                                               
state and at  the "higher of" price; these leases  will be rolled                                                               
in  to the  contract, and  the current  terms will  be nullified,                                                               
since the lease  terms will become the terms  under the contract.                                                               
He asked:   Was any concession given by the  companies to make up                                                               
for what the state is losing in this manner?                                                                                    
                                                                                                                                
MR. CLARK  requested that  Dr. van Meurs,  Mr. Loeffler  or Roger                                                               
Marks talk about the economics.   He then offered his belief that                                                               
the state never  received it for free.  Rather,  the question was                                                               
where the state  paid.  Because it was taken  in value, Mr. Clark                                                               
said  he believed  it  was  paid on  the  back  end, through  the                                                               
tariffs.                                                                                                                        
                                                                                                                                
DR. VAN  MEURS agreed that  under the  current leases there  is a                                                               
"higher of" option;  companies market the gas for  the state, and                                                               
the state has a benefit.   He said that option was evaluated, and                                                               
a DNR study  concluded it was worth about 2 percent  of the value                                                               
of  the gas.    In  his own  economic  analysis, therefore,  with                                                               
respect  to the  status-quo option  with which  it was  compared,                                                               
he'd  added 2  percent to  the  status quo.   Thus  it was  taken                                                               
completely into account in structuring the deal.                                                                                
                                                                                                                                
He emphasized that an entirely new  package is being put in place                                                               
of an older one, and he explained:   "We are not trying to offset                                                               
every  little  thing  with  another thing;  that's  not  how  you                                                               
negotiate.   You negotiate one  package versus  another package."                                                               
In  comparing the  packages, Dr.  van Meurs  said, the  2 percent                                                               
differential in value  was taken into account in  order to ensure                                                               
that,  under the  stranded gas  contract that  was negotiated,  a                                                               
fair  share of  the revenues  was received.   However,  it wasn't                                                               
offset by any specific issue, because that isn't practical.                                                                     
                                                                                                                                
2:06:14 PM                                                                                                                    
^Roger Marks, Economist, Department of Revenue                                                                                  
ROGER MARKS,  Economist, Department  of Revenue  (DOR), clarified                                                               
that  under  the  current system,  there  actually  are  upstream                                                               
deductions  for royalties  on  Prudhoe  Bay and  for  tax on  all                                                               
fields.  As Dr. van Meurs noted,  however, the state incorporated                                                               
the  additional  marketing  costs  and  "higher  of"  provisions.                                                               
Mr. Marks emphasized  that the  state came  to the  table wanting                                                               
more than  the status  quo, while the  producers expected  to pay                                                               
less.  As it evolved, however, it settled on the status quo.                                                                    
                                                                                                                                
He suggested  focusing on  the total deal,  not just  items where                                                               
something was given up.   For example, the 7.25 percent severance                                                               
tax is quite a bit higher than  the status quo in terms of money.                                                               
Mr. Marks explained  that for Prudhoe Bay,  the average severance                                                               
tax  over the  next  35  years is  about  5.9  percent, but  7.25                                                               
percent under the contract.  All  fields are put together, so the                                                               
average  severance  tax is  about  0.4  percent higher  than  the                                                               
status quo.   It is actually quite  a bit of money:   0.4 percent                                                               
of 20  percent of 4.5  Bcf a day  for 35 years.   When it  is put                                                               
together,  Mr. Marks  opined, it  comes  out fairly  even at  all                                                               
prices compared with the status quo.                                                                                            
                                                                                                                                
2:08:38 PM                                                                                                                    
MR. LOEFFLER  offered another point:   Downstream marketing costs                                                               
under  a netback  system would  be deducted  and thus  affect the                                                               
netback  received by  the state  at the  North Slope.   Companies                                                               
marketing gas downstream would deduct  all their legitimate costs                                                               
to  produce   that  lower  netback   figure.     Marketing  costs                                                               
downstream are paid by the state under the current system.                                                                      
                                                                                                                                
2:09:12 PM                                                                                                                    
CHAIR SEEKINS asked  Mr. Marks what the status quo  is and how it                                                               
was arrived at.                                                                                                                 
                                                                                                                                
MR.  MARKS  specified that  the  status-quo  severance tax  is  a                                                               
10 percent nominal rate and an  economic limit factor (ELF) quite                                                               
a bit different  from the oil ELF.   The gas ELF  is simply 3,000                                                               
Mcf per well per day tax-free.   The effective severance tax rate                                                               
varies on different  fields.  Over 35 years, the  average rate is                                                               
about  6.8  or 6.9 percent,  whereas  the  state would  get  7.25                                                               
percent under  the contract.   As for  other fiscal terms  in the                                                               
contract compared with the status  quo, royalties are pretty much                                                               
unchanged; corporate  income tax  is unchanged; and  property tax                                                               
is changed quite  a bit, from a  tax based on value  to one based                                                               
on throughput.                                                                                                                  
                                                                                                                                
CHAIR  SEEKINS  summarized  that  the current  severance  tax  on                                                               
natural gas  is 10  percent, with  an ELF that  is really  an in-                                                               
field  allowance of  3,000 Mcf  per well  per day  tax-free.   He                                                               
suggested  it is  similar to  a  proposal for  a field  allowance                                                               
under the PPT bill.                                                                                                             
                                                                                                                                
MR.  MARKS replied  that it  is similar  to the  current oil  ELF                                                               
under which 300  barrels per well per day is  tax-free, but there                                                               
is also a field-size element that  affects it.  For gas, there is                                                               
no  field-size   component.     It  is   simply  based   on  well                                                               
productivity.                                                                                                                   
                                                                                                                                
2:11:40 PM                                                                                                                    
SENATOR  BUNDE voiced  appreciation for  the list  given earlier,                                                               
suggesting  it would  be  wise to  add,  for consideration,  what                                                               
Dr. van  Meurs had  said  about other  potential  players in  the                                                               
world.  Senator Bunde opined that  what the state gets out of the                                                               
deal is someone who will participate.   He said the public should                                                               
be aware  of all  the potential "Prudhoe  Bays" elsewhere  in the                                                               
world and  that Alaska isn't in  the driver's seat when  it comes                                                               
to negotiating for gas because of the supply and demand.                                                                        
                                                                                                                                
CHAIR SEEKINS pointed  out that most legislators would  see a tax                                                               
increase  as  a  state  prerogative, whereas  here  there  is  an                                                               
agreement by the CEOs for a tax increase.                                                                                       
                                                                                                                                
2:13:27 PM                                                                                                                    
MR. LOEFFLER, in response to  Senator Wagoner, explained that for                                                               
oil,  for the  most part,  the state  takes it  in value,  not in                                                               
kind.  All  costs between the point  at which it is  sold back to                                                               
the  wellhead are  deducted, including  the TAPS  tariff, tankers                                                               
and commissions on the sale of the oil wherever it is sold.                                                                     
                                                                                                                                
MR.  CLARK highlighted  the value  of a  seat at  the table.   He                                                               
recalled serious debate in the  Egan administration on whether to                                                               
take an ownership interest in TAPS,  which failed by two votes in                                                               
the Senate but  passed the House.  He surmised  Alaska would have                                                               
profited by having a seat at the  table then.  "We will here," he                                                               
predicted,  saying  it  relates  back to  the  point  about  work                                                               
commitments, since  the state will  be a member of  the ownership                                                               
group,  the limited  liability company  (LLC)  that will  oversee                                                               
development of the  project.  It is another way  to have far more                                                               
information  about  what  is  going   on  in  terms  of  diligent                                                               
advancement   of   the   project   as  is   prudent   under   the                                                               
circumstances, for example.                                                                                                     
                                                                                                                                
2:15:54 PM                                                                                                                    
CHAIR SEEKINS  indicated that a  recent e-mail relayed  a concern                                                               
that the  permanent fund would be  used to finance and  build the                                                               
gas pipeline.   Having previously  been on the Board  of Trustees                                                               
of  the  Alaska  Permanent  Fund Corporation  (APFC),  which  has                                                               
returned about 8 percent over  time, Chair Seekins said he looked                                                               
at ownership of the pipeline,  with about a 14 percent guaranteed                                                               
return,  as a  fairly stable  investment that  perhaps should  be                                                               
taken advantage of by APFC.                                                                                                     
                                                                                                                                
2:17:17 PM                                                                                                                    
^Bill Corbus, Commissioner, Department of Revenue                                                                               
WILLIAM A. CORBUS, Commissioner,  Department of Revenue, noted he                                                               
is a  trustee for APFC.   He suggested  there are three  ways for                                                               
the state  to come up  with its  equity portion of  the pipeline.                                                               
The  first  is  through  direct  appropriations,  for  which  the                                                               
legislature put  aside $300 million last session;  DOR recommends                                                               
that  the  remainder  come  from  direct  appropriations  in  the                                                               
future.    Barring  that,  further   options  are  to  sell  more                                                               
obligation revenue bonds or to  ask APFC whether it is interested                                                               
in making an equity investment.                                                                                                 
                                                                                                                                
He informed  the committee that  the Board of Trustees  has begun                                                               
an education process  to get familiar with  this complex subject.                                                               
Responding  to  concern  that investing  in  the  pipeline  would                                                               
endanger  the permanent  fund, for  example, Commissioner  Corbus                                                               
gave assurance  that if  invited to invest  in the  gas pipeline,                                                               
APFC would scrutinize it the same as all investments.                                                                           
                                                                                                                                
He  opined  that  the  14  percent  rate  of  return  on  equity,                                                               
apparently the going rate for  FERC, is an attractive return, one                                                               
APFC would  consider if it  came to that.   In response  to Chair                                                               
Seekins, Commissioner  Corbus said  two or  three years  ago APFC                                                               
embarked  on private-equity  investments.   Some have  a rate  of                                                               
return of  that order, but  certainly it's  at the higher  end of                                                               
returns for the  corporation as an asset class.   Private equity,                                                               
in his assessment, is considered more risky than the pipeline.                                                                  
                                                                                                                                
SENATOR  STEDMAN  pointed  out  that  an  80  percent  government                                                               
guarantee  doesn't exist  in  private-equity markets.    It is  a                                                               
handsome benefit if it can be secured.                                                                                          
                                                                                                                                
CHAIR SEEKINS agreed, saying he'd like  to own the whole thing if                                                               
he had the money.                                                                                                               
                                                                                                                                
2:22:29 PM                                                                                                                    
MR. LOEFFLER urged care, however,  because those who want a lower                                                               
tariff  will argue  that the  presence of  the federal  guarantee                                                               
reduces the  risk of the project  and thus the rate  of return on                                                               
equity should be lower than normal.                                                                                             
                                                                                                                                
COMMISSIONER  CORBUS  reminded  members  that  the  federal  loan                                                               
guarantee  just provides  assurance to  the people  who lend  the                                                               
money  that they  will  be repaid.   The  state,  along with  the                                                               
producers, would  be borrowing the  money, and would still  be on                                                               
the hook in the event of a default.                                                                                             
                                                                                                                                
SENATOR  BEN  STEVENS remarked  that  the  challenge to  get  the                                                               
project built isn't the financing  package, but getting financial                                                               
commitments to  ship the gas.   He referred to  Senator Wagoner's                                                               
comments and said the policy call  is whether to take the royalty                                                               
gas and  tax gas in kind,  and whether to make  the commitment to                                                               
ship that gas  in the capacity.  He suggested  going through this                                                               
element  by  element:   the  upstream,  the gas  treatment  plant                                                               
(GTP), and  the midstream.  He  said most important to  the state                                                               
is the  upstream, and the  policy call proposed in  the agreement                                                               
is this:  whether  taking the gas in kind is  the proper thing to                                                               
do and  will result in  a deal and a  good return for  the state,                                                               
compared with the alternative.                                                                                                  
                                                                                                                                
2:25:35 PM                                                                                                                    
CHAIR SEEKINS  inquired about the qualification  process in order                                                               
to get the loan guarantee.                                                                                                      
                                                                                                                                
COMMISSIONER CORBUS explained that  the U.S. Department of Energy                                                               
(DOE),  which  is responsible  for  this  process, hasn't  issued                                                               
regulations or  provided much information  on the  exact process.                                                               
He  pointed out  that the  project must  be built  beforehand, so                                                               
there  is an  issue  of interim  financing.   That  is where  the                                                               
completion-risk issue comes in.                                                                                                 
                                                                                                                                
CHAIR  SEEKINS surmised  the loan  guarantees  are for  long-term                                                               
financing  of  the  pipeline, not  for  construction  or  interim                                                               
financing.                                                                                                                      
                                                                                                                                
COMMISSIONER CORBUS affirmed that and deferred to Mr. Loeffler.                                                                 
                                                                                                                                
MR. LOEFFLER  agreed there  is little guidance  on what  DOE will                                                               
want for the  loan guarantees.  He noted his  law firm represents                                                               
a  number  of  federal  agencies in  loans  for  overseas  energy                                                               
projects and thus  has some experience.  He said  they'll want to                                                               
be  satisfied on  their own,  like a  bank, that  it is  a viable                                                               
project.  Thus  it wouldn't surprise him if they  hired their own                                                               
investment  bankers,   financial  consultants   and  construction                                                               
engineers to look at making a  creditworthy loan.  He pointed out                                                               
that a big question is whether  they'll want their own fee on top                                                               
of the terms of the loan.                                                                                                       
                                                                                                                                
2:28:58 PM                                                                                                                    
MR.  CLARK  emphasized  the critical  nature  of  the  completion                                                               
guarantee, touched on by Commissioner  Corbus.  Mr. Clark said it                                                               
is probably  the single most  important piece.   For construction                                                               
financing,  this guarantee  is  given on  the  strength of  one's                                                               
balance  sheet.    Once  there is  construction  and  first  gas,                                                               
revenue will  flow to pay going  forward.  The risk  lies between                                                               
sanction  and first  gas, during  construction.   The  completion                                                               
guarantee is  probably the biggest  risk for someone in  order to                                                               
reach the $18 billion.                                                                                                          
                                                                                                                                
He noted  this issue  has come  up with  the Alaska  Gasline Port                                                               
Authority  ("Port Authority")  project, for  example, where  they                                                               
say  they'll  build   it  on  the  basis  of   the  federal  loan                                                               
guarantees.    Mr.  Clark  said that  cannot  be  reached  unless                                                               
something is  constructed, but  construction cannot  be completed                                                               
without the  completion guarantees.  He  deferred to Mr. Loeffler                                                               
and  Commissioner  Corbus, saying  this  is  highly important  to                                                               
understand with respect to the financing.                                                                                       
                                                                                                                                
2:30:31 PM                                                                                                                    
MR. LOEFFLER suggested perhaps the  companies also could speak to                                                               
this.   Equating interim financing to  construction financing, he                                                               
explained  that it  is secured  by  demonstrating the  following:                                                               
that   there  are   customers,   which   means  having   shipping                                                               
commitments,  although those  are  conditional; that  there is  a                                                               
viable  project, with  enough reserves  behind the  project; that                                                               
there is  a realistic construction  plan and cost  estimate; that                                                               
all necessary  permits have  been secured;  and that  the project                                                               
will be built on a particular schedule.                                                                                         
                                                                                                                                
He said to  get that construction financing, one  needs the basic                                                               
permits in hand:  for the  Alaska portion, a certificate of pubic                                                               
convenience  and  necessity  in  order to  understand  the  terms                                                               
attached  to it  and the  costs; the  right-of-way leases,  along                                                               
with their  terms and conditions; perhaps  clean-air permits; and                                                               
numerous others.   Mr. Loeffler  added that lenders will  look at                                                               
the cost  of complying  with those permits  and whether  they are                                                               
feasible or realistic.                                                                                                          
                                                                                                                                
He reported that companies typically  have their own construction                                                               
people.  If there will  be outside financing for the construction                                                               
loan,  however,  the  outside financing  people  hire  their  own                                                               
experienced construction supervisors to  ensure it is a realistic                                                               
plan  and  can be  built  within  the timetable  and  conditions.                                                               
Mr. Loeffler  also  reported  they'll   hire  their  own  reserve                                                               
engineers to double-check the reserves behind the project.                                                                      
                                                                                                                                
He gave  his understanding  that once  the certificate  of public                                                               
convenience  comes  from  FERC  -  assuming  the  conditions  are                                                               
acceptable  and don't  have to  be clarified  or changed  - there                                                               
will be a  rush period of six  months or a year  during which the                                                               
sponsors of  the project, if  borrowing outside money,  work with                                                               
the banks.   There will be a financing plan,  Mr. Loeffler noted,                                                               
but the deal  cannot be closed until the  certificate is obtained                                                               
and people  are satisfied that  there is a viable  project, under                                                               
viable regulatory permits.                                                                                                      
                                                                                                                                
2:33:32 PM                                                                                                                    
COMMISSIONER CORBUS  highlighted a  virtue of the  state's future                                                               
partners  on this  project:   their  strong balance  sheets.   In                                                               
response to  Chair Seekins, he  explained that  interim financing                                                               
will  be based  on  the  strength of  the  project.   As  backup,                                                               
however,  it doesn't  hurt to  have  three of  the world's  great                                                               
corporations involved, which the banks are certainly aware of.                                                                  
                                                                                                                                
SENATOR DYSON  raised a concern  that the state will  likely deal                                                               
with subsidiaries  of major companies,  and the  parent companies                                                               
won't be on the hook for the obligations.                                                                                       
                                                                                                                                
COMMISSIONER CORBUS  responded that if  he were a  banker lending                                                               
money, he'd  point out  to the  borrowers that  they need  to get                                                               
repaid if  something goes wrong.   He said there is  a difference                                                               
between a  "parent guarantee" for  purposes of this  contract and                                                               
the purposes of a construction loan.                                                                                            
                                                                                                                                
SENATOR DYSON  asked:  Has  the state done as  good a job  as the                                                               
banks with regard to looking after its own interests?                                                                           
                                                                                                                                
MR.  LOEFFLER said  he believed  the answer  was yes.   Recalling                                                               
discussion   before  the   committee   about  the   need  for   a                                                               
coordinating  agreement  to pull  all  the  pieces together,  and                                                               
discussion  of  ensuring  there  is a  party  of  ample  economic                                                               
strength  backing  up  the obligations,  Mr.  Loeffler  said  the                                                               
subsidiaries of  the company signing  the contract, as  it stands                                                               
today, have  huge assets.   The real  test is whether  the assets                                                               
are  good enough  to back  up the  obligation; this  is what  the                                                               
banks  will ask  too.   He  suggested asking  the companies,  but                                                               
offered his understanding that in  many of their huge financings,                                                               
an intermediate-layer subsidiary  provides the guarantee, instead                                                               
of the parent company.                                                                                                          
                                                                                                                                
2:38:05 PM                                                                                                                    
COMMISSIONER  CORBUS brought  up  the question  of  how deep  the                                                               
state's pockets  are in  the event  of a cost  overrun.   He told                                                               
members, "We  have wrestled with that,  and want to be  sure that                                                               
we do not  adversely impact the state's general  credit rating to                                                               
carry  on  our  normal  functions while  the  pipeline  is  being                                                               
constructed."   Thus  Commissioner Corbus  said the  following is                                                               
envisioned:  For  interim financing commitments, there  must be a                                                               
standby line  of credit or  some other instrument to  protect the                                                               
state  against a  cost overrun;  that  would be  done before  the                                                               
project starts, rather than when the money is needed.                                                                           
                                                                                                                                
2:39:22 PM                                                                                                                    
CHAIR  SEEKINS mentioned  a recent  letter to  the governor  from                                                               
TransCanada.  He asked whether  TransCanada has the balance sheet                                                               
necessary to get financing for a project like this.                                                                             
                                                                                                                                
MR.  CLARK  recalled,  from the  last  letter,  that  TransCanada                                                               
believed  it  necessary to  have  the  Alaska North  Slope  (ANS)                                                               
producers to  proceed.  Mr.  Clark said  it is partly  because of                                                               
the need to underpin this with  the FT commitments that will lead                                                               
to  the  financing  of  this   agreement,  a  position  taken  in                                                               
conversations with them.   TransCanada is a  very good $7 billion                                                               
company that could  perhaps play an important role.   However, in                                                               
terms  of financially  underpinning  the project  - for  example,                                                               
getting the completion  guarantees necessary to build  the line -                                                               
Mr. Clark opined it would take  more than that.  Furthermore, the                                                               
assessment was  that it would  have taken  more for the  state if                                                               
TransCanada had been involved instead of the producers.                                                                         
                                                                                                                                
He  made a  final point:    Because of  the cost  of using  those                                                               
federal loan guarantees, it isn't  a foregone conclusion that the                                                               
state will  use them to  support long-term financing.   Mr. Clark                                                               
acknowledged  there  might  be  other ways  that  will  cost  the                                                               
project  less, reducing  the tariff  and  thereby increasing  the                                                               
value of the state's gas.                                                                                                       
                                                                                                                                
2:41:44 PM                                                                                                                    
SENATOR  DYSON asked:   Will  the federal  loan guarantees  after                                                               
completion  of  the project  apply  to  cost overruns  and  other                                                               
obligations?                                                                                                                    
                                                                                                                                
MR. LOEFFLER  related his expectation  that if they are  used for                                                               
permanent financing,  that would cover  the cost of  the pipeline                                                               
as built, which means including cost overruns.                                                                                  
                                                                                                                                
SENATOR DYSON asked:   Would it be an incentive  to the companies                                                               
to contain  cost overruns if  the federal loan  guarantees didn't                                                               
apply?  He  highlighted concern about project  "creep" and higher                                                               
tariffs as a result of a significantly larger construction bill.                                                                
                                                                                                                                
MR. LOEFFLER said he needed to  think it through, but pointed out                                                               
that if  the federal  loan guarantee money  is the  cheaper money                                                               
and only  covers part of the  project cost, the part  not covered                                                               
would be  higher-cost debt.   The higher overall cost  of capital                                                               
would increase  the tariff.   Thus it  might not work  out right.                                                               
Mr. Loeffler again said he needed to think about it further.                                                                    
                                                                                                                                
COMMISSIONER CORBUS  reiterated that  DOE hasn't  articulated its                                                               
policy on  the federal loan  guarantees.  He relayed  one concept                                                               
considered by  the state:   Finance the debt portion  without the                                                               
loan guarantees,  but keep a  portion of the unused  federal loan                                                               
guarantee in reserve in case of cost overruns.                                                                                  
                                                                                                                                
SENATOR  BEN STEVENS  recalled from  previous presentations  that                                                               
the $18 billion  resulted from an 80  percent loan-back guarantee                                                               
of what was then termed  a $22.5 billion project, halfway between                                                               
$20 billion  and  $25 billion.    He  also  recalled  talk  that,                                                               
depending on  the outlook, Congress may  consider increasing this                                                               
number as a result of the costs  of steel and labor, as well as a                                                               
prolonged delay affecting construction costs.                                                                                   
                                                                                                                                
2:45:52 PM                                                                                                                    
SENATOR WAGONER asked  when the new study by  Lukens Energy Group                                                               
would be available.                                                                                                             
                                                                                                                                
COMMISSIONER  CORBUS  gave his  understanding  that  it would  be                                                               
within a week or so, from discussions with Ken Griffin of DNR.                                                                  
                                                                                                                                
MR. CLARK indicated it would be provided to the committee.                                                                      
                                                                                                                                
2:46:27 PM                                                                                                                    
CHAIR SEEKINS reminded  members of Senator Wilken's  chart on the                                                               
timeframe,  labeled "Oil  Tax Certainty,  Amendment 4,  SB 2004,"                                                               
dated 6/4/06,  as well as the  amendment adopted to SB  2004 that                                                               
came from Senator  Ben Stevens.  Chair Seekins  asked whether the                                                               
testifiers had had a chance to look at those.                                                                                   
                                                                                                                                
MR. CLARK recalled that amendment had passed the Senate as well.                                                                
                                                                                                                                
CHAIR SEEKINS concurred.                                                                                                        
                                                                                                                                
CHAIR SEEKINS reminded  listeners that the concept  was having no                                                               
certainty on the  oil tax until the point of  project sanction; a                                                               
period of 5 years, plus or  minus, to procure and build; a period                                                               
of 9  years for  capital cost recovery;  and then  some remaining                                                               
time at  the end of  that, if  capital cost recovery  hadn't been                                                               
reached, during  which if the  legislature raised the  taxes, the                                                               
commissioner  would  be  authorized  to enter  into  a  balancing                                                               
agreement for  the remainder of  time necessary  to do that.   He                                                               
requested comment from Mr. Clark and Dr. van Meurs.                                                                             
                                                                                                                                
2:48:29 PM                                                                                                                    
MR. CLARK affirmed  it had been looked at, with  the producers as                                                               
well.    He   recognized  the  point  made  by   the  public  and                                                               
legislators, driven  home by what  passed the Senate:   Something                                                               
must  be done  differently with  respect to  fiscal certainty  on                                                               
oil.   Mr. Clark indicated  the administration is looking  to see                                                               
whether this is  the best way to  get at the issue  Dr. van Meurs                                                               
discussed,  that the  risk  of something  going  wrong with  high                                                               
costs/low prices is a bigger risk  to the companies and the state                                                               
than the upside potential.                                                                                                      
                                                                                                                                
He recalled  Dr. van  Meurs' discussion of  the need  to maintain                                                               
the opportunity not  only to recover costs, but also  to gain the                                                               
upside as a  justification for taking on  that asymmetrical risk.                                                               
Mr. Clark deferred to Dr. van  Meurs, suggesting the desire is to                                                               
see whether  there is something  the administration can  bring to                                                               
the committee and  to Alaskans to fine-tune this  and provide the                                                               
necessary risk coverage to maintain the existing agreement.                                                                     
                                                                                                                                
2:50:27 PM                                                                                                                    
DR.  VAN  MEURS  noted  he   wasn't  involved  in  preparing  the                                                               
aforementioned   amendment,   but   had  participated   in   some                                                               
preliminary  discussions.    He  said  countries  satisfy  fiscal                                                               
stability  and fiscal  certainty  objectives  in different  ways.                                                               
During feedback,  public hearings  and previous  discussions with                                                               
the legislature  about introducing a completely  new PPT, concern                                                               
was  expressed that  there should  be an  experimentation period,                                                               
with changes  in regulations, auditing procedures  or other areas                                                               
before  the PPT  can be  stabilized.   Saying  it's a  reasonable                                                               
concern,  Dr.  van  Meurs  advised   members  that  a  period  of                                                               
tinkering is typical  when a whole new system is  introduced.  He                                                               
suggested it might be beneficial here.                                                                                          
                                                                                                                                
He highlighted  the concept,  at the end  of the  period proposed                                                               
here, of a fiscal stabilization  clause.  Dr. van Meurs explained                                                               
that some  governments consider the  "pay on behalf"  and "fiscal                                                               
exemption"  systems, in  the contract  now, a  little inflexible.                                                               
Their agreements have a simple  stabilization clause that says if                                                               
there   is  any   material  change   in  fiscal   terms,  they'll                                                               
renegotiate the  contract to establish  the fiscal  balance; this                                                               
in  turn  is  subject  to  arbitration.    This  approach  allows                                                               
modifying  the   tax  without  destroying  the   core  objective:                                                               
guaranteeing that companies can count  on extra profits to offset                                                               
possible  losses.    Common internationally,  these  clauses  are                                                               
accepted by oil companies around the world, Dr. van Meurs said.                                                                 
                                                                                                                                
He observed  there are  some problems with  every way  of dealing                                                               
with fiscal certainty.  For  the fiscal-stabilization clause, the                                                               
most  important  problem  is defining  a  material  change;  this                                                               
requires  either relying  on  arbitration  procedures or  putting                                                               
criteria  in.   Dr.  van Meurs  noted  another possible  problem:                                                               
Substantial  changes for  oil  might result  in  a commitment  to                                                               
negotiate  a  substantial  change   to  the  gas  contract,  with                                                               
possible undesirable side effects.                                                                                              
                                                                                                                                
He  suggested  there  are  ways to  make  fiscal  certainty  more                                                               
flexible -  as he understands this  proposal is - as  long as the                                                               
state  sticks with  the  basic  concept:   the  central need  for                                                               
investors  to have  certainty  that  if there  is  a really  good                                                               
upside, taken into  account when they made the  analysis, it will                                                               
balance  against the  downside, and  that the  companies want  to                                                               
count  on fiscal  stability  for oil.   Dr.  van  Meurs said  the                                                               
procedures in  the contract are  widely used  internationally and                                                               
have certain  advantages; for instance,  the exemption  system is                                                               
easy to handle and administer, and is less disputable.                                                                          
                                                                                                                                
He opined  that an initial  period of  "no stability" could  be a                                                               
very good idea as  well.  Dr. van Meurs noted  it would allow the                                                               
state to make some improvements  to the PPT law if administrative                                                               
details  weren't  working,   thus  perhaps  addressing  Alaskans'                                                               
concerns.  He concluded by lauding  the Senate for coming up with                                                               
ideas  that  are  creative  but  still very  much  in  line  with                                                               
international practices.                                                                                                        
                                                                                                                                
2:59:30 PM                                                                                                                    
CHAIR  SEEKINS mentioned  concern about  the length  of time  for                                                               
freezing a tax rate, as well  as whether the legislature has that                                                               
ability  constitutionally.   He  noted  that  Senator French  had                                                               
provided a white paper on this.                                                                                                 
                                                                                                                                
He highlighted  features of  Senator Ben  Stevens' proposal:   In                                                               
that 4-year period, the question  is answered, likely through the                                                               
courts; there  is an  opportunity for  the legislature  to adjust                                                               
the tax scheme; and at that  point there is some incentive to get                                                               
to project sanction, because the tax  rate can be changed if that                                                               
point isn't  reached within a  reasonable time or if  there isn't                                                               
some diligence in proceeding.   Saying this was presented to help                                                               
solve some of legislators' concerns,  Chair Seekins asked whether                                                               
the AG would be available to give his opinion on this subject.                                                                  
                                                                                                                                
MR. CLARK affirmed that.                                                                                                        
                                                                                                                                
CHAIR SEEKINS  asked:  If the  contract is passed as  is, but the                                                               
supreme  court says  no, is  everyone willing  to take  that risk                                                               
with that unanswered question in negotiating the contract?                                                                      
                                                                                                                                
3:03:30 PM                                                                                                                    
MR.  CLARK  suggested two  issues  are  involved, discussed  this                                                               
morning:   Under Article IX,  Section 4, of the  constitution, is                                                               
there power  to contract  away the taxation  powers of  the state                                                               
for any period of time?  If so,  is 30 years for oil and 45 years                                                               
for gas too much?  Mr.  Clark opined that the supreme court would                                                               
uphold it.                                                                                                                      
                                                                                                                                
He discussed  the expected  timeline.   Mr. Clark  explained that                                                               
within 60 days  of ratification by the  legislature, the governor                                                               
would sign  the agreement, assuming  it was the  contract already                                                               
worked  out.   The planning  process would  start 90  days later.                                                               
Around that time, 120 days  after signing of the contract, anyone                                                               
with a constitutional complaint must file it.                                                                                   
                                                                                                                                
He said the  administration hopes to persuade  the legislature to                                                               
have such  a case go directly  to the supreme court;  now it must                                                               
go through  the normal process.   Mr. Clark noted that  under the                                                               
contract, planning  would go forward for  15 months, contemplated                                                               
in the  Gantt chart  discussed earlier, up  to an  expenditure of                                                               
$120 million; at that  point, if there were no  decision from the                                                               
supreme court,  it would stop unless  the state wanted to  put in                                                               
money to keep the process going.                                                                                                
                                                                                                                                
He added that what is  contemplated is getting the process moving                                                               
and then having the supreme  court decide within that time period                                                               
whether this is constitutional or not.   If the latter, the court                                                               
would explain why not.  Mr.  Clark pointed out that the state and                                                               
the producers  would figure out what  needs to be changed  to win                                                               
the next round,  and whether they are  willing to do so.   If so,                                                               
another contract  would come  back to the  legislature.   If not,                                                               
something else must be done.                                                                                                    
                                                                                                                                
3:07:18 PM                                                                                                                    
SENATOR   BUNDE  reported   that  an   ExxonMobil  representative                                                               
recently told  him any  PPT beyond the  "20/20" -  20 percent tax                                                               
and  20 percent  credit -  would kill  the deal.   Senator  Bunde                                                               
asked  whether  the  administration  is  ready  to  address  that                                                               
eventuality.                                                                                                                    
                                                                                                                                
MR.  CLARK affirmed  that.   He  noted over  the  last year  many                                                               
things  were  laid  on  the  table as  immovable,  which  is  why                                                               
completing  the contract  took until  May 10.   Calling  the deal                                                               
remarkable  for  all   the  obstacles  overcome  to   get  to  an                                                               
agreement,  Mr. Clark  said he  would  view the  issue raised  by                                                               
Senator  Bunde as  another obstacle  to overcome.   The  focus of                                                               
this administration and  its gas team has been to  get a gas line                                                               
because  of its  overwhelming  importance to  the  state, and  to                                                               
negotiate towards  that position  in a  way that  the legislature                                                               
hopefully can support after necessary changes are made.                                                                         
                                                                                                                                
3:09:28 PM                                                                                                                    
SENATOR  ELTON surmised  it  is out  of the  question  to have  a                                                               
severability  clause in  the contract  dependent  on whether  the                                                               
supreme  court  decides it  is  unconstitutional  to provide  the                                                               
fiscal certainty  sought by  the producers.   He opined  that the                                                               
legislature hasn't  been rapacious over  the last 30 or  35 years                                                               
when it comes to taxing natural resources.                                                                                      
                                                                                                                                
MR.  CLARK  suggested looking  at  TAPS-related  history, when  a                                                               
number of changes in tax law were made.                                                                                         
                                                                                                                                
SENATOR ELTON  recalled a separate-accounting tax  system, backed                                                               
off  during  that  time,  which the  supreme  court  later  found                                                               
acceptable.   He said the  tax system  which was moved  to didn't                                                               
bring in the revenues that  separate accounting would have "if we                                                               
had stuck to our guns."                                                                                                         
                                                                                                                                
MR.  CLARK  observed  that  the  PPT  would  return  to  separate                                                               
accounting, in a way, which is  one advantage.  He indicated that                                                               
from 1967  through construction of  TAPS, seven or  eight changes                                                               
were made  to the tax laws,  all increases.  Offering  to provide                                                               
specific  information,  Mr. Clark  reported  that  a point  cited                                                               
during negotiations was  the number of times the  State of Alaska                                                               
changed the  tax laws during  TAPS construction; the  concern was                                                               
inability  to  accomplish  the   goal  of  the  fiscal  contract:                                                               
pinning down this project's economics.                                                                                          
                                                                                                                                
He  agreed, if  the supreme  court determines  either the  fiscal                                                               
certainty or  anything else isn't constitutional,  there would be                                                               
no contract  because there  is no severability  clause.   If that                                                               
happens, Mr.  Clark indicated, the administration's  current plan                                                               
is to  sit down  with the  producers and  go through  the court's                                                               
rationale, to try to negotiate around it and get to a contract.                                                                 
                                                                                                                                
CHAIR  SEEKINS  asked  whether the  aforementioned  position  was                                                               
taken uniformly by the major producers.                                                                                         
                                                                                                                                
MR.  CLARK answered  that  some were  more  adamant about  fiscal                                                               
certainty, while others were more  concerned about issues such as                                                               
capacity or  expansion.   For the most  part, there  were nuances                                                               
among the parties, an additional challenge in negotiating.                                                                      
                                                                                                                                
3:14:21 PM                                                                                                                    
DR. VAN MEURS pointed out that  there is an important tradeoff in                                                               
investors' minds  between fiscal  stability and  government take.                                                               
He said the  fiscal stability in Alaska's contract is  why it was                                                               
possible to  get significant  revenues equal  to the  status quo.                                                               
This is  in contrast  to Canada, with  its far  higher government                                                               
take  under lower  prices; he  gave details  about the  Mackenzie                                                               
Valley project.                                                                                                                 
                                                                                                                                
He emphasized that  if the supreme court  orders renegotiation of                                                               
the contract,  it will be  important to explain the  following to                                                               
the  court:   The  more  fiscal stability  is  reduced, the  more                                                               
government  take  is   reduced  in  order  to   create  the  same                                                               
risk/reward  balance   for  investors.    Dr.   van  Meurs  cited                                                               
Australia as an OECD country  that has large LNG projects without                                                               
fiscal  stability; under  low gas  prices, there  is no  royalty,                                                               
severance tax or production tax -  just corporate income tax.  He                                                               
asked whether Alaska would be willing to live with that.                                                                        
                                                                                                                                
MR. CLARK added his belief that  the risk from an adverse supreme                                                               
court decision is this:  Time  isn't on Alaska's side in terms of                                                               
waiting  and  renegotiating  and  doing  it  later.    Suggesting                                                               
Mr. Marks speak to this, since  he'd done the modeling, Mr. Clark                                                               
explained that the administration had  looked at the current TAPS                                                               
system without a gas pipeline, and  had deemed TAPS would stop by                                                               
about  2030.   With 10  years'  lead-time to  get a  gas line  in                                                               
place, that allows only 10 years  of wiggle room.  The state will                                                               
have a far less favorable negotiating position.                                                                                 
                                                                                                                                
3:21:54 PM                                                                                                                    
DR. VAN  MEURS, in response  to Senator Dyson, explained  that it                                                               
isn't unusual around the world  that if a government negotiates a                                                               
contract with a  petroleum company, parliament approves  it or it                                                               
goes back  to the bargaining  table; he cited  examples including                                                               
Egypt and  Kuwait.  Agreeing  with Mr.  Clark that time  isn't on                                                               
Alaska's  side,  and  expressing  deep  concern,  Dr.  van  Meurs                                                               
cautioned that  if this  contract is delayed  and it  is reported                                                               
internationally, companies eager  to market gas to  the U.S. will                                                               
see  a new  opportunity and  capitalize on  it.   It will  become                                                               
difficult  to get  into that  market slot  again; gas  prices and                                                               
technology,  especially LNG  transportation technology,  might go                                                               
against it.   This contract could fade away as  easily as the gas                                                               
contract  in the  1970s.   Acknowledging it  is unfortunate  that                                                               
time is so short, Dr. van Meurs suggested making the best of it.                                                                
                                                                                                                                
MR. CLARK concurred with Senator  Ben Stevens' assessment that if                                                               
it isn't done soon, there will  be a two-year delay.  Regardless,                                                               
there will be the supreme court issue.                                                                                          
                                                                                                                                
The committee took an at-ease from 3:26:23 PM to 3:45:08 PM.                                                                
                                                                                                                                
CHAIR  SEEKINS invited  representatives  from BP,  ConocoPhillips                                                               
and ExxonMobil to testify on fiscal certainty.                                                                                  
                                                                                                                                
3:45:49 PM                                                                                                                    
^David Van Tuyl, BP                                                                                                             
DAVID  VAN  TUYL,  Commercial  Manager,  Alaska  Gas  Group,  BP,                                                               
informed members  that topics discussed  this morning  also arose                                                               
during   negotiations   and   were  worked   through   with   the                                                               
administration.   He assured the  committee that others  have had                                                               
sleepless   nights  wondering   whether   the   deal  struck   is                                                               
suboptimal, but from a company  perspective.  He recalled hearing                                                               
questions  from  BP's  internal groups  similar  to  those  heard                                                               
today.   During the hard  negotiations, many  contract provisions                                                               
were  resolved in  a  way BP  didn't necessarily  prefer.   As  a                                                               
whole, however,  BP believes  the contract  is fair  and provides                                                               
the fiscal stability necessary to  attract the massive investment                                                               
required to allow the project to advance.                                                                                       
                                                                                                                                
He  noted  the essence  of  the  Strand Gas  Act  is  to allow  a                                                               
contract  to  be  developed  to   provide  the  fiscal  stability                                                               
necessary to enable  a gas pipeline.  For this  project, really a                                                               
series of  mega-projects, Mr. Van  Tuyl said the biggest  cost to                                                               
investors isn't  the capital  cost, but  is the  government take.                                                               
This  risk  can  be  mitigated   through  a  contract.    Simply,                                                               
investors want  to know  the rules  so the  necessary investments                                                               
can be  made.  One reason  for fiscal certainty is  linked to the                                                               
size  of the  investment and  associated risk.   That  is why  BP                                                               
requires fiscal certainty in this project.                                                                                      
                                                                                                                                
He  emphasized that  including  both oil  and  gas is  critically                                                               
important to  BP; as  Dr. van  Meurs had  discussed, this  is the                                                               
international norm for attracting  investment for major projects,                                                               
since  oil  and  gas  are  inextricably  linked,  physically  and                                                               
commercially.    Mr. Van  Tuyl explained  that  to  underpin  the                                                               
project, the shippers - the  producers - will commit to long-term                                                               
FT agreements.   Thus they will commit to  maintaining those same                                                               
oil and  gas facilities  for the  term of  the FT  agreements and                                                               
decades longer, which is a  significant challenge and undertaking                                                               
and is an implied work commitment for oil.                                                                                      
                                                                                                                                
He  reported  that at  BP  they  talk  about the  50-year  future                                                               
underpinned by  this gas pipeline.   Mr. Van Tuyl  explained that                                                               
because of  upfront commitments, BP  believes it is  essential to                                                               
protect investors  from after-the-fact tax increases,  which have                                                               
happened in Alaska during the last 30 years.                                                                                    
                                                                                                                                
3:51:47 PM                                                                                                                    
MR. VAN TUYL recalled a series of reports generated by the                                                                      
Anchorage Chamber of Commerce this year that highlight the                                                                      
importance of fiscal stability.  He read the following excerpt:                                                                 
                                                                                                                                
     As to why the State  should even consider entering into                                                                    
     tax contracts  under the Stranded  Gas Act,  the reason                                                                    
     is  to substantially  reduce or  eliminate  one of  the                                                                    
     major risks  that would-be investors perceive  in going                                                                    
     forward with a Gas Pipeline.                                                                                               
                                                                                                                                
     And what, exactly,  is this risk that  would be reduced                                                                    
     or eliminated?   The risk is that -  once the investors                                                                    
     have  irrevocably committed  to build  a Gas  Pipeline,                                                                    
     and  especially once  it  is built  -  the State  would                                                                    
     "change  the  rules"  by  raising   its  taxes  on  the                                                                    
     Pipeline   and   materially  lowering   the   financial                                                                    
     performance  of  the  investment below  the  investors'                                                                    
     expectations for it.   By then, of course,  it would be                                                                    
     too late for the investors to change their mind.                                                                           
                                                                                                                                
     How important  do potential investors see  this risk to                                                                    
     be?   It's very important,  at least for  some parties.                                                                    
     Once   built,  a   project  that   costs  as   much  as                                                                    
     $20 billion or  more becomes far  more tempting  to tax                                                                    
     than,  say,  enacting a  state  sales  tax or  personal                                                                    
     income tax or using any  portion of the earnings of the                                                                    
     Permanent  Fund   to  pay  for   the  costs   of  state                                                                    
     government.                                                                                                                
                                                                                                                                
     If investors  don't have assurance  that taxes  on them                                                                    
     and  their  project  won't  be   raised  once  the  Gas                                                                    
     Pipeline is  underway, they  will make  some assumption                                                                    
     about the  likelihood that this would  happen, and they                                                                    
     will  factor   that  assumption  into   their  economic                                                                    
     calculations  about  whether  to   invest  in  the  Gas                                                                    
     Pipeline or not.                                                                                                           
                                                                                                                                
     Of  all the  things that  are in  the State's  power to                                                                    
     change  or  influence,  the  elimination  both  of  the                                                                    
     actual taxation risk and  of investors' perception that                                                                    
     this risk exists is among  the most powerful things the                                                                    
     State can do  to help move the construction  of the Gas                                                                    
     Pipeline forward.                                                                                                          
                                                                                                                                
     The taxation  risk appears particularly great  in light                                                                    
     of Alaska's  own historical track  record with  the $8+                                                                    
     billion trans-Alaska  oil pipeline and  the development                                                                    
     of the  Prudhoe Bay  field on the  North Slope.   After                                                                    
     the  pipe  for  TAPS   had  been  ordered  and  started                                                                    
     arriving  in Alaska,  the State  changed  the tax  laws                                                                    
     applicable  to Prudhoe  Bay and  TAPS 14  times in  the                                                                    
     next decade,  and the great  majority of  those changes                                                                    
     were tax increases for Prudhoe Bay or TAPS, or both.                                                                       
                                                                                                                                
3:54:08 PM                                                                                                                    
MR.  VAN  TUYL listed  taxation  legislation  enacted in  Alaska,                                                               
reminding  members that  the Prudhoe  Bay  discovery occurred  in                                                               
late 1967:   In April 1968,  the oil production tax  was tripled.                                                               
Two  years  later,  the  gas   production  tax  was  raised  from                                                               
1 percent to  4 percent,  with a stair-step  system for  rates on                                                               
oil related  to the production rate.   Two years after  that, the                                                               
stair-step rate was  changed and a credit  against the cents-per-                                                               
barrel rate was applied against royalty.   A year later, in 1973,                                                               
after the  pipe had arrived  in Alaska, that credit  was repealed                                                               
and the stair-step  rates were increased; the  20-mill ad valorem                                                               
severance tax  now in place  was enacted; and a  conservation tax                                                               
was enacted.                                                                                                                    
                                                                                                                                
He continued, noting in 1975  a temporary new two-year ad valorem                                                               
tax  was enacted.   In  1976, the  limit on  a municipality's  ad                                                               
valorem tax  (AVT) was  raised from $1,000  per capita  to $1,500                                                               
per capita, and  the concept of prevailing  value was instituted.                                                               
In May  1977, still before  first oil  from Prudhoe Bay,  the ELF                                                               
factor  for production  taxes was  passed.   After first  oil, in                                                               
July  1978, the  separate-accounting  income  tax, referenced  by                                                               
Senator Elton at  this meeting, was originally passed.   In 1980,                                                               
the  personal  income  tax  was  repealed.    In  1987,  separate                                                               
accounting   was   repealed   and  replaced   with   a   modified                                                               
apportionment  system, and  an  ELF  "rounding rule"  effectively                                                               
increased  the ELF  rate.   Perhaps  a  month later,  legislation                                                               
raised the  oil conservation tax  and imposed a  gas conservation                                                               
tax.   In 1989,  legislation amended the  ELF formula,  and other                                                               
legislation created the 5-cents-a-barrel tax surcharge on oil.                                                                  
                                                                                                                                
3:57:17 PM                                                                                                                    
MR.  VAN  TUYL  concluded  the   taxation  history,  noting  1994                                                               
legislation increased  the amount  of the spill-response  fund to                                                               
greater  than  $50  million,  and  legislation  last  year  again                                                               
modified the  production tax  system, with  ELF aggregation.   Of                                                               
the aforementioned changes, particularly  important were the ones                                                               
near  the  time  of  the investments  associated  with  TAPS  and                                                               
Prudhoe Bay.   That is why BP seeks fiscal  stability to underpin                                                               
the investment of this project.                                                                                                 
                                                                                                                                
He   explained   that   the  fiscal-stability   model   is   used                                                               
internationally,  as  mentioned  by  Dr.  van  Meurs,  to  enable                                                               
projects  that  investors  otherwise wouldn't  find  sufficiently                                                               
attractive.   Mr. Van Tuyl reported  that a prime example  for BP                                                               
is  the   recently  completed  Baku-Tbilisi-Ceyhan   (BTC)  mega-                                                               
project,  which   many  predicted  wouldn't  happen   because  of                                                               
complexities  and  yet  was  made   possible  by  a  fiscal-terms                                                               
contract similar to  what is discussed here; it has  a term of 40                                                               
years from first  oil, with two optional  10-year extensions, and                                                               
thus in  effect is  up to  a 66-year term,  since it  was entered                                                               
into 6 years before first oil.                                                                                                  
                                                                                                                                
3:59:41 PM                                                                                                                    
MR.  VAN TUYL  highlighted Dr.  van Meurs'  testimony today  on a                                                               
typical work  commitment in a production-sharing  contract (PSC),                                                               
where there  might be  specific wells drilled  by a  certain date                                                               
and so  forth, versus a  midstream mega-project,  which typically                                                               
doesn't have a work commitment.   Noting the BTC fiscal agreement                                                               
is publicly  available on the  Internet, which is a  bit unusual,                                                               
Mr.  Van   Tuyl  read  an   excerpt,  which  specifies   that  no                                                               
participant  is in  any  manner  obligated to  any  of the  state                                                               
authorities  to undertake  any project  activities; to  carry out                                                               
the project; or to continue  any project activities that may have                                                               
begun  in reliance  on that  or any  other project  agreement, or                                                               
otherwise.                                                                                                                      
                                                                                                                                
He pointed  out that  the language  is almost  the opposite  of a                                                               
work commitment.   Mr. Van Tuyl  said it clarifies that  what the                                                               
contract provides  for is long-term fiscal  stability, relying on                                                               
that stability  to attract  the investment  - not  compelling the                                                               
investment with  a specific work  commitment.  He  emphasized the                                                               
end result:  The BTC project was built and is now shipping oil.                                                                 
                                                                                                                                
He  recalled recent  meetings on  the  North Slope  at which  the                                                               
current contract and project were  discussed with employees.  Two                                                               
people from Baku attended who'd  worked on that project, and were                                                               
intrigued  with  the  similar   Alaska  project.    Mr. Van  Tuyl                                                               
reported they'd  talked about jobs and  new opportunities created                                                               
in Baku.   A South  Caucasus pipeline in  the same area  has been                                                               
built under a similar fiscal-terms  contract, with a 60-year term                                                               
instead of a 40-year term with two extensions.                                                                                  
                                                                                                                                
He  closed by  saying BP  wants the  same result  for the  Alaska                                                               
project.    The  company  develops  projects  around  the  world,                                                               
entering  into  agreements  that  enable  those  projects  to  be                                                               
developed.   Mr.  Van  Tuyl  emphasized BP's  view:   The  fiscal                                                               
stability provided in  the contract is essential  to allowing the                                                               
project to go ahead.                                                                                                            
                                                                                                                                
4:02:58 PM                                                                                                                    
SENATOR ELTON referred  to Mr. Van Tuyl's  testimony with respect                                                               
to taxes  and asked:  Given  BP's history with the  state, has it                                                               
been mutually beneficial?                                                                                                       
                                                                                                                                
MR.  VAN  TUYL offered  his  belief  that  it has  been  mutually                                                               
beneficial.   He  reiterated earlier  points, including  BP's 50-                                                               
year future in Alaska; that the  key is the gas pipeline project;                                                               
that  what enables  the project  is this  fiscal contract,  which                                                               
provides fiscal stability;  and that anywhere in  the world there                                                               
is  investment of  this kind,  there is  a need  to manage  risks                                                               
where  possible, including  fiscal  risks, which  can be  managed                                                               
through a contract.                                                                                                             
                                                                                                                                
4:05:31 PM                                                                                                                    
^Wendy King, ConocoPhillips                                                                                                     
WENDY KING, Director of External  Strategies, ANS Gas Development                                                               
Team,   ConocoPhillips   Alaska,   Inc.,   characterized   fiscal                                                               
stability as a  core pillar to the contract.   She explained that                                                               
in 2001-2002,  when the  three companies  looked at  updating the                                                               
engineering  and costs,  trying  to assess  risk versus  rewards,                                                               
they concluded  more work  was needed to  try to  mitigate risks.                                                               
Some of  this happened  through so-called  government frameworks:                                                               
the federal  Alaska Natural Gas  Pipeline Act  (ANGPA), supported                                                               
by all three  companies, and reauthorization of  the Stranded Gas                                                               
Act, also  in 2003, which  ConocoPhillips supported as a  tool to                                                               
allow developing government frameworks  needed to go forward with                                                               
this project with the state.                                                                                                    
                                                                                                                                
She said a key  purpose of the Stranded Gas Act  was to allow the                                                               
fiscal terms, applicable  to a qualified sponsor or  members of a                                                               
sponsor  group,  to  be  tailored   to  the  particular  economic                                                               
conditions, and to establish those  fiscal terms in advance, with                                                               
as much  certainty as  the state constitution  allows.   Ms. King                                                               
informed  members that  ConocoPhillips  therefore envisioned  all                                                               
along that there'd be a question of constitutionality.                                                                          
                                                                                                                                
She   recalled  discussion   in  2003,   and  specifically   when                                                               
negotiating Article 27 of the  contract.  Ms. King explained that                                                               
this critical  article addresses judicial challenge;  it says the                                                               
project  sponsors should  continue  diligent advancement  through                                                               
either  completion of  project planning,  15 months,  or, to  her                                                               
belief,  $120 million,  even though  the constitutional  question                                                               
won't  have  been addressed  yet.    Ms.  King  said there  is  a                                                               
recognition  that the  final answer  will need  to come  with the                                                               
constitutional test.                                                                                                            
                                                                                                                                
She referred  to Mr.  Van Tuyl's testimony.   Ms.  King specified                                                               
what is  sought with respect  to fiscal stability:   removing the                                                               
risks associated with changes to  Alaska Statute, regulations and                                                               
interpretations  as the  project  is being  moved  forward.   She                                                               
pointed out  that although  this removes one  risk -  fiscal risk                                                               
with  the State  of Alaska  - it  doesn't remove  others such  as                                                               
permitting or  construction delays, labor  shortages, procurement                                                               
challenges, cost overruns and market-price volatility.                                                                          
                                                                                                                                
4:09:13 PM                                                                                                                    
MS.  KING observed  that a  number of  provisions out  there help                                                               
achieve  fiscal  stability.   For  example,  there is  a  fiscal-                                                               
stability term  right now with  the State of Alaska  with respect                                                               
to  leases signed  for  Prudhoe Bay;  that  contract has  existed                                                               
since  the 1960s.   She  related  personal experience,  including                                                               
involvement  with life-of-project  contracts that  give stability                                                               
with respect to  the contract as long as a  project is producing,                                                               
as  well  as  involvement with  the  exploration-production  PSCs                                                               
discussed  by Dr. van  Meurs.   Most of  those are  confidential,                                                               
Ms. King  pointed out,  although  Dr. van  Meurs had  distributed                                                               
publicly  available   model  contracts   and  Mr. Van   Tuyl  had                                                               
mentioned one contract in the public arena.                                                                                     
                                                                                                                                
She  turned  to  issues  raised by  Senators  Dyson  and  Wilken.                                                               
Ms. King surmised, because of  confidential negotiations, that it                                                               
is  hard for  the public  to understand  that the  companies have                                                               
been diligently  advancing the project.   She  predicted diligent                                                               
advancement  will  be  easy  to  determine,  however,  since  the                                                               
project  is so  big.   The companies  will be  spending millions,                                                               
soon  to  be  hundreds  of   millions,  advancing  it.    Drawing                                                               
attention to  the project  summary - a  separate document  on the                                                               
website that clearly  describes what the schedule  is believed to                                                               
be  right now  - Ms. King  said it  will need  to change,  but is                                                               
publicly available  and will  be updated  annually so  people can                                                               
see whether the project is advancing diligently.                                                                                
                                                                                                                                
She  told  members that  there  are  real penalties  -  primarily                                                               
termination of  the contract and  thus fiscal stability -  if the                                                               
state doesn't  believe the project is  being advanced diligently.                                                               
Ms.  King emphasized  there also  may be  opportunities to  cure.                                                               
Addressing  motivation  to keep  costs,  she  called this  a  key                                                               
driver  in alignment  among the  parties, since  the majority  of                                                               
value  in the  project comes  from delivering  gas at  the lowest                                                               
cost possible.                                                                                                                  
                                                                                                                                
4:13:24 PM                                                                                                                    
SENATOR  ELTON  clarified  that  penalties  are  incurred  if  an                                                               
arbitrator -  not the  state -   decides  a company  isn't acting                                                               
diligently.  Furthermore,  an arbitrator cannot find  in favor of                                                               
the state if  the company makes a compelling  argument that there                                                               
was an error in judgment.                                                                                                       
                                                                                                                                
MS. KING,  in response to  Chair Seekins as well,  specified that                                                               
it will  be a  tribunal with three  members and  that technically                                                               
Senator  Elton is  correct:   the state  would file  a notice  of                                                               
dispute to  begin the termination process,  and it would go  to a                                                               
tribunal  as  outlined in  Article  5,  work commitments.    With                                                               
respect to  dispute resolution, she  recalled that Article  5 was                                                               
important to  the state  because of wanting  a rapid  decision on                                                               
contract  termination.    Thus  the  informal  dispute-resolution                                                               
process  had been  waived.   With respect  to the  opportunity to                                                               
cure  within the  contract,  she noted  this is  at  the time  of                                                               
filing  a notice  of dispute,  but  also exists  if the  tribunal                                                               
rules that there hasn't been diligent advancement.                                                                              
                                                                                                                                
4:15:13 PM                                                                                                                    
^Bill McMahon, ExxonMobil                                                                                                       
S.A.  (BILL)   McMAHON  JR.,   Commercial  Manager,   Alaska  Gas                                                               
Development, ExxonMobil  Production Company,  began by  saying he                                                               
would  echo comments  by the  administration as  well as  Mr. Van                                                               
Tuyl and  Ms. King about  fiscal stability.   As for  leaving the                                                               
PPT  open  before  sanction  so  it  could  change,  Mr.  McMahon                                                               
highlighted  that it  would expose  the producers  to significant                                                               
risk, since close  to $1 billion will be spent  to get to project                                                               
sanction.  For  example, the legislature could  increase taxes to                                                               
pressure  the companies  to hurry  the project.   He  referred to                                                               
previous testimony  about increased risk of  failure for projects                                                               
that become  schedule-driven, especially mega-projects,  if there                                                               
is pressure to go faster than prudent.                                                                                          
                                                                                                                                
He estimated that  an increase in PPT taxes by  50 percent in the                                                               
last two years before sanction  would increase the producers' tax                                                               
burden   such  that   a  $20 billion   project  would   become  a                                                               
$23 billion  project.   Looking at  it another  way, Mr.  McMahon                                                               
said it would  consume half of the first year  of production from                                                               
the project.  Leaving that open increases risk for the project.                                                                 
                                                                                                                                
He recalled that  in discussing the PPT  with the administration,                                                               
the sponsor group  sought a 12.5 percent tax rate,  but agreed to                                                               
20 percent  - doubling  production taxes at  today's prices  - in                                                               
return for  stability with  respect to oil,  because that  is how                                                               
important the stability is.  Mr.  McMahon noted if the project is                                                               
to the point of sanctioning but  something has gone wrong and the                                                               
economics  aren't  right, the  production  taxes  will have  been                                                               
doubled but  there still won't  be a pipeline.   Thus uncertainty                                                               
about building the pipeline hits both sides.                                                                                    
                                                                                                                                
He  emphasized  that  fiscal  stability  is  critical  to  ensure                                                               
commercial  viability for  this  project.   Mr. McMahon  reported                                                               
that during  contract negotiations it  was agreed from  the onset                                                               
that significant  steps needed to  be taken to mitigate  risk and                                                               
improve  commercial  viability.    On   May  24,  2006,  a  final                                                               
agreement was reached that he  opined meets the state's needs and                                                               
provides fiscal stability for the  producers.  Adverse changes to                                                               
taxes on  oil and  gas, including a  reserves tax,  would clearly                                                               
undermine the fiscal stability necessary  to advance the project,                                                               
Mr. McMahon warned.  He closed  by saying the three producers are                                                               
prepared to  sign this fiscal  contract and progress  the project                                                               
when  it  is  approved  by  the legislature  and  signed  by  the                                                               
governor.                                                                                                                       
                                                                                                                                
4:19:52 PM                                                                                                                    
MR. McMAHON,  in response  to Senator Wilken,  said the  LLCs are                                                               
being   discussed    between   the   sponsor   group    and   the                                                               
administration, and are  being advanced at this point.   He added                                                               
that  those   agreements  are  highly  important   for  the  full                                                               
understanding  of  this  contract,  and he  wouldn't  expect  the                                                               
fiscal contract to be signed without being able to see them.                                                                    
                                                                                                                                
SENATOR BEN  STEVENS highlighted  the number  of decisions  to be                                                               
made.   While  the producers  say  they're ready  to execute  the                                                               
contract,  the legislature  is still  at the  point of  approving                                                               
changes to  the Stranded  Gas Act.   He  said the  public comment                                                               
period  closed two  days ago  on the  contract, for  example, but                                                               
under  statute  the legislature  cannot  address  that until  the                                                               
fiscal  interest  finding is  presented  by  the commissioner  of                                                               
revenue.  Suggesting the need for  clarity on how to proceed, and                                                               
indicating  the  contract  probably  won't be  executed  until  a                                                               
template is seen for the  LLC or pipeline corporation, he pointed                                                               
out that the contract cannot  be fulfilled without such an entity                                                               
in place.                                                                                                                       
                                                                                                                                
CHAIR SEEKINS  noted today's discussion relates  to amendments to                                                               
the Stranded Gas Act when  talking about as much fiscal certainty                                                               
as the state  constitution allows, but some  ancillary issues are                                                               
inextricably linked.   With  respect to  the calendar,  he agreed                                                               
with  Senator  Ben  Stevens,  saying  he  wasn't  sure  what  was                                                               
happening in  response to the  public comment period  that closed                                                               
on  the  24th  regarding  any   potential  modifications  to  the                                                               
contract  that will  be  proposed to  the  legislature under  the                                                               
Stranded Gas Act.  He suggested  perhaps this wasn't as far along                                                               
as everyone hoped.                                                                                                              
                                                                                                                                
SENATOR  BUNDE  said he  also  feels  the  pressure of  time  and                                                               
frustration  of spinning  of wheels.    Alluding to  SB 3002  and                                                               
SB 3001,  he expressed  hope that  the chairman  would focus  the                                                               
committee more tightly on amendments  to the Stranded Gas Act and                                                               
the other first step, the PPT.                                                                                                  
                                                                                                                                
CHAIR SEEKINS  suggested the need  to hear about  related issues,                                                               
however.   For example,  tomorrow the  committee would  hear from                                                               
Anadarko with respect to the  draft contract.  Then the committee                                                               
would address  proposed amendments to  the Stranded Gas Act.   He                                                               
indicated he would ask Attorney  General Márquez to testify about                                                               
the language "with  as much certainty as the  Constitution of the                                                               
State of Alaska allows" in SB 3002.                                                                                             
                                                                                                                                
4:28:08 PM                                                                                                                    
SENATOR  WILKEN  asked what  happens  in  the following  scenario                                                               
under  the  fiscal  contract:    As  the  project-sanction  point                                                               
approaches,  one producer  decides this  doesn't meet  the hurdle                                                               
rate, for example, and thus  that company doesn't want to proceed                                                               
for legitimate business reasons.                                                                                                
                                                                                                                                
4:29:42 PM                                                                                                                    
^Patrick Coughlin, Senior Counsel, BP                                                                                           
PATRICK  COUGHLIN, Senior  Counsel, BP,  replied that  the fiscal                                                               
contract  addresses  that  possibility.   If  one  of  the  group                                                               
doesn't wish to go forward,  it can terminate, with consequences.                                                               
The others  can continue  by picking up  the obligations  of that                                                               
entity.  The consequences to  the withdrawing company depend upon                                                               
timing.   After the  state has  made a  FT commitment in  an open                                                               
season, a  producer cannot withdraw without  severe consequences:                                                               
relinquishing interests  in all of  Alaska.  That  producer would                                                               
be forced to either sell, in  a distress sale, or give everything                                                               
up to  the State  of Alaska.   All investment  would be  lost and                                                               
would become the property of the state.                                                                                         
                                                                                                                                
He noted if that happens,  options allow the project to continue.                                                               
If  the other  sponsors elect  not  to go  forward, Mr.  Coughlin                                                               
explained,  the sanctions  again depend  upon timing.   After  an                                                               
open  season in  which the  state has  taken FT  commitments, the                                                               
consequences  will be  severe.   Once  the state  has made  those                                                               
types of  commitments, it would  be putting itself at  risk; thus                                                               
the state negotiated this to ensure adequate protection.                                                                        
                                                                                                                                
SENATOR WILKEN  recalled discussion  of that at  Centennial Hall.                                                               
He asked which article in the contract addresses those options.                                                                 
                                                                                                                                
AN  UNIDENTIFIED  SPEAKER offered  his  recollection  that it  is                                                               
Article 31, paragraph (5).                                                                                                      
                                                                                                                                
MR. COUGHLIN,  in response to  Senator Wilken, reported  that one                                                               
provision  relating to  judicial challenge  provides that  if any                                                               
portion  of   the  contract   is  declared   unconstitutional,  a                                                               
participant  may  elect to  terminate;  it  is a  participant-by-                                                               
participant  decision.   It is  possible the  supreme court  will                                                               
declare something unconstitutional  that might not be  so bad and                                                               
the parties  might decide to go  forward anyway.  So  that option                                                               
exists.   If a party elects  to withdraw at that  point, however,                                                               
the party  faces the  consequences of  losing the  investment and                                                               
also  losing fiscal  stability and  becoming subject  to whatever                                                               
tax the state chooses to impose.                                                                                                
                                                                                                                                
He  explained  that the  other  producers  still would  have  the                                                               
option  of picking  up the  obligations and  continuing with  the                                                               
project,  or   else  finding  someone  else   to  substitute  in.                                                               
Mr. Coughlin  noted  if  someone  is substituted  in,  there  are                                                               
protections for the  state.  It couldn't be  just any mom-and-pop                                                               
organization and would have to be  approved by the state.  So the                                                               
state would  have comfort that  the new entity would  fulfill the                                                               
obligations agreed to by the withdrawing company.                                                                               
                                                                                                                                
4:35:07 PM                                                                                                                    
^David W. Márquez, Attorney General                                                                                             
DAVID  W. MÁRQUEZ,  Attorney General,  Department  of Law  (DOL),                                                               
provided  a  handout  labeled  "Excerpts  of  Attorney  General's                                                               
Presentation to the Legislature  at Centennial Hall Regarding the                                                               
May  10, 2006  Attorney  General's Opinion  on  the Authority  to                                                               
Provide Fiscal  Certainty Under Article  IX, Sections 1 and  4 of                                                               
the  Alaska Constitution."   Noting  this would  be the  basis of                                                               
today's  slide presentation,  he referred  interested persons  to                                                               
DOL's website  for the  full  presentation;  the May  10 opinion;                                                               
and  opinions from  legislative counsel  and others,  as well  as                                                               
DOL's responses.                                                                                                                
                                                                                                                                
He  explained that  many aspects  of this  contract will  present                                                               
unique issues to the Alaska Supreme  Court.  Pointing out that he                                                               
couldn't predict how the court  would address fiscal certainty or                                                               
any other  issue that might  be raised, Attorney  General Márquez                                                               
offered his  belief that the  May 10 opinion  thoroughly examined                                                               
the issue.   It was  conducted over  a couple of  years, starting                                                               
before he became  AG.  Prior to devoting  resources to developing                                                               
a  contract,  the administration  had  wanted  some assurance  on                                                               
whether it was worth the time and effort.                                                                                       
                                                                                                                                
He noted that, through the  Stranded Gas Act, the legislature had                                                               
directed the administration to develop  a contract, recognizing a                                                               
possible constitutional  issue with  respect to  fiscal certainty                                                               
and  allowing  people  to  bring suit  in  an  expedited  manner.                                                               
Giving  further history,  Attorney  General Márquez  said a  good                                                               
case was made  as to why the supreme court  likely would find the                                                               
fiscal contract  constitutional; thus  DOL felt  confident enough                                                               
to devote  thousands of staff  hours and, with  the legislature's                                                               
appropriations, millions  of dollars, to develop  it.  Similarly,                                                               
he  surmised the  producers spent  much time  and money  with the                                                               
expectation that the  supreme court, more likely  than not, would                                                               
find it constitutional.  Thus it was thoroughly researched.                                                                     
                                                                                                                                
He  told  members the  administration  and  legislature would  be                                                               
shirking their  duty if  they didn't  address the  policy issues,                                                               
deciding   whether  to   enter  into   this  contract   with  the                                                               
expectation  that DOL  will do  everything it  can to  defend its                                                               
constitutionality.      Attorney   General   Márquez   said   the                                                               
legislature  often   passes  laws  in  spite   of  constitutional                                                               
concerns.  He  opined that the legislature has the  right and the                                                               
obligation  to  go  forward  with legislation  it  deems  in  the                                                               
citizens' best  interest.  The  Alaska Supreme Court  will decide                                                               
when a case is brought before it.                                                                                               
                                                                                                                                
He turned  to the  slides, duplicated in  the handout.   Attorney                                                               
General Márquez said the question  is whether Sections 1 and 4 of                                                               
Article IX  of Alaska's  constitution permit  the state  to enter                                                               
into a long-term fiscal contract under  the Stranded Gas Act.  He                                                               
noted  that slide 3,  with respect  to whether  states can  enter                                                               
into  binding  fiscal  contracts   that  cannot  be  modified  by                                                               
subsequent  legislative  enactments,  says the  federal  contract                                                               
clause provides  that no state  shall pass any law  impairing the                                                               
obligation of contracts.                                                                                                        
                                                                                                                                
4:41:48 PM                                                                                                                    
ATTORNEY GENERAL  MÁRQUEZ continued,  reporting that in  a series                                                               
of  cases, starting  in the  1800s, the  U.S. Supreme  Court held                                                               
that  the contract  clause applied  to contracts  in which  state                                                               
legislatures agreed  to specific tax  obligations.  He  read from                                                               
slide  4,  saying although  the  court  found there  are  certain                                                               
inherent  and  essential  elements  of  sovereignty  -  "reserved                                                               
powers" - that can never be  contracted away, the court also held                                                               
that the  taxation power  isn't one.   Rather, it  is "alienable"                                                               
and  can  be  bargained  away for  consideration  because  it  is                                                               
incidental to  the exercise of governmental  functions and exists                                                               
to facilitate inherent and legitimate governmental functions.                                                                   
                                                                                                                                
He continued  with slide  4, saying any  such alienation  must be                                                               
allowable under  the state's constitution  and must  be expressed                                                               
in  a clear  and  unequivocal manner;  it  must be  unmistakable.                                                               
Attorney General Márquez  said passage of an  Act authorizing the                                                               
governor to execute the contract on  behalf of the state would be                                                               
such  a  clear  and  unequivocal expression  of  the  alienation.                                                               
Furthermore,  a  state   can  be  held  to   a  contract  despite                                                               
subsequent state  legislation that alters  the fiscal terms  in a                                                               
manner  that   substantially  impairs  the  contract   and  isn't                                                               
otherwise  justified  as reasonable  and  necessary  to serve  an                                                               
important public purpose.                                                                                                       
                                                                                                                                
He turned  to slide  5, saying  Sections 1 and  4 of  Article IX,                                                               
read  together, provide  the  authority to  enter  into a  fiscal                                                               
contract  that would  be enforceable  under the  federal contract                                                               
clause.   Noting Section  1 provides that  the power  of taxation                                                               
shall never be surrendered, Attorney  General Márquez opined that                                                               
many  critics of  the fiscal  contract stop  there; however,  the                                                               
constitution  goes  on  to  say  that this  power  shall  not  be                                                               
suspended or contracted away except  as provided in this article.                                                               
Section 4 provides  for specific  exemptions from taxes,  such as                                                               
for  properties   owned  by  state  and   local  governments  and                                                               
nonprofits, and  also provides that  other exemptions of  like or                                                               
different kind may be granted by general law.                                                                                   
                                                                                                                                
He said  the history of  Sections 1 and  4, depicted in  slide 6,                                                               
shows  that  the  Framers  chose  to  give  the  legislature  the                                                               
flexibility  to provide  for  tax exemptions  by  general law  to                                                               
develop industries  in Alaska.  They  rejected stricter language,                                                               
endorsed economic  development incentives and were  familiar with                                                               
contemporaneous industrial  incentive Acts.  Turning  to slide 7,                                                               
Attorney   General  Márquez   pointed   out   that  the   Framers                                                               
specifically  considered  and  rejected  a  model  provision  put                                                               
forward by the  National Municipal League that  said the taxation                                                               
power shall never be surrendered, suspended or contracted away.                                                                 
                                                                                                                                
4:44:57 PM                                                                                                                    
ATTORNEY  GENERAL  MÁRQUEZ  reported  that  the  Framers  instead                                                               
adopted Article IX,  Section 1, which says the  power of taxation                                                               
shall  never  be  surrendered,  and shall  not  be  suspended  or                                                               
contracted  away  except  as  provided in  this  article.    They                                                               
rejected  the   stronger  wording   and  adopted   more  flexible                                                               
language.    He  opined  that the  stricter  wording  arose  from                                                               
concerns  of some  states that  it  restricted the  power to  tax                                                               
businesses through approval of long-term  tax rates and corporate                                                               
charters which were later upheld  by the U.S. Supreme Court under                                                               
the contracts clause in the cases he'd discussed in the opinion.                                                                
                                                                                                                                
He  continued  with  slide  7.   Attorney  General  Márquez  said                                                               
consultants  to   the  Framers  noted  that   without  the  model                                                               
provision - the  stricter wording - Alaska could be  bound by the                                                               
types  of fiscal  contracts  other states  had  authorized to  be                                                               
bound  by.    Nonetheless,  the Framers  rejected  this  stricter                                                               
language  in   light  of  Alaska's  unique   circumstances  as  a                                                               
resource-rich but sparsely populated  state without local capital                                                               
available to develop its resources.                                                                                             
                                                                                                                                
He read  from slide 8, posing  the following question:   What did                                                               
the  Framers mean  when they  stated that  the power  of taxation                                                               
shall not be suspended or  contracted away, except as provided in                                                               
this  article?    Attorney  General   Márquez  told  members  the                                                               
official commentary about  Section 1 explained that  the power to                                                               
tax  is never  to be  surrendered, but  under terms  that may  be                                                               
established  by   the  legislature,   it  may  be   suspended  or                                                               
temporarily  contracted  away.   This  could  include  industrial                                                               
incentives, for example.                                                                                                        
                                                                                                                                
He  continued, noting  the convention  history demonstrates  that                                                               
the Framers were referencing the  tax-exemption power provided in                                                               
Section 4, which says other  exemptions of like or different kind                                                               
may be granted by general law.   Attorney General Márquez went on                                                               
to say that  the official commentary to  Section 4 explained that                                                               
the legislature is  authorized to make further  tax exemptions to                                                               
encourage, among other purposes, new industry.                                                                                  
                                                                                                                                
He  related   historical  information  from  slides   9  and  10.                                                               
Attorney General  Márquez said Delegate  White had  indicated the                                                               
last paragraph  of Section 4  provides that other  exemptions may                                                               
be  provided by  general law,  and that  this would  allow, among                                                               
other  things,  granting of  tax  incentives  to new  industries;                                                               
Delegate Nerland had  said this is the provision  that allows for                                                               
some  exemption or  inducement to  industries or  similar things;                                                               
Delegate Smith  had asked whether  that isn't, in  effect, saying                                                               
exemptions of any  kind may be granted; and  Delegate Nerland had                                                               
responded to Delegate  Smith, "Yes, that was the  purpose of it."                                                               
He opined that such archival  history demonstrates the following:                                                               
Although the prohibition against  surrendering taxation power may                                                               
be absolute,  the prohibition  against suspending  or contracting                                                               
away  taxing power  is  not  absolute, but  is  qualified by  the                                                               
permissible-exemption provision in Section 4.                                                                                   
                                                                                                                                
He turned  to slides 11  and 12.   Attorney General  Márquez said                                                               
that consistent  with the Framers'  intent, the Stranded  Gas Act                                                               
provides fiscal certainty for the  length of the project in order                                                               
to  realize  the  state's  long-term  goal of  an  ANS  gas  line                                                               
necessary to  monetize its vast  gas resources.  The  Finance and                                                               
Taxation Committee  of the Framers  had expressly  considered but                                                               
chose not  to include any  time limit on tax  exemptions provided                                                               
for in Section 4.                                                                                                               
                                                                                                                                
He further  opined that if  tax liability  could constitutionally                                                               
be  entirely   extinguished  by  granting  an   exemption  for  a                                                               
particular  industry, it  follows that  tax liability  could also                                                               
constitutionally be  extinguished in favor  of fixed  payments in                                                               
lieu of those  taxes for a set term.   In short, Attorney General                                                               
Márquez said,  the proposed Stranded  Gas Act contract  is within                                                               
the parameters established by the Framers  in Sections 1 and 4 of                                                               
Article IX  to  use  the  state's   tax  structure  to  encourage                                                               
development for the maximum benefit of the people.                                                                              
                                                                                                                                
He turned  to slide 13.   Attorney  General Márquez said  that to                                                               
address  the need  for  an economic  base,  Congress granted  103                                                               
million  acres  of  federal  land  to  Alaska  -  including  land                                                               
containing the North  Slope oil and gas fields -  as an endowment                                                               
that  would  yield  income  to meet  the  costs  associated  with                                                               
becoming a  state.   He opined that  the Framers  recognized that                                                               
developing  Alaska's  resources  according   to  the  mandate  of                                                               
Article VIII might  require an innovate tax  regime, as reflected                                                               
in  their rejection  of the  highly  restrictive model  provision                                                               
wording in favor  of Section 1 of Article IX  and the adoption of                                                               
the  "like  or different"  exemption  language  in Section  4  of                                                               
Article IX.                                                                                                                     
                                                                                                                                
He turned to slides 14 and  15.  Attorney General Márquez said it                                                               
is  significant  that  fiscal contracts  have  been  employed  in                                                               
Alaska  to attract  new industries  since territorial  days.   In                                                               
1949,  the territory  authorized  the tax  commissioner to  enter                                                               
into fiscal contracts  for new industrial enterprises.   In 1957,                                                               
after Alaska's  constitution was ratified, the  territory enacted                                                               
an industrial  incentive Act  to permit  businesses to  apply for                                                               
fiscal  contracts to  encourage new  investments.   In 1968,  the                                                               
legislature enacted  the Alaska Industrial Incentive  Tax Credits                                                               
Act.  And  in 1971, the Alaska Supreme Court  held that the grant                                                               
of tax  relief provided for in  the 1968 Act was  in the broadest                                                               
possible form,  and that the  legislature intended that  a credit                                                               
could be provided for almost any tax within the State of Alaska.                                                                
                                                                                                                                
He opined  that the  proposed contract is  more favorable  to the                                                               
state  than the  tax  exemptions previously  required to  attract                                                               
industry  to   Alaska.    Attorney  General   Márquez  cited  the                                                               
following reasons:   It is  not a complete exemption  from taxes;                                                               
it requires  continuous payments  in lieu of  taxes; and  it will                                                               
provide  a steady  source  of state  revenue  while providing  an                                                               
incentive to  the sponsor group to  build a gas line  in order to                                                               
develop Alaska's gas resources.                                                                                                 
                                                                                                                                
He  relayed  the  conclusions  on slide  16.    Attorney  General                                                               
Márquez said  there is always  a degree of uncertainty  in trying                                                               
to anticipate  what action  a future  legislature might  take and                                                               
how  a court  might rule  on  that action.   He  opined that  the                                                               
proposed  contract is  within the  parameters established  by the                                                               
Framers in Sections 1 and 4 of  Article IX to use the state's tax                                                               
structure  to encourage  development for  the maximum  benefit of                                                               
the  people.     Additionally,  Article  11.1   of  the  proposed                                                               
contract,  coupled   with  a  legislative  Act   authorizing  the                                                               
governor  to  sign the  contract,  will  constitute a  clear  and                                                               
unequivocal statement of  intent to alienate the  power to change                                                               
taxes  for  the  terms  established in  the  contract;  thus  the                                                               
contract will be enforceable under the contracts clause.                                                                        
                                                                                                                                
4:52:01 PM                                                                                                                    
SENATOR  HOLLIS  FRENCH,   Alaska  State  Legislature,  expressed                                                               
concern that  a wealth of  legal opinion contradicts some  of the                                                               
foregoing  testimony.   He  recalled that  Jack  Coghill and  Vic                                                               
Fischer,  Founding Fathers  from opposite  ends of  the political                                                               
spectrum, recently opined that this  sort of long-term tax freeze                                                               
was  never  in  their  minds  when drafting  and  voting  on  the                                                               
proposed  state constitution.   Senator  Hollis reported  hearing                                                               
from  former attorneys  general and  assistant attorneys  general                                                               
that  a long-term  tax freeze  isn't constitutional,  and hearing                                                               
something  similar from  Tamara Cook,  head of  Legislative Legal                                                               
and  Research Services  Division, and  from legislative  attorney                                                               
Don Bullock.   Senator  French explained  that he'd  been looking                                                               
for some  authority outside DOL  that took the view  expressed by                                                               
Attorney General Márquez, but couldn't find it.                                                                                 
                                                                                                                                
He  asked whether  Attorney General  Márquez was  concerned about                                                               
that lack of  legal authority in view of the  supreme court's one                                                               
pronouncement on this topic -  that the state couldn't and didn't                                                               
contract away its  power to tax in a tax  case involving ARCO, BP                                                               
and Exxon.   Senator French also asked:  What  do you think about                                                               
this general  law as being  the parameters that the  Founders put                                                               
on the authority to contract away the taxing authority?                                                                         
                                                                                                                                
4:54:01 PM                                                                                                                    
ATTORNEY GENERAL MÁRQUEZ referred Senator  French to his reply to                                                               
Senator  French's earlier  letter  for a  definitive response  to                                                               
that  question and  for  a reference  to  the Atlantic  Richfield                                                               
Company case.   Expressing  utmost respect  for Jack  Coghill and                                                               
Vic Fischer and  their work as Framers,  he nonetheless suggested                                                               
a couple  of Alaska Supreme  Court opinions would  indicate their                                                               
present view of the constitutionality  of the Stranded Gas Act or                                                               
a fiscal contract would not be considered by the court.                                                                         
                                                                                                                                
He added  that in legal cases  for which he could  get the cites,                                                               
legislators had  tried to testify  about what they  intended when                                                               
voting on legislation;  the supreme court has  rejected this type                                                               
of evidence  as to whether it  is controlling in deciding  what a                                                               
statute  means.     Furthermore,  in  an   early  royalty-dispute                                                               
decision, then-Judge  Carpeneti wouldn't allow a  state expert to                                                               
testify on  what he meant  when writing the lease  form, Attorney                                                               
General Márquez reported.                                                                                                       
                                                                                                                                
He opined  that the following were  the reasons:  1)  what people                                                               
say 50  years later  might be  different from  what was  in their                                                               
minds  at the  time; 2)  if only  a couple  of Framers  are heard                                                               
from, there  won't be a  full sampling of what  everyone thought;                                                               
and  3)  particularly  with  respect  to  Alaska's  constitution,                                                               
explanatory documents  were made available  to the public  at the                                                               
time, and  thus what  was in  the people's minds  at the  time of                                                               
ratification  is  what's  important.   Attorney  General  Márquez                                                               
emphasized his belief  that the Alaska Supreme Court  will take a                                                               
view of  this that  won't consider  the opinions of  2 of  the 55                                                               
Framers of the constitution.                                                                                                    
                                                                                                                                
4:57:25 PM                                                                                                                    
CHAIR  SEEKINS asked  whether  Mr. Coghill  or  Mr. Fischer  were                                                               
among  those  involved  in  the   committee  which  drafted  that                                                               
particular article.                                                                                                             
                                                                                                                                
SENATOR FRENCH replied  that he didn't know.  He  said the AG had                                                               
made a  perfect analysis,  that it is  difficult to  look outside                                                               
the language of the constitution itself  to try to get an answer.                                                               
He  suggested, for  the same  reason,  it undercuts  much of  the                                                               
discussion  at  the convention  about  what  was happened  to  be                                                               
embodied in  the document itself.   Ultimately, they'll  look not                                                               
at  what  someone  said,  but  at what  is  written,  which  says                                                               
"general law."  He opined that  the Alaska Supreme Court has been                                                               
clear that what that means  is statute, which the legislature can                                                               
change whenever it sits down.                                                                                                   
                                                                                                                                
He said he has  yet to see anything that even  begins to move him                                                               
away from  that position.  Senator  French expressed appreciation                                                               
for  Attorney  General  Márquez's  discussion,  but  offered  his                                                               
belief that  "general law" is  not a  complex term, and  that the                                                               
supreme  court  has  repeatedly  set  forth  how  it  goes  about                                                               
analyzing  these cases  - looking  to  the plain  meaning of  the                                                               
term, for instance.                                                                                                             
                                                                                                                                
He  opined  that the  court  will  decide  that the  Framers  put                                                               
constraints on  the limits to  give away the  taxation authority;                                                               
it  said to  go  ahead  and give  a  property-tax exemption,  for                                                               
example, but  it can  be taken  away, and the  same is  true when                                                               
granting  municipalities  the  authority to  provide  exemptions.                                                               
Senator French suggested  it is all bound and  constrained by the                                                               
term "general law."                                                                                                             
                                                                                                                                
4:59:05 PM                                                                                                                    
CHAIR  SEEKINS acknowledged  he  isn't an  attorney, as  Attorney                                                               
General Márquez  and Senator French are,  but said he has  read a                                                               
lot of  supreme court  and superior court  opinions having  to do                                                               
with statutes  passed while he has  been in the legislature.   In                                                               
every  case,  to  his recollection,  the  courts  referenced  the                                                               
record  in the  committee  having to  do  with the  legislature's                                                               
intent as the  process went forward; this is in  contrast to what                                                               
is remembered afterwards.  He  asked whether the courts have ever                                                               
not considered  the record of  the committee process  in reaching                                                               
these kinds of interpretations.                                                                                                 
                                                                                                                                
ATTORNEY  GENERAL  MÁRQUEZ  affirmed  that  the  courts  consider                                                               
contemporaneous   documents  such   as  legislative   history  in                                                               
interpreting   statutes   when  there   is   a   dispute.     The                                                               
contemporaneous evidence  can be important to  the supreme court.                                                               
As to  whether it is always  controlling, he said no.   He added,                                                               
"I think the  record that we've put forth in  our opinion will be                                                               
considered by the  Alaska Supreme Court, what people  said at the                                                               
time, what these committee members said at the time."                                                                           
                                                                                                                                
5:00:54 PM                                                                                                                    
SENATOR FRENCH  surmised Attorney General Márquez  would agree it                                                               
typically depends upon how difficult  it is to understand what is                                                               
written in a  statute or the constitution; if it  is abstract and                                                               
not clear, then the history is  looked at.  Senator French opined                                                               
that the  history here shows  that what many delegates  meant was                                                               
attracting new industry  to Alaska, as mentioned  in the document                                                               
provided by  the AG and  also in other  parts of the  minutes; it                                                               
was not  about granting  a tax exemption  to an  existing, robust                                                               
and healthy industry.   To the extent the supreme  court looks at                                                               
minutes   of  the   constitutional  convention,   Senator  French                                                               
suggested the justices might be of  a divided mind about what the                                                               
delegates really meant.                                                                                                         
                                                                                                                                
ATTORNEY GENERAL MÁRQUEZ offered his  belief that this is way too                                                               
a restrictive  a reading of "new  industry."  Saying he  knows of                                                               
no gas  pipeline industry on  the North Slope or  through Alaska,                                                               
he  suggested   this  will  open   a  whole  new  basin   of  gas                                                               
exploration.  As for general law,  he said it isn't confusing:  a                                                               
general law is  one passed by the legislature  that isn't special                                                               
legislation;  for   example,  a   case  dealing   with  Northstar                                                               
legislation held it to  be a general law, not a  special one.  He                                                               
said the  Act approving  the governor's  signature on  a Stranded                                                               
Gas Act  contract will be  a general law,  as is the  Act itself.                                                               
Both will  provide a  general law that  the Alaska  Supreme Court                                                               
will require  as evidence of  a clear and  unequivocal alienation                                                               
of the taxing power in substituting it for these payments.                                                                      
                                                                                                                                
5:03:06 PM                                                                                                                    
CHAIR  SEEKINS  asked:    If  the  proposed  contract  containing                                                               
fiscal-terms  agreements or  related  items is  approved and  the                                                               
legislature then  decides to increase  the severance tax  on oil,                                                               
would  that increase  apply to  every other  producer other  than                                                               
those covered under this contract?                                                                                              
                                                                                                                                
ATTORNEY GENERAL MÁRQUEZ answered that he believed so.                                                                          
                                                                                                                                
CHAIR  SEEKINS   surmised  that   the  legislature   wouldn't  be                                                               
contracting away  the general  power to  change oil  taxes, then,                                                               
but would be doing it for this particular contract and project.                                                                 
                                                                                                                                
ATTORNEY  GENERAL  MÁRQUEZ  noted  if   there  were  a  huge  oil                                                               
discovery in Bristol  Bay, for example, the  legislature could do                                                               
what it  wanted with respect  to taxes  on that development.   In                                                               
further response, he  said the power would be  contracted away to                                                               
help underpin this project.                                                                                                     
                                                                                                                                
5:04:43 PM                                                                                                                    
SENATOR ELTON related  his belief that there is  no discussion in                                                               
the commentaries or  the constitution itself about  how to define                                                               
a  tax.   He asked  whether it  could be  defined as  narrowly as                                                               
suspending a  tax to a corporation,  not just a general  tax, and                                                               
whether  it is  correct  that neither  the  commentaries nor  the                                                               
constitution speak to one being okay, but not the other.                                                                        
                                                                                                                                
ATTORNEY  GENERAL  MÁRQUEZ  acknowledged   he  didn't  have  that                                                               
thorough  a   knowledge  of  the  commentaries,   but  said,  "We                                                               
certainly  haven't decided  that."   He  added that  a couple  of                                                               
exemptions  granted   before  and   after  ratification   of  the                                                               
constitution weren't just to provide  for incentives, and were in                                                               
the minds of the drafters of the constitution.                                                                                  
                                                                                                                                
SENATOR  ELTON referred  to slide  8, which  quotes the  official                                                               
commentary on Section  1 as saying, in part, "[t]he  power to tax                                                               
is  never  to  be  surrendered,  but  under  terms  that  may  be                                                               
established  by   the  legislature,   it  may  be   suspended  or                                                               
temporarily contracted  away."  He  asked whether there  has been                                                               
any discussion  at DOL  of what  "temporary" means.   He  said it                                                               
seems  a multigenerational  term of  30 or  40 years  goes beyond                                                               
"temporary" as referenced in that commentary.                                                                                   
                                                                                                                                
ATTORNEY  GENERAL MÁRQUEZ  referenced  slide 11,  which says  the                                                               
Finance  and Taxation  Committee expressly  considered but  chose                                                               
not to include  any time limit on tax exemptions  provided for in                                                               
Section  4.   He said  this  indicates they  were leaving  things                                                               
flexible for  the legislature to  determine what a good  term is.                                                               
Indicating  discussions  at  DOL  were that  "temporary"  is  the                                                               
opposite of "permanent"  and so could be for any  length of time,                                                               
he specified that is his own view.                                                                                              
                                                                                                                                
SENATOR ELTON expressed concern that it is an expansive view.                                                                   
                                                                                                                                
5:07:41 PM                                                                                                                    
CHAIR SEEKINS  suggested that  the power  in question  relates to                                                               
the  ability  to bind  future  legislatures  through a  contract,                                                               
regardless of the length of time.                                                                                               
                                                                                                                                
SENATOR HOLLIS  highlighted the  magnitude, noting  it has  to do                                                               
with binding the next legislature  with respect to its power over                                                               
what constitutes 80-90  percent of the revenue  that supports the                                                               
state.  He voiced concern that  it removes the ability to address                                                               
the fiscal health of the state.                                                                                                 
                                                                                                                                
5:09:16 PM                                                                                                                    
CHAIR  SEEKINS  announced  that the  committee  would  hear  from                                                               
Anadarko and others tomorrow, and  Dr. van Meurs would testify on                                                               
gross  versus net  tax systems.   After  that, amendments  to the                                                               
Stranded Gas Act would be addressed.                                                                                            
                                                                                                                                
SENATOR  ELTON  informed members  that  he  wouldn't prepare  any                                                               
amendments because he thought it  premature to amend the Stranded                                                               
Gas  Act  until  there  was  more  information.    He  referenced                                                               
previous discussion about the LLC  and the fact that the contract                                                               
hadn't been seen yet.                                                                                                           
                                                                                                                                
5:12:23 PM                                                                                                                    
^Patrick Coughlin, Senior Counsel, BP                                                                                           
MR.  COUGHLIN referred  to Senator  French's question  of whether                                                               
other attorneys  support the AG's  position that the  effort here                                                               
is  constitutional.   Mr. Coughlin  reported  that  BP has  spent                                                               
millions of dollars  in the last couple of years  to try to bring                                                               
this contract to fruition in a  manner that allows the project to                                                               
proceed.  Before  even beginning contract negotiations,  BP did a                                                               
legal analysis of  the constitutionality of such  a clause; based                                                               
on   that,   the   company  went   forward   with   negotiations.                                                               
Mr. Coughlin said he didn't intend  to debate with Senator French                                                               
the merits of his memorandum, other than to state disagreement.                                                                 
                                                                                                                                
He   opined   that   the  negotiated   position   has   a   sound                                                               
constitutional basis, noting BP,  along with the other companies,                                                               
has  agreed  to  risk  $120  million  to  find  out  the  answer.                                                               
Mr. Coughlin  emphasized the  importance  of an  answer from  the                                                               
supreme court  in order to  have a  contract that is  durable and                                                               
acceptable  to the  people of  Alaska and  all three  branches of                                                               
government -  executive, legislative and judicial.   With respect                                                               
to  whether it  is  constitutional, Mr.  Coughlin concluded,  "We                                                               
believe it  is.   We have  received many  legal opinions  to that                                                               
effect.   And that is the  basis upon which we  have gone forward                                                               
with this key provision in the contract."                                                                                       
                                                                                                                                
CHAIR SEEKINS thanked  participants and held SB 3001  and SB 3002                                                               
over.                                                                                                                           
                                                                                                                                
There being  no further  business to  come before  the committee,                                                               
Chair Seekins  adjourned the Senate Special  Committee on Natural                                                               
Gas Development meeting at 5:15:03 PM.                                                                                        

Document Name Date/Time Subjects