Legislature(2003 - 2004)
03/05/2003 03:30 PM Senate RES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
March 5, 2003
3:30 p.m.
MEMBERS PRESENT
Senator Scott Ogan, Chair
Senator Thomas Wagoner, Vice Chair
Senator Fred Dyson
Senator Ralph Seekins
Senator Ben Stevens
Senator Kim Elton
Senator Georgianna Lincoln
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
SENATE BILL NO. 74
"An Act extending the renewal period for oil discharge
prevention and contingency plans; and providing for an effective
date."
MOVED CSSB 74(RES) OUT OF COMMITTEE
SENATE BILL NO. 79
"An Act extending the termination date of the Alaska Minerals
Commission."
MOVED SB 79 OUT OF COMMITTEE
SENATE BILL NO. 92
"An Act amending the standards applicable to determining
whether, for purposes of the Alaska Stranded Gas Development
Act, a proposed new investment constitutes a qualified project,
and extending the deadline for applications relating to the
development of contracts for payments in lieu of taxes and for
royalty adjustments that may be submitted for consideration
under that Act; and providing for an effective date."
HEARD AND HELD
PREVIOUS ACTION
SB 74 - See Resources minutes dated 2/24/03.
SB 79 - No previous action to record.
SB 92 - No previous action to record.
WITNESS REGISTER
Marilyn Crockett
Alaska Oil and Gas Association (AOGA)
121 West Fireweed Lane
Anchorage, Alaska 99503
POSITION STATEMENT: Stated support for Amendment 2 to SB 74.
Dr. Lance Miller
Executive Director
Juneau Economic Development Council
612 W. Willoughby Ave.
Juneau, AK 99801
POSITION STATEMENT: Supports SB 79
Neil MacKinnon
Vice Chair
Alaska Minerals Commission
Hyak Mining Co.
1114 Glacier Avenue
Juneau, AK 99801
POSITION STATEMENT: Supports SB 79
Irene Anderson
Chair
Alaska Minerals Commission
Sitnasuak Native Corporation
PO Box 905
Nome, AK 99762
POSITION STATEMENT: Supports SB 79
Dan Dickinson, Director
Tax Division
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Supports SB 92
Roger Marks, Petroleum Economist
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Supports SB 92
Mark Myers, Director
Oil and Gas Division
Department of Natural Resources
400 Willoughby Ave.
Juneau, AK 99801-1724
POSITION STATEMENT: Supports SB 92
ACTION NARRATIVE
TAPE 03-9, SIDE A
CHAIR SCOTT OGAN called the Senate Resources Standing Committee
meeting to order at 3:30 p.m. Senators Wagoner, Stevens, Dyson,
Seekins, Elton and Chair Ogan were present.
SB 74-DISCHARGE PREVENTION & CONTINGENCY PLANS
CHAIR OGAN reminded members that SB 74 was heard at the last
meeting and that an amendment is pending.
SENATOR SEEKINS moved to withdraw his motion to amend SB 74.
There being no objection, the motion carried.
SENATOR SEEKINS moved to adopt Amendment 2, which reads as
follows:
AMENDMENT 2
OFFERED IN THE SENATE RESOURCES BY SENATOR SEEKINS
COMMITTEE
TO: SB 74
Page 1, following line 10:
Insert a new bill section to read:
** Sec. 2 The uncodified law of the State of Alaska is
amended by adding a new section to read:
TRANSITION. Notwithstanding any contrary provision of AS
46.04, including the review procedures in AS 46.04.030, and the
regulations adopted under AS 46.04, the expiration date of an
oil discharge prevention and contingency plan approved by the
Department of Environmental Conservation before the effective
date of this Act shall be extended for two years, or for a
shorter period if a shorter period is requested by the holder of
the approved plan, if
(1) the plan is still in effect on the day before the
effective date of this Act; and
(2) the Department of Environmental Conservation has
not given a notice of violation of AS 46.04.030 to the holder of
the plan that has not been corrected to the satisfaction of the
Department of Environmental Conservation.
Renumber remaining sections accordingly.
SENATOR LINCOLN objected for the purpose of hearing an
explanation of Amendment 2.
SENATOR SEEKINS explained that Amendment 2 allows a holder of an
approved plan to request an extension for a period of less than
two years.
CHAIR OGAN noted that several people were available to testify
or answer questions on Amendment 2: Larry Dietrick, Marilyn
Crockett, and Breck Tostevin.
SENATOR LINCOLN removed her objection. Therefore, Amendment 2
was adopted.
CHAIR OGAN took public testimony.
MS. MARILYN CROCKETT, Alaska Oil and Gas Association, stated
support for Amendment 2.
SENATOR DYSON moved SB 74 as amended [CSSB 74(RES)] from
committee with attached fiscal notes.
SENATOR LINCOLN objected to ask if this legislation will next go
to the Senate floor.
CHAIR OGAN said that it has a zero fiscal note so it has no
further referrals, but that the other body will review it.
SENATOR LINCOLN felt that since the Senate Resources Committee
is the only committee of referral, it should do the best job
possible on this legislation.
CHAIR OGAN replied, "For the record I think we have. We held it
up a week and a half and we worked out a good compromise on the
amendment. Some questions were addressed."
SENATOR LINCOLN said Amendment 2 was a good compromise but she
still has concerns. She then withdrew her objection.
CHAIR OGAN stated that with no further objection, CSSB 74(RES)
moved from committee.
SB 79-EXTEND ALASKA MINERALS COMMISSION
SENATOR BEN STEVENS, sponsor of SB 79, told members this measure
would extend the Alaska Minerals Commission to 2014. It is
currently set to expire February 1, 2004. The Alaska Minerals
Commission was established in 1986 to make recommendations to
the governor and legislature on ways to mitigate constraints on
development of mineral resources in Alaska. The commission is
comprised of six appointees by the governor and three appointees
each by the Senate President and House Speaker. He believes the
commission has done an excellent job over the last 16 years. He
highlighted some of the commission's recommendations that have
been adopted:
· Passage of the Minerals Policy Act.
· Funding for the airborne geophysical surveys.
· Assisting in the creation of a task force for RS2477 trail
inventory.
· Assertion of RS2477 rights-of-way.
· Legislative Resolution 31 passed in opposition of the
creation of international parks, world heritage sites, and
marine biosphere reserves in Western Alaska.
· Extending terms of permits when legal impediments prevent
use.
SENATOR BEN STEVENS stated the Alaska Minerals Commission has
been working well so he believes the Legislature should allow it
to do its good work. He pointed out the recommendations in the
executive summary of the Report of the 2003 Alaska Minerals
Commission are valuable. He encouraged committee members to pass
SB 79 on.
CHAIR OGAN took public testimony.
MR. LANCE MILLER, Executive Director of the Juneau Economic
Development Council (JEDC), told members that prior to his
current position, he was the projects manager with Placer Dome
and he worked as chief geologist with Echo Bay [Mining] on the
A-J project for nine years. He said SB 79 will extend the
commission for a longer period of time than has been done
previously. He noted that the minerals industry is a billion
dollar industry - the third largest in the state. Mining
companies are committing their capital to Alaska over the course
of 10 to 20 years, just to get a project going. Mines take at
least ten years to build. He believes if the Commission is in
existence for at least ten years running, that will send a good
message to the industry. He summarized that if companies are
willing to commit risk capital for that time frame in the hope
of getting a mine going, a ten year extension of the commission
will show good will toward a working partnership with industry.
CHAIR OGAN asked the length of the previous extension.
MR. MILLER said it was five years.
MR. NEIL MacKINNON, Vice Chair of the Alaska Minerals Commission
and President of Hyak Mining Company, a small Juneau-based
exploration company, told members he has been on the commission
through several five-year extensions and five years passes very
quickly. He said that when it comes time to write the Alaska
Minerals Commission report, members do a vast amount of work
that is not accounted for in the budget: they do the work to get
it done.
MR. MacKINNON told members the Alaska Minerals Commission is
made up of a diverse group of individuals, from placer miners to
representatives of companies such as Cominco. Members bring a
vast array of views therefore the Commission takes an
overarching view of the problems facing the mining industry. The
commission also tries to look ahead for potential problems. One
example is essential fish habitat, which the commission picked
up on its "radar screen" several years ago. It is a brewing
problem that has not come to the forefront yet.
SENATOR DYSON asked Mr. MacKinnon to clarify what "essential
fish habitat" means to the mining industry.
MR. MacKINNON said that the Stevens-Magnuson Act contains a few
lines that give the National Marine Fisheries Service (NMFS)
power over what it deems to be essential fish habitat. He said
when the act was written, he thinks it was meant to address
ground fish and bottom draggers. While the tendency of
bureaucracies is to expand power as far as possible, he sees
NMFS exercising that authority over creeks and any water body.
He noted that numerous groups are working on the issue,
including U.S. Senator Ted Stevens and the Resource Development
Council. He repeated that the NMFS policy has not yet been fully
expanded so that keeping the issue on the radar screen may be
enough to control the problem.
SENATOR DYSON asked:
So, when you say 'essential fish habitat' you're
talking about the regulatory problems that come from
those lines being in the National Marine Fisheries.
And when you talk about wetlands problems, you're
talking about the jurisdiction of the Corps of
Engineers and others over wetlands and how that impact
might - you're not just talking about the wetlands.
MR. MacKINNON stated the Alaska Minerals Commission sees this as
a wetlands problem coming from another angle - the National
Marine Fisheries Service, based on the 'essential fish habitat'
definition, which is a rough definition.
SENATOR LINCOLN noted this will be the fourth extension of the
Alaska Minerals Commission, which she supports. She pointed out
SB 79 does not address the length of the terms of commission
members and asked if members are appointed for a five-year term.
MR. MacKINNON said members serve at the pleasure of the
appointee. He noted the statute is not clear about term limits.
SENATOR LINCOLN suggested that the term be clearly defined so
that the people who are serving understand how long they will be
in office. She noted that serving for five-years may seem like a
lifetime to some people while that amount of time passes quickly
for others. She then asked why, if the five-year extensions have
posed no problem, the commission believes a ten-year extension
will be more beneficial.
MR. MacKINNON replied:
Well, maybe it's just a perspective that five years
comes real fast. That was part of the comment that
it's been over and over so let's just put ten years
and go for ten because it gives a little more
permanence to it and, like I say, five years isn't
that long.
CHAIR OGAN pointed out the statute says that members serve at
the pleasure of the appointing authority and members must have
at least five years experience in various aspects of mineral
industries in the state.
SENATOR LINCOLN asked if the commission has ever recommended
terms for members to the legislature.
MR. MacKINNON said that he was appointed by the Senate
President, and if the Senate President chooses to appoint
someone else, that is his choice. He said that one commission
member brought up this discussion thinking that the commission
should get some "fresh blood." However, in the history of the
commission, there has been enough turnover from people leaving
to take other positions or for other reasons. As an example, Tom
Irwin will no longer serve on the commission as he has taken the
position as the Commissioner of the Department of Natural
Resources.
CHAIR OGAN asked how often the Alaska Minerals Commission meets.
MR. MacKINNON said it meets three times per year. Its report to
the legislature is due in December.
CHAIR OGAN asked Mr. MacKinnon if he feels the report gets
attention.
MR. MacKINNON said that depends on the make-up of the
legislature, but it has during the last few years.
SENATOR LINCOLN said she is pleased to see that two women serve
on the 11 member commission but she would like to see that
number expanded.
MR. MacKINNON said that Irene Anderson is the Chair and that the
women "probably do most of the heavy lifting."
SENATOR ELTON said he supports the Alaska Minerals Commission
and feels it is a model that is being looked at for other
economic sector proposals in Alaska.
MS. IRENE ANDERSON, Chair, Alaska Minerals Commission,
maintained that a ten-year extension will save a lot of people
time, such as legislators and staff. She agrees with Mr.
MacKinnon that members come and go and that the group is very
diverse. She indicated that ten years is not a long time period
in the mining industry, especially when trying to build
infrastructure in rural Alaska.
CHAIR OGAN asked Ms. Anderson to describe her background.
MS. ANDERSON said she comes from a family of placer miners in
the Nome area. Her husband is originally from McGrath. She said
her grandfather began mining in Nome in 1905.
Ms. Frankie Pillifant, staff to the Alaska Minerals Commission,
was available to answer questions, however there were none.
SENATOR BEN STEVENS moved SB 79 from committee with individual
recommendations and its attached fiscal note.
CHAIR OGAN announced that without objection, SB 79 would move
from committee.
The committee took a brief at-ease.
SB 92-STRANDED GAS DEVELOPMENT ACT AMENDMENTS
CHAIR OGAN told members that SB 92, sponsored by the Senate
Resources Committee, reauthorizes the Stranded Gas Development
Act. He indicated that he spent hundreds of hours working on the
original legislation several years ago. He explained that he
does not intend to take action on this legislation today, as
similar legislation is working its way through the House. He
said he would like the committee to get an overview of what the
original Stranded Gas Act did. He said this Act has had a big
impact on the State of Alaska, and especially on the communities
affected by gas development. It gives the state a lot of
latitude to negotiate settlements that highly effect local
communities. He indicated that building a gas pipeline project
through a community causes high impact to that community, for
example by increasing the population. He noted SB 92 only
reauthorizes the original Act. He asked Dan Dickinson to brief
the committee.
MR. DAN DICKINSON gave the following testimony.
My name is Dan Dickinson, Tax Division director at the
Department of Revenue. With me is Roger Marks, a
Petroleum Economist with the Tax Division, who will
speak briefly about the history, intent and mechanics
of the Stranded Gas Act. But first, I think it is
important to introduce ourselves, as the Department of
Revenue has many responsibilities under the Stranded
Gas Act, and the Tax Division has considerable
expertise and experience in oil and gas matters.
Five years ago we were three separate divisions - the
Oil and Gas Audit Division, the Income and Excise
Audit Division and the Charitable Gaming Division. We
are now merged into a single division. Some think that
was a mistake. We named ourselves the Tax Division. It
is what we do but no one wants to be seen talking to
us anymore so, again, I appreciate the chance to come
before this committee.
What we do can be seen from the FY 2002 Comprehensive
Annual Financial Report for the State of Alaska. You
should have a copy of an excerpt from Table 1.13. Of
total governmental fund revenues of $3.5 billion:
· $1.6 billion comes from the feds
· Taxes are $1 billion
· Royalties are $900 million
· Interest and investment income, plus all the
other ways the government raises money - charges
for services, fines and forfeitures and 'other'
were more than offset by investment losses.
The Tax Division administers 19 of the 20 tax
types that comprise the $1 billion tax figure. Of
the billion dollars in taxes, all but a little
more than $100 million were oil and gas taxes.
The state's oil and gas take is often
characterized as four bites of the apple, and we
are experienced at all four bites.
For the first bite we are charged with auditing
royalties and net profit share leases, and we
work with DNR closely on those matters.
The other three bites of the apple cover the
three areas that we anticipate will be our focus
in any Stranded Gas Act negotiation.
The second bite of the apple is the oil and gas
property tax. Last Friday, to meet our March 1
deadline, the Division's Oil and Gas Property Tax
assessor and his staff mailed out the 2003 tax
roll, showing oil and gas property valued at
about $13.5 billion. As Senator Ogan pointed out
in his introductive remarks, property taxes play
a unique role in determining any natural gas
project's profitability.
The next bite of the apple is the oil and gas
corporate income tax. Income taxes are focused on
taxing profits. As Roger will elaborate later on,
the more we focus on taxing profits, the more
progressive our system becomes. This is one of
the stated goals of the Stranded Gas Act. We have
a large experienced group in our division that
works these issues and we expect them to be
critical.
The last bite of the apple is the production tax.
Like royalty, the production tax focuses on the
commodity value of the resource at or near the
wellhead. We have lots of experience in this area
- market pricing, inter-company transfer pricing,
how markets work, how energy contracts work,
business practices and cost analysis.
Now, let me add a personal observation, but one
that I think reflects what many of us in the
division believe about what the state should be
trying to achieve in any Stranded Gas Act
negotiation - taxes - and the government's take
in general is the subject of the Stranded Gas
Act. It should not distort commercial realities.
The government's take should not be what is red-
lighting this project.
As Roger will explain, our current fiscal system
intensifies some of the risks faced by the
producers. Ironically, not only the producers but
the state could be better off changing those same
aspects of its fiscal system. Stranded Gas Act
negotiations should be about risk sharing and who
among the state and the commercial entities
involved can best handle what risks. As soon as
SB 92 becomes law, we can start discussing how
price risk will be shared or how return on the
investment in the pipeline will be taxed, or
really figure out what each party wants to get
from this project, aside from more. There are
lots of specifics that can be set aside until it
is clearer how our gas will fit in with the
market mechanisms that will be in place when we
are ready to market it. The state's role should
not be to increase risks. Maybe we can make the
project fly by reducing risk.
On the other hand, we have to make sure that the
state is not naively underwriting a risky
project. As the only ones who will still be
around if things go sour, we don't want to be
left holding a bag we didn't quite understand the
dimensions of.
That's my quick overview of the Department of
Revenue Tax Division. The administration strongly
supports reauthorizing the Stranded Gas
Development Act. We believe it creates a great
mechanism to work these difficult issues we face.
The Tax Division looks forward to being able to
play our part in that work.
Thank you for the opportunity to testify and to
introduce the people who will be doing a lot of
the foot slogging in any stranded gas act
negotiation.
CHAIR OGAN asked Mr. Dickinson to give the committee an
overview of what he envisions the state negotiations -
pretty much on the part of the municipalities - to look
like at the end of the day, including the sticking points.
MR. DICKINSON said Chair Ogan correctly identified what
will be going on with the municipalities. Property taxes
could form a very large piece of the fiscal take. Property
taxes are set up so that they are due as soon as the
project begins. It may be six years before any gas or
profit flows to the project, but the project is taxable.
Early property taxes can harm the rate of return on a
project. On the other hand, those taxes are the sole source
of revenue from those projects to the municipalities. In
addition, the municipalities need those revenues to deal
with population pressures and disruptions. Those are the
tensions the state must balance. The municipalities must
participate through a formal committee but ultimately the
state is charged with making judgments on behalf of the
municipalities and striking a delicate balance.
CHAIR OGAN commented that if all of the taxes are due when
the materials and equipment hit the ground, it adds an
extra expense for the builders of the pipeline so the state
allows them to negotiate a payment in lieu of taxes.
MR. DICKINSON agreed.
CHAIR OGAN said if he was the mayor of a municipality, he
might not have a high comfort level with the state
negotiating payments in lieu of taxes on his behalf. He
asked Mr. Dickinson if he has heard any feedback from the
municipalities.
MR. DICKINSON said he has, but he would first like to share
some observations. First, the Stranded Gas Act will have to
be passed by the legislature so if something is really
askew, the legislature will have a role in making sure that
municipalities have not been left out. The law specifically
states there will be a fair and reasonable share of
payments, so if there is a payment in lieu of taxes, the
focus may have been on how that was arrived at. He thought
the law establishes that the communities need to get a
piece of that. As an example, Mr. Dickinson said:
Under our current oil regime, about 80 percent of
the government's take is based on the value of
the wellhead. About 10 percent is based on
profits and about 10 percent is based on property
taxes. If we were to look at a profit like this
and say gee, let's switch it over and make it 80
percent based on profit and smaller pieces on
wellhead value and property taxes, what we might
do is make sure that the communities got those
early dollars when they will need them, but the
state would not be taking those early dollars and
we would be hoping to be repaid or to make up
[indisc.] by getting a piece of the profit later
on. So, those are the kind of larger questions
that we've got to deal with conceptually in the
Stranded Gas Act negotiations.
CHAIR OGAN asked how it has been working out, as time goes
on, that the state ends up with its share of these types of
taxes and revenues due. He asked whether that keeps a
project from being front-end loaded and how it has worked
out at the end of the project after the pipe has been
amortized and is profitable.
MR. DICKINSON said that is one of the things to be
determined. The division could look at an income tax built
on a rate of return built into the tariff or it could have
a simple measure that defines the measure of possibilities
so that if prices go above x, the payments will be a
certain amount. He said all kinds of mechanisms can be used
depending on the amount of price risk the state is willing
to share.
CHAIR OGAN referred to Sec. 43.82.210, Contract terms
relating to payment in lieu of one or more taxes, which
lists nine taxes. He said that section essentially gives
the commissioner broad sweeping authority on behalf of
affected municipalities. He noted the "circuit breaker"
protection is that the legislature has to approve the deal.
He said he wanted to bring that to committee members'
attention because the commissioner will have broad powers
if a gas line is built in Alaska.
MR. DICKINSON pointed out that item (3), the oil and gas
conservation tax, was repealed and replaced by
other state or municipal taxes. He said the Chair correctly
pointed out that the commissioner of the Department of
Revenue has enormous powers under this act. He observed
that the Department of Revenue assesses the values of the
properties for which it levies taxes so it already plays a
critical role in determining the revenues that flow to the
department. The affected municipalities will be able to
communicate with an advisory board that can relay concerns
to the commissioner. He again agreed that this essentially
identifies the sources from which the affected localities
finance their local operations. The negotiations will be
curious for the municipalities because they will have a lot
to do with whether a project ends up being a net benefit
for them.
4:10 p.m.
CHAIR OGAN asked Mr. Dickinson to consider the
legislature's role in this. He noted the legislature will
have a role in approving the deal but the idea of making
sure that a legislator is appointed to the committee or in
some oversight capacity over the negotiations has been
suggested. He is opposed to putting that into the bill
because he feels it is a separation of powers issue.
TAPE 03-9, SIDE B
CHAIR OGAN said the Administration has the authority to
negotiate. However, he believes it would be in the
Administration's best interest to have someone from the
legislature be at the table, if not as an active negotiator
as a participant in the discussions, so that the legislator
can report back to the legislature and provide information.
He asked Mr. Dickinson if the Administration has taken a
position on that.
MR. DICKINSON said he cannot speak for the Administration,
but stated:
No administration wants to bring a bill to the
House and then sit down and - first impression -
try to explain it. Clearly, the legislature will
be involved. They'll get reports. There are a
number of very big picture decisions about the
shape of the state's revenue, whether - just how
many risks it wants to bear that I think clearly
we're going to be getting input - you know, the
Administration's going to want input from across
a spectrum, especially the legislature, because
if suddenly the legislature's unhappy with the
conceptual basis on which a negotiation is being
made, we might as well not show up with a bill
later. So, I think if the Administration wants to
get this stranded gas tax negotiation going once
it's [indisc.], if they do, clearly they're going
to be involved with the legislature so that when
that bill comes, you'll certainly get all of the
oversight you need but there basically is
something that they're fairly certain will result
into the fiscal system that will then lead to the
project. So, I think just as a matter of self
interest, they are certainly going to keep the
folks who get to vote on it involved.
SENATOR ELTON said he is assuming the broad powers as
exercised by the commissioner under this act include his
ability to negotiate different levels with different
municipalities. For example, the commissioner could charge
x mils in one jurisdiction and y mils in another
jurisdiction under a municipal property tax.
MR. DICKINSON said he did not see why not. His personal
opinion is the focus would be on issues such as impact
rather than on mils. For example, one community might have
acres covered by piles of steel but no one near, while
another community has a work camp of families with children
in school and drawing on medical resources, therefore
looking at the straight mil rate would not serve the
problems of both communities.
SENATOR SEEKINS referred to Article 3 on page 10 of SCS
CSHB 393(FIN) and read, "If the commissioner approves an
application and proposed project plan under AS 43.82.140,
the commissioner may develop a contract that may include"
specific provisions. He asked if the commissioner is under
any obligation to include any of the terms in that chapter.
MR. DICKINSON replied:
Absolutely. Looked at one way, the State of
Alaska has a set of taxes in place that are - get
to be applied as is. The question is can the
commissioner use the power here to make a better
project that is both better for the state and
better for the folks who want to do the project.
Obviously the negotiator, if he doesn't see
anything worth negotiating, will [indisc.]. I
think that's entirely correct.
SENATOR SEEKINS maintained that the commissioner could make
a very simple contract or a very complex one.
MR. DICKINSON agreed. He said the department doesn't really
know how many things it will want to bundle into the
project yet.
With no further questions of Mr. Dickinson, CHAIR OGAN
asked Roger Marks to testify.
MR. ROGER MARKS, Petroleum Economist with the Tax Division
at the Department of Revenue, gave the following testimony.
Good afternoon, Mr. Chairman and members of the
committee. My name is Roger Marks. I am a
petroleum economist with the Tax Division of the
Department of Revenue. I worked on the original
Stranded Gas Act in 1998 and am familiar with its
history, intent and mechanics. I would like to
provide a very brief overview of the Act at AS
43.82. A more detailed synopsis is with the
fiscal note.
The Act originated in HB 250 in 1997, which
established a North Slope Gas Commercialization
team in the Administration to research and
recommend changes to state law to encourage
commercialization of North Slope gas. The team
concluded that the project faced considerable
risk, namely gas price risk and cost overrun
risk, and that the state's fiscal system actually
exacerbated those risks. Two of the risks of
particular concern were fiscal uncertainty and
the state's regressive tax system.
A brief comment on the price risk: the cost of
the project is very large, $20 billion. That is a
lot of money to any corporation, even ones the
size of Exxon, BP or Conoco Phillips. If this
project is built and something goes wrong, such
as low prices, the sponsors face very large
losses. And even if these are relatively low-
probability events, the project may not be built
if a company cannot tolerate a loss of that size.
That is why the risk reduction mechanism proposed
in Congress, which is currently in place for non-
conventional gas in the Lower 48, may be a very
necessary linchpin in making this project a
reality.
By fiscal uncertainty we mean the threat of
changes in fiscal provisions after a project is
built that may change the project's viability
after it is too late to do anything about it. A
project may be feasible under one tax system. If
it is built under the assumption that the tax
system in place will stay in place, but the tax
system changes, the changes could cause heavy
financial losses.
Second, there are two significant elements of the
state's fiscal system that make it regressive. By
regressive we mean that the state's take is a
high percentage of income at low prices, and a
low percentage at high prices. First, the
property tax is based on cost. The higher the
cost, the higher the tax. This is a double whammy
to an investor who incurs a cost overrun.
Moreover, the property tax is payable when
construction begins, years before revenues start
accruing. On a time value of money basis, this
diminishes the rate of return and increases the
risk of not recovering the investment.
The second regressive elements are the severance
tax and royalty. They are based on the value at
the point where the gas comes out of the ground,
and ignore upstream costs such as capital and
operating costs. Thus, when costs are high and
prices are low, the state's take is a high
percentage of low income. Again, this intensifies
the danger of low prices.
I might add that a regressive system also limits
the state's take at high prices. Fixing that
could be very important to the state for securing
more revenue when prices are high, without
threatening the viability of the project.
The Stranded Gas Act was the result of trying to
fix these shortcomings. The law provided a
mechanism for converting the state's fiscal
system from a statutory basis to a contractual
basis. This would provide for greater fiscal
certainty. The fiscal system would be negotiated
between the state and the project sponsors, and
approved by the legislature, after a public
review period. Payments to the state would be
made in-lieu of taxes. And per the Act, the
contract terms would provide for a more
progressive or less regressive system.
Most of the provisions subject to the negotiation
are the tax provisions. Given that the royalty
represents the state's ownership share, there was
not interest in making the royalty rate subject
to change. The only royalty provisions subject to
negotiation would be the gas valuation method,
and the timing of royalty in-kind and in-value
notices.
The Commissioner of Revenue would be the primary
agent for negotiating and implementing the
contract. However, the Commissioner of Natural
Resources is also responsible for reviewing the
project plan for acceptability, and for
negotiating any changes in those royalty issues.
There was concern by municipalities that a
contract could compromise their property tax
revenues. Accordingly, the Act created a
municipal advisory group to participate in
developing contract terms, and the Act requires
that a fair and reasonable share of the payments
due under the contract be paid to affected
municipalities with regard to the size of the tax
base that may be exempted, and the economic and
social burdens imposed by construction and
operation.
The Act also has provisions for sponsors to help
make gas available to communities, to promote
local hire, to deal with confidential information
provided by the sponsors, and to reimburse the
state for contractors it may use to assist in the
negotiation process.
Finally, there were some questions raised as to
whether this would surrender or contract away the
power to tax, which is forbidden by our
Constitution. It was the Administration's
judgment that this would not preclude future
legislatures from imposing other taxes, but this
contract would represent a solemn pledge, a moral
commitment by the state, and a message to future
legislatures that, once it agrees to the terms,
it will not change them.
CHAIR OGAN asked what provision of the Constitution Mr.
Marks was referring to.
MR. MARKS said questions have been raised about switching
the tax system from a statutory to a contractual basis.
Article IX of Alaska's Constitution forbids that. He said
it was the judgment of the Attorney General's Office that a
contract would not prohibit future legislatures from
imposing taxes. Insofar as it would not prohibit the
legislature from imposing taxes, the contract would not be
airtight.
There being no further questions of Mr. Marks, CHAIR OGAN
asked Mr. Myers to testify.
MR. MARK MYERS, Director of the Division of Oil and Gas,
Department of Natural Resources (DNR), told members it is
hard to overestimate the importance of the gas line. With
over 35 trillion cubic feet (TCF) of proven and over 100
TCF of additional potential gas, a gas pipeline will enable
development of Alaska's incredible gas resources for the
next 50 plus years. The stranded gas bill sets the stage
for a broad based technical negotiation. It is strongly
supported by the Administration as a vehicle to accelerate
the construction of the North Slope gas line. In addition
to dealing with issues of oil taxes, it also addresses
major royalties and resource ownership issues managed by
DNR, including royalty in-kind and royalty in-value, the
evaluation methodology used for calculating the state's
royalty share and appropriate transportation charges for
royalty gas. On the oil side, the state's sale of royalty
in-kind oil has stimulated Alaska's refining industry with
a huge positive effect on the state's economy. The state's
royalty in-kind sales for its gas could be used as a
vehicle for opening a major petrochemical business in
Alaska or for exploration on currently untapped basins. The
Stranded Gas Act also opens the door for other negotiations
in key areas involving DNR's resource management role with
respect to oil and gas production on state land. As the
state's manager of the state's oil and gas, the Division
understands project risk and economic drivers from both the
industry and government perspective.
SENATOR STEVENS asked if, during the enactment of HB 393,
under the tariff settlement methodology (TSM) with the
pipeline, the state would get its money at the front end
and then the amount would shrink as the project aged.
MR. MARKS replied:
In the oil pipeline, actually the original
tariffs were very high, in the order of upwards
of $6 as filed by the pipeline owners. What that
did was actually lead - and since our wellhead
values derived after subtraction of the tariff,
what that did was create lower values for
severance tax and royalty early on.
What happened in TSM in the settlement - the
settlement method that you refer to, what that
did was actually lower tariffs and it partially
compensated for the high tariffs that were
derived early on. So, it wasn't really - it
didn't really start out to be that way
intentionally but, as a matter of history, the
pipeline tariffs were actually, as far as the
state's concerned or as far as the sponsor - or
who built the pipeline, that was back end loaded
as well because they got to recover a big chunk
of their money in the early years.
SENATOR STEVENS said that when the TAPS began operation, it was
back-end loaded.
MR. MARKS said the tariff itself was front-end loaded but what
that did was create a back-end loaded fiscal system because a
high tariff on the front end resulted in low severance taxes and
royalties for the producers.
CHAIR OGAN asked if the tariff is lower because the costs are
lower, more revenue should be generated for the state in the
front end of the project, regarding well price and netback.
MR. DICKINSON said an important observation is if the state
chooses to get most of its revenue from the wellhead, the tariff
will become very important. He said the higher the tariff, the
lower the wellhead. He explained:
Let's propose that a portion of the pipeline is in
Alaska and it costs $10 billion. A very large piece of
the tariff is going to be the interest on that $10
billion, it's like the first couple years when you buy
a house most of the mortgage payments are interest.
That interest is going to be taxable. If you look at
it from an income tax point of view, we say that's
return on investment. So, for folks on that piece,
then in fact what happens at the wellhead is less
important. And those are the kind of mechanisms that
we need to trade off as we look at how we are going to
quantify our fiscal [indisc.].
MR. MARKS commented that if the [gas] pipeline goes to Chicago
and the upper Midwest, the Federal Energy Regulatory Commission
(FERC) will establish a tariff. He does not envision that a
tariff would come out of this negotiation process. That is not
to say that another way of accounting for the pipeline costs
could not come out of the negotiations, but the official tariff
that shippers will have to pay to the pipeline will be
established in a federal jurisdiction.
SENATOR STEVENS thanked Mr. Marks and said he was trying to
clarify back-end loading in relation to the other large pipeline
project in the state and how it compared.
CHAIR OGAN said that SB 92 extends actions taken by the
legislature before for North Slope gas, contains a provision
banning an over-the-top route and contains a deadline for the
application. He explained, regarding the deadline:
We're saying we'd like to - if we don't have a project
in the next few years, whether or not the legislature
wants to take up the issue again. So, those are the
policy calls I think we need to make on this bill.
And, to be honest with you, I kind of picked a date
out of the - kind of an arbitrary date so that's open
for discussion and I expect we'll get some comments on
that.
With no further questions or comments, CHAIR OGAN adjourned the
meeting at 4:52 p.m.
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