Legislature(2005 - 2006)Anch LIO Conf Rm
10/27/2006 01:00 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Administration Presentation - Public Comments on the Draft Alaska Gas Pipeline Contract | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
JOINT MEETING
SENATE RESOURCES STANDING COMMITTEE
HOUSE RESOURCES STANDING COMMITTEE
October 27, 2006
1:04 p.m.
MEMBERS PRESENT
SENATE RESOURCES
Senator Thomas Wagoner, Chair
Senator Fred Dyson
Senator Bert Stedman
Senator Kim Elton
HOUSE RESOURCES
Representative Jay Ramras, Co-Chair
Representative Ralph Samuels, Co-Chair
Representative Paul Seaton, Vice Chair
Representative Kurt Olson
Representative Harry Crawford
Representative Gabrielle LeDoux
Representative Carl Gatto
MEMBERS ABSENT
SENATE RESOURCES
Senator Ralph Seekins, Vice Chair
Senator Ben Stevens
Senator Albert Kookesh
HOUSE RESOURCES
Representative Jim Elkins
Representative Mary Kapsner
OTHER LEGISLATORS PRESENT
Representative Bill Thomas
Representative Bill Stoltze
COMMITTEE CALENDAR
Presentation by the Administration - Public Comments on the
Draft Alaska Gas Pipeline Contract
PREVIOUS COMMITTEE ACTION
No previous action to record.
WITNESS REGISTER
JIM CLARK, Chief Negotiator
Office of the Governor
PO Box 110001
Juneau, AK 99811-0001
POSITION STATEMENT: Presented information related to public
comments on the draft Gas Pipeline Contract.
WILLIAM A. CORBUS, Commissioner
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Presented information related to public
comments on the draft Gas Pipeline Contract.
MARCUS HARTLEY
Northern Economics
th
880 8 Street, Ste 210
Anchorage, AK
POSITION STATEMENT: Presented information related to public
comments on the draft Gas Pipeline Contract.
STEVE PORTER, Deputy Commissioner
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Presented information related to public
comments on the draft Gas Pipeline Contract.
BEN LEVINE, URS Corporation
Northern Economics Sub-Contractor
th
880 8 Street, Ste 210
Anchorage, AK
POSITION STATEMENT: Presented information related to public
comments on the draft Gas Pipeline Contract.
KEN GRIFFIN, Deputy Commissioner
Department of Natural Resources
400 Willoughby Avenue
Juneau, AK 99801-1724
POSITION STATEMENT: Presented information related to public
comments on the draft Gas Pipeline Contract.
MICHAEL WILLIAMS, Chief Economist
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Presented information related to public
comments on the draft Gas Pipeline Contract.
BOB LOEFFLER
Morrison & Foerster
Counsel to the Governor
Office of the Governor
PO Box 110001
Juneau, AK 99811-0001
POSITION STATEMENT: Presented information related to public
comments on the draft Gas Pipeline Contract.
ROGER MARKS, Economist
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Presented information related to public
comments on the draft Gas Pipeline Contract.
DAN DICKINSON, CPA
Consultant to the Governor
Office of the Governor
PO Box 110001
Juneau, AK 998811-0001
POSITION STATEMENT: Presented information related to public
comments on the draft Gas Pipeline Contract.
ACTION NARRATIVE
CHAIR THOMAS WAGONER called the joint meeting of the Senate and
House Resources Standing Committees to order at 1:04:52 PM.
Present at the call to order were Senators Bert Stedman, Lyda
Green, Fred Dyson, Kim Elton and Thomas Wagoner and
Representatives Harry Crawford, Kurt Olson, Gabrielle LeDoux,
Ralph Samuels, Jay Ramras, and Paul Seaton.
^Administration Presentation - Public Comments on the Draft
Alaska Gas Pipeline Contract
CHAIR THOMAS WAGONER announced the purpose of the meeting is for
the administration to present public comments on the draft
Alaska Gas Pipeline Contract.
1:06:50 PM
JIM CLARK, Chief Negotiator on the Gas Pipeline Project,
informed the committee that the administration had two documents
to present to the legislature. The first is the public comment
overview that contains over 2,100 comments and it will be
presented today. The second document is the Interim Fiscal
Interest Finding, which includes the information from the
public, the administration's responses, and the expert
information that was gathered in the process of preparing
responses to the public. That document ought to be finished and
ready for presentation in the next several weeks.
COMMISSIONER BILL CORBUS, Department of Revenue (DOR), recapped
the public process that began on May 10 when the draft Gas
Pipeline Contract and Preliminary Fiscal Interest Finding were
released. The public process, which was extended to 75 days, was
broken into three phases: phase one consisted of 11 days of
presentations to the legislature that were broadcast statewide;
phase two was the nine public hearings that were held throughout
the state; and phase three included seven public forums that
included a question and answer format.
During the process the administration had an outreach program
where administration members visited 70 different communities
and discussed the issue with anyone willing to listen. At the
same time comments were accepted by mail, email and
telephonically. Also, the Senate Special Committee on Natural
Gas Development and the House Resources Standing Committee held
extensive hearings on the subject. He noted that much of the
legislative process was mixed with the PPT legislation. The
public process closed on July 24 and Northern Economics prepared
the document before the committee under the direction of the
Department of Revenue.
The document includes three attachments: attachment one indexes
all the comments that were submitted; attachment two includes
specific responses the state made to legislators and others who
submitted detailed comments on the contract and the fiscal
interest finding; attachment three is a presentation on basin
control. The public process document will be an appendix to the
interim fiscal interest finding, which is due for release in
November. It consists of five sections: introduction, comment
analysis, response to public comments, detailed analysis of the
public comments, and conclusion.
COMMISSIONER CORBUS said 2,169 comments were cataloged. Forty-
nine were discarded so a total of 2,120 submissions were
analyzed. The difference between respondents who wanted a gas
pipeline and those who were addressing the contract was very
clear, but it's noteworthy that sixty-five percent of the
respondents favored the contract, twenty-nine percent opposed
the contract, and six percent maintained a neutral position.
1:17:02 PM
The comments were summarized into fourteen general areas of
concern that are found in Table 12 on page 25. The general areas
of concern were further broken down into specific areas of
concern. They are found in Table 5 on page 13. Some of the 2,120
comments addressed more than one area of concern so there were
actually 4,285 statements of concern. Section 2 contains a
demographic analysis of all comments including the community of
origin and the timing of the submission.
Table 13, on page 25, is a summary of the most frequent comments
including: fiscal certainty, PPT legislation, Alaska hire
provision, Alaska Gas Port Authority alternative, work
commitments, legislative process, in-state demand, market risk,
and general project timeline. About one third of the comments
related to those topics.
1:19:40 PM
COMMISSIONER CORBUS said Section 3 is largely devoted to the
responses that were made to the public comments. He noted that
every comment received a response such that 365 sub areas of
concern were addressed and account for three quarters of the
document.
Section 4 analyzes the comments in entirety. Table 15 on page
180 is a matrix of the comments by group and contract article.
The top row indicates the categories of responders and the left
column indicates the different issues.
1:23:06 PM
COMMISSIONER CORBUS summarized that nothing came up in the
public process to change the administration's mind that the gas
is stranded. Sixty-five percent of the people who made
submissions supported the view that the original contract is
good for Alaska and the state should expeditiously proceed with
a gas pipeline and transition to a gas-based economy.
1:24:13 PM
REPRESENTATIVE RALPH SAMUELS mentioned the general commented
letters that Trans Canada sent the administration and said he'd
like confirmation that those comments weren't included as
specific submissions.
COMMISSIONER CORBUS replied that entity did submit comments. The
administration did not interpret them to require a response, but
they would be covered in the interim fiscal interest finding.
1:25:23 PM
SENATOR FRED DYSON said he was struggling to comprehend that
65 percent of the respondents approved of the contract. He asked
if that is what he intended to communicate.
COMMISSIONER CORBUS replied in most cases yes.
MR. CLARK added a lot of comments suggested changes and fixes so
there was a mix.
SENATOR DYSON responded that was his assumption.
1:26:53 PM
MR. CLARK said his point is that there was a combination of
responses. There were a lot of very thoughtful comments and it
was obvious that people spent a great deal of time thinking
about the subject. For the most part they suggested that a few
changes ought to be made, which is similar to the comments that
came from the legislature.
SENATOR DYSON asked how the responses were sorted into pro or
con categories.
COMMISSIONER CORBUS asked Mr. Hartley to respond.
CHAIR WAGONER recognized that Representative Bill Thomas,
Representative Bill Stoltze and Representative Carl Gatto had
joined the meeting.
MARCUS HARTLEY, Northern Economics, Anchorage, explained that
categorizing the responses includes a certain amount of
interpretation. Usually when a submission was catalogued as pro,
it was because the response was clearly favorable even though
some changes may have been recommended. Other submitters said,
"This is a good idea, but I don't like certain issues." That
type response was catalogued as neutral. If the submitter
suggested another alternative or said that the approach was
wrong, that comment was cataloged as con. He said it was clear
that the majority of respondents were in favor of the contract
as written.
SENATOR DYSON asked if he said that more than fifty percent of
the submitters said don't change the contract at all.
MR. HARTLEY responded he wouldn't say that. He would say that
more than half were very much in favor of the contract, but not
without changes.
SENATOR DYSON said that's the point.
MR. HARTLEY continued to say he couldn't identify the specific
percentage that suggested one particular change or another.
1:32:17 PM
MR. CLARK added that he didn't want to leave the committee with
the impression that the administration concluded that it should
proceed without some changes to the contract. He emphasized that
they reviewed and seriously evaluated all public and legislative
comments.
Today the purpose is to report what the public said. Discussion
might touch on the administration's reaction to the comments,
but the Interim Fiscal Interest Finding is where discussion will
take place regarding proposals for making changes to address
issues that the public and the legislature raised. The
administration has certainly taken this process seriously and is
not resting on the notion that people have given the green light
to go forward with the contract as-is, he said.
1:35:32 PM
SENATOR DYSON asked when the legislature could expect to see the
changes the administration recommends as a result of the entire
process.
MR. CLARK responded all public and legislative comments are
reflected in this document. He noted that the administration's
thinking has matured in the process of responding to the
questions and he would urge committee members to read the
document. Well thought out first-rate comments were submitted
and the administration tried to respond with first-rate answers.
SENATOR DYSON again asked when the legislature could expect to
see proposed changes to the contract.
MR. CLARK responded in the Interim Fiscal Interest Finding that
will be presented to the committees in November.
SENATOR DYSON asked if the administration had discussed that
with the producers.
MR. CLARK replied there has been contact, but the producers are
reluctant to negotiate with an outgoing administration.
1:39:18 PM
REPRESENTATIVE GABRIELLE LEDOUX said she was trying to
understand the concept of comment interpretation. She posed a
hypothetical response that included a positive comment about the
contract along with several suggestions to make rather
significant changes. She asked if such a comment would be
interpreted as favorable or negative.
MR. HARTLEY summarized that the comment is positive with regard
to the contract, but it also includes suggestions for several
large changes so that sort of response would be categorized as
neutral. He mentioned an actual comment that said do it even
though the contract could be improved. That sort of comment
would be interpreted as in favor of the contract.
REPRESENTATIVE LEDOUX noted that it's polite to say something
positive initially, which caused her to question how many
negative points a person would need to detail for the comment to
be interpreted as negative.
MR. HARTLEY responded it is an interpretation, but they looked
for tone and tried to weigh all the factors before concluding
that the person did or did not favor the contract. We feel we
did a good job in categorizing, he said.
1:43:49 PM
SENATOR KIM ELTON said the initial report said that 65 percent
of the people who testified were in favor of the contract, but
he suspects that there was more nuance. He asked Mr. Hartley to
assign percentages to the pro, con, and neutral categories.
MR. HARTLEY replied that would be difficult since he did not
look at it from that perspective, but he is comfortable saying
that a majority of the people who commented said they would like
to see the contract go forward. He clarified that doesn't mean a
majority of Alaskans; it means a majority of those who elected
to comment on the contract.
SENATOR ELTON said he was trying to put this into the context of
the initial report, which is that 65 percent of the people
favored the contract. Now it sounds more nuanced so he was
trying to figure out just how nuanced it might be. He tended to
agree with Representative LeDoux that people like to be polite.
1:47:00 PM
MR. CLARK said there were many thoughtful submissions, but the
comments were predominantly in favor of moving forward with this
contract with changes. Even if you count all the neutral
comments as negative, it would still be 2 to 1 in favor of going
ahead with the contract with some changes so the administration
is moving in that direction.
1:48:08 PM
REPRESENTATIVE PAUL SEATON asked how a comment would be
cataloged if someone wanted the pipeline to go forward, but
didn't comment on the contract specifically.
MR. HARTLEY explained that if the comment said "the pipeline"
that was interpreted to mean the one that is the object of the
fiscal interest statement. If the person said a gas pipeline is
good and it ought to go to certain places then that comment was
absolutely not counted as favorable for this contract.
1:49:01 PM
STEVE PORTER, Deputy Commissioner, Department of Revenue (DOR),
provided context for the relationship between the administration
and Northern Economics. He explained that the contractor was
asked to capture the information and the administration
maintained a hands-off approach so it did not influence the
outcome one way or the other. He said it's important to know
that two-thirds of the comments basically said, "We like the
contract; we think it ought to go forward or we don't." Page 24,
section 2.3.2, contains a summary of the comments by area of
concern and issue and it says two thirds of the submissions
dealt with general comments on the contract. The actual comments
are on the website so it's possible to get a flavor for the
comments that were submitted, he said.
1:50:33 PM
REPRESENTATIVE RALPH SAMUELS commented the most telling
statistic is 2,000. Of 600,000 Alaskans just 2,000 commented on
this incredibly important issue that will affect all Alaskans
for generations to come.
SENATOR DYSON said he was looking for the number of people who
favored the contract as written, but it's also important to know
what the "deal-breakers" might be.
MR. CLARK responded the thoughtful comments from various groups
were very supportive of this contract, but there were also ideas
about making it better. Legislators have said about the same
thing, which is to go forward but make some changes. He
expressed the view that that is what is happening and that the
legislature is fairly well aligned with the administration. The
problem is that the producers agreed with the contract that was
dated May 24. As a consequence of the public process and the
legislative process, changes are being made. The producers have
not responded to the additional ideas and changes because they
are waiting to deal with the next administration. He suggested
that getting alignment there is the challenge for Alaska moving
forward.
1:55:26 PM
REPRESENTATIVE CARL GATTO referenced Representative Samuels
comment and said Alaskans are depending on their representatives
so he wants to make sure that the legislature plays a very
significant role. He said he is very proud of what came out of
the House Resources committee on PPT and it closely resembled
the final product. The legislature should be heavily involved,
he reiterated.
1:57:09 PM
SENATOR BERT STEDMAN correlated the public comments and the
issues the Senate Special Committee on Natural Gas Development
addressed when amending the Stranded Gas Development Act (SGDA).
He noted that legislation did not move from the committee and
asked if it's fair to conclude that 60 percent of the comments
would fall in line with the SGDA amendments. That means move
forward after the changes are made.
MR. CLARK said that's spot on and page 24 has a breakdown of the
concerns that were most frequently expressed. Fiscal certainty
is the number one concern and that's what the legislature said.
Other concerns were PPT and Alaska hire. Again he said there is
quite an alignment between the concerns the public expressed and
the concerns the legislature expressed.
REPRESENTATIVE KURT OLSON asked if the governor intends to sign
a gas pipeline contract before leaving office in December.
MR. CLARK replied not that he knew. The administration is going
through the legislative process here today and after that the
Interim Fiscal Interest Finding will be presented.
CHAIR WAGONER described the process as a work in progress.
MR. CLARK agreed.
2:00:23 PM
REPRESENTATIVE GATTO referenced page 24 and asked what "In-State
Demand (124)" means.
COMMISSIONER CORBUS answered that covers a wide range of issues
for in-state use of gas.
2:01:57 PM Recess 2:10:43 PM
MR. CLARK told the committee that Mr. Levine, who did the actual
counting, was available to provide an explanation of the
process.
CHAIR WAGONER said it might clarify some things.
BEN LEVINE, URS Corporation, sub-contractor to Northern
Economics, explained that he developed the database to analyze
the comments. He read every comment and flagged it pro, con, or
neutral and in general it was obvious that a particular comment
was generally for or generally against the contract. He
referenced Representative LeDoux's hypothetical comment and said
he would have categorized that comment as con. Perhaps just 10
percent of the comments fell in the middle where he had to
struggle to decide whether it was pro or con. A lot of comments
were positive with reservations, he said.
After the initial coding, each submission was looked at and
broken down into individual comments and given an issue code.
Those were further broken down into statements of concern. Issue
codes were neutral. For example, fiscal certainty is an issue
code and is neither for nor against a provision; it is simply a
topic. In the next step, Northern Economics looked at the fiscal
certainty comments and broke those into specific statements of
concern - very specific portions of the fiscal certainty issue.
Some of those comments were positive and some were negative. An
analysis on positive and negative statements of concern was not
done.
SENATOR DYSON asked how many of the comments were interpreted to
say, "Go forward with this contract as written, without any
modifications."
MR. LEVINE replied 65 percent of the comments were coded pro and
about 70 percent of those said, "Do it." and probably dozens
said, "Don't do it."
2:16:14 PM
REPRESENTATIVE OLSON asked if there was any indication how many
respondents had actually read the material.
MR. LEVINE replied some of them had obviously read the material
while others had not. You don't know when some says, "Do it."
But then he wasn't there to judge that, he said.
REPRESENTATIVE OLSON remarked copies of the contract were
available in his office, but few people took advantage of that
and he assumes that would hold true in other districts.
SENATOR WAGONER asked Mr. Clark to continue.
MR. CLARK asked Mr. Griffin to discuss the issues that were
raised on in-state demand and use of gas.
KEN GRIFFIN, Deputy Commissioner, Department of Natural
Resources, explained that the title "In-State Demand"
encompasses anything that might fall under the broad umbrella of
in-state demand. It might include people expressing concerns
about whether Chicago prices will be charged for gas that is
taken off in Fairbanks. Other comments may not actually be
addressing the gas line. Rather, the comments may simply be
addressing the need for gas in Southcentral or expressing
concern about what getting gas to Southcentral might do for
Southeast or Kodiak or Bethel.
MR. CLARK asked Mr. Marks and Mr. Williams to address the
impacts of delay.
MICHAEL WILLIAMS, Chief Economist, Department of Revenue (DOR),
said his comments relate to the impacts of delaying natural gas
development. He reviewed three major points: fiscal impacts to
the state, the loss to the Alaska economy, and the loss of
potential market share for Alaska natural gas.
Fiscal Impacts to the State: Beginning in 2016 the state will
receive about $1 billion per year depending on the price of
natural gas. Because oil production is declining, it's simply a
matter of time before the state runs a deficit. The Preliminary
Fiscal Interest Finding analysis indicates that will occur in
2009 and the Constitutional Budget Reserve (CBR) will be
depleted in 2014. He emphasized the need for diversifying the
revenue base.
Loss to the State Economy with a Focus on Employment: About
11,000 pipeline related construction jobs will be available each
of the roughly five years that construction occurs. With project
delays, those jobs are pushed into the future. The assumption is
that the state will spend most of the money that accrues to it
from natural gas sales and those expenditures are recycled into
products and services. The impact from state expenditures
amounts to about 22,000 jobs per year over the life of the
project or some 35 years. Clearly, the impacts from state
expenditures dominate what is received from construction.
Delaying one year reduces construction employment beginning in
2011 and reduces the additional impacts beginning in 2017.
Loss of Potential Market Share for Alaska Natural Gas: This is
the most important point. If the project is delayed there may be
no demand for Alaska's natural gas. First, there is currently
demand for Alaska natural gas in North America and probably it
will be for electric generation. Second, the recent high natural
gas prices combined with the interruption of supply due to
hurricanes has caused utilities to explore coal and nuclear
options. The U.S. petrochemical industry is the largest natural
gas consumer in the country, but it is not competitive in the
world market. That is an indication that it will not be a source
of demand for Alaska natural gas.
Clearly, Mr. Williams said, timing is important. If the gas
isn't developed soon, other industries will seek alternate
sources of energy. For example, Agrium has announced that it
plans to close for part of the year due to interrupted natural
gas supplies and that it is investigating coal gasification in
conjunction with a local utility. If Agrium and other U.S.
companies decide to make capital investments in coal, that
decision will not be reversed to return to natural gas.
Additional impacts related to delay include reduction to the
Permanent Fund and reduced net present value of the project.
MR. WILLIAMS summarized that delaying the gas pipeline could be
devastating to the state economy. There would be a loss of
revenue to state government, a loss of jobs to the state
economy, a potential loss of market share such that the project
may never go forward. He noted that a summary of the public
comments and the responses are found on pages 65 and 66.
CHAIR WAGONER asked Mr. Williams to provide Ms. Jackson with a
copy of his presentation.
MR. WILLIAMS said he would do so.
REPRESENTATIVE LEDOUX asked when the gas pipeline would be
completed if the contract was signed tomorrow.
MR. WILLIAMS replied the first gas would flow in 10 years.
REPRESENTATIVE LEDOUX said in that case, why is there a rush to
sign the contract before December 4as opposed to several days
after that date.
MR. WILLIAMS clarified he is not tied to a specific date; he is
talking about uncertainty and the perception of whether or not
Alaska gas is going to market. That uncertainty is causing
utilities to look at other options.
REPRESENTATIVE LEDOUX again asked what difference it would make
if the contract were signed before December 4 as opposed to
early January or February.
MR. WILLIAMS replied his perception is that utilities realize
there are problems with getting Alaska gas; he isn't talking
about a specific date or signing a particular contract. The idea
he is trying to convey is that the market is uncertain whether
Alaska gas is coming forward or not.
REPRESENTATIVE SAMUELS referenced the mention of $1 billion per
year and asked what the price of gas would be.
MR. WILLIAMS replied he would need to check the Preliminary
Fiscal Interest Finding to be certain, but he believes $5.50
MMBtu was used for the calculations.
REPRESENTATIVE SAMUELS pointed out that a delay does not benefit
anybody and the message that needs to be sent to the oil
companies is that from this day forward their net present value
drops too so be careful.
23105
MR. CLARK said that is the essential message and the fundamental
reason for moving forward with dispatch. The particular date
doesn't really matter; what does matter is that the transition
from an oil-based regime to a gas-based regime is managed such
that there is not a revenue gap. Regardless of when the contract
is signed, there will be the 8-10 year lead-time before gas
flows. But the longer the gap before the process begins the
greater the revenue dip as oil revenues decline. The challenge
before the legislature and the new administration is to manage
the transition so there isn't an issue of how to fill the
revenue gap.
2:32:44 PM
REPRESENTATIVE HARRY CRAWFORD said he and probably everyone at
the table feels the urgency, but this contract has a built-in
four-year gap to get to project sanction and the window of
opportunity could be closed before a decision is made. He
suggested that if the contract isn't signed within the next few
months then there ought to be a new contract.
MR. CLARK responded part of the lead-time includes four years to
determine whether there is a project. That means going through
the permitting process, the design-engineering phase, and the
FERC process. Large projects are built in a series of sequential
steps and the contract is one of those steps. The Fiscal
Interest Finding deals with the project in its entirety while
the contract deals with management of the fiscal terms of the
project. The urgency is to get the process started and if the
project is economic, then go forward. He emphasized that
economics can't be judged without going through the process.
2:35:42 PM
REPRESENTATIVE CRAWFORD commented it seems as though the project
has been studied over and over and he would suggest that it's
time to "put up or shut up." If the state can't get a
commitment, then it should not give an exclusive right to build
a pipeline.
MR. CLARK responded he is not aware of any permits that have
been issued for this project and other than the 2001 study he is
not aware of any design engineering specific to this project.
REPRESENTATIVE SAMUELS clarified that FERC has indicated that it
would be six years to project sanction and four years to build
so that's the ten year window.
BOB LOEFFLER, Morrison & Foerster, Counsel to the Governor,
agreed with Representative Samuels about the timeline. Ground
cannot be broken without a FERC permit and by statute that
process is 20 months. The open season process, which entails a
lot of detailed engineering, takes at least a year. As the
engineering and regulatory process goes along, the financial
community enters the picture, but won't lend any money until the
certificate is issued. That could take another year so you're
right on the time-line, he said.
REPRESENTATIVE SAMUELS said that goes back to the impacts
related to a delay, but in any event it will take ten years and
it can't be speeded up.
MR LOEFFLER agreed and mentioned that he went through the first
failed attempt.
REPRESENTATIVE SEATON asked about the validity of the
commitments to start the Alaska line after McKinsey in light of
the fact that McKinsey Valley has been held up.
MR. LOEFFLER replied it has been rumored in the press, but he is
unaware of any such commitment and it is not in the contract.
MR. CLARK affirmed the administration has made no such
commitment.
2:40:43 PM
MR. PORTER noted that he has been working with the LLC
agreement, which is the gas pipeline agreement, and he wanted to
reemphasize what Representative Samuels said. The critical issue
is not whether you commit to build today or four years from now;
the critical issue is to move forward so it can happen ten years
from now.
SENATOR DYSON asked Mr. Loeffler to comment on the potential for
the federal government citing national interest and taking over
management of the project if the state doesn't take decisive and
timely action.
MR. LOEFFLER replied that sort of thing happens in times of war
and national emergency. He doesn't see it at this point, but it
can't be ruled out.
SENATOR DYSON said if did it happen, what would be the revenue
impact to the state.
MR. LOEFFLER offered the view that the federal government isn't
entirely benevolent toward Alaska. The federal government would
take its share and, in some sense, Alaska would be a loser.
SENATOR DYSON asked for clarification that Alaska wouldn't lose
out entirely.
MR. LOEFFLER responded it wouldn't be a total loser.
REPRESENTATIVE GATTO asked if the six-year FERC timeframe
depends on the diameter of the pipe and if a smaller pipe could
be put in first to shorten the timeline.
MR. LOEFFLER replied the regulatory process would take the same
time regardless of pipe size and putting is a small pipe
followed by a larger pipe would likely be problematic and not
make a material difference in time.
REPRESENTATIVE CRAWFORD said he does not dispute the timeline,
but he does not want to spend five or six years just to have the
oil companies say they don't have a project. He wants the
companies to commit today to move ahead with the project at that
point.
2:47:05 PM
MR. LOEFFLER said project sanction wasn't invented for this
contract; it's the point that a company commits its full
financial resources to do a project. It's not possible to say
what the cost of long-term debt or the cost of steel will be six
years from now just as it's not possible to say what conditions
FERC will put on the tariff. The state could hypothetically
write a commitment to say the company will go ahead if certain
conditions are met. You can't do better than that, he said.
REPRESENTATIVE MIKE KELLY questioned whether it might be wise to
conduct a professional survey to perfect the knowledge of what
the public said.
2:50:16 PM
CHAIR WAGONER said 2,100 is not a large percentage of the
population, but he is comfortable that those who wanted to
testify have done so.
REPRESENTATIVE KELLY said he didn't disagree, but there are
648,000 people who haven't weighed in and if there is a better
way to find out what they want then he questioned not pursuing
that information.
SENATOR STEDMAN asked if Congress asked FERC to look at what
process would be created if the federal government were to go
forward and take control.
MR. LOEFFLER said yes, a requirement in the October 2004 federal
statute says if an application is not made at a certain point,
the federal government would study alternatives. He said he
believes that has started.
2:52:25 PM
SENATOR STEDMAN said the other issue on a timeline is the loan
guaranty for 80 percent backing.
MR. LOEFFLER responded that has a longer time limit; but it's
hard to tell what will happen if the leadership in Congress
changes.
REPRESENTATIVE SEATON asked if the process would be accelerated
if the producers decided to inject gas into oil and transport it
on the TAPS because that wouldn't require FERC approval.
MR. LOEFFLER said it's an interesting question because advance
FERC approval is not necessary to build an oil pipeline. If the
owners could build the infrastructure for gas to liquids, the
only FERC involvement would be a new tariff case.
REPRESENTATIVE SEATON asked whether a new tariff would be
necessary if the gas liquids were mixed with heavy oil such that
it was a single-phase liquid.
MR. LOEFFLER said yes and no. There would be a much greater
volume down the TAPS and the carriers would want to keep the
tariff based on a smaller volume to earn more money. The state
and others would say the tariff ought to go down because there's
a greater volume over which to spread the cost.
CHAIR WAGONER added, whether it's feasible or not has to do with
why you would mix a sought-after fuel with oil and then have to
recondition it.
REPRESENTATIVE SEATON asked if it's correct that a change in a
tariff proposal would come after and wouldn't necessitate a
delay.
MR. LOEFFLER said yes, the fight with FERC about the right
tariff would come later.
25636
MR. WILLIAMS agreed with Chair Wagoner that converting gas to
liquid produces a very clean and light fuel, but it might not
make economic sense. Second, he cautioned the committee to
remain cognizant of outside events that might determine whether
or not there is a market for Alaska gas. Be aware that there is
a renewed interest in coal and nuclear energy so this window may
close if the debate goes on too long
MR. CLARK said Commissioner Corbus would discuss the key issue
of how the document deals with whether the gas is stranded or
not.
COMMISSIONER CORBUS directed attention to page 48 on stranded
gas and read the following from the report:
STRND_01(26 Comment)
Statement of Concern: Statements on the determination
of stranded ANS gas, including (1) the gas is
stranded, (2) the gas is not stranded, (3) the gas is
stranded only until a contract is signed and (4) the
decision to declare the gas stranded is a policy
decision rather than an empirical one.
COMMISSIONER CORBUS explained that the definition for stranded
comes from the Stranded Gas Development Act and it's gas that is
not marketed because of cost and prevailing market conditions.
Prevailing is defined as over the life of the gas pipeline,
which is between 40 and 45 years. To reach a conclusion some
quantitative, but mostly qualitative considerations are made.
That includes: the future predictability of the price; the
volatility of the price; the magnitude of the project in
relation to other opportunities available to the investors; the
risk of cost overruns; and competition.
The supply side of competition includes: LNG, the Rocky Mountain
area, and the Gulf of Mexico. The demand side is tempered by the
demand for clean coal technology and the renaissance of nuclear
power.
3:02:12 PM
COMMISSIONER CORBUS continued to say that in November 2003 the
state made a preliminary numerical analysis as to whether or not
the gas was stranded. On November 1 the price of gas was $3.63
MMBtu and the conclusion was that the internal rate of return
was 9.7 percent, which was inadequate. The conclusion then and
now is that the gas is stranded. The numerical analysis supports
the qualitative judgment. He noted that Michael Williams and
Roger Marks helped prepare the analysis.
REPRESENTATIVE GATTO posed worst-case hypothetical scenarios and
questioned what would happen if the gas pipeline was partially
built and it became apparent that there was no hope for
financial payback.
30530
COMMISSIONER CORBUS replied that brings up the question of risk.
During open season a few years from now, binding commitments
will be made to reserve capacity on the gas line. Those
commitments must be honored whether nuclear power comes on line
or not, but it is a worry that when open season comes there may
not be a demand for the gas.
REPRESENTATIVE GATTO asked what happens to the investors in the
event of default.
MR. LOEFFLER replied the pipeline establishes credit standards
just as a bank does, so a company would have to have the assets
to back up the size of the particular commitment. In the event
of default, the capacity would become available to someone else.
MR. LOEFFLER made the point that the commitments made at the
open season are conditional upon the project being built at a
certain cost for a certain tariff. That provides an escape if
things blow up. Also, the state has an op-out provision in the
LLC agreement such that at project sanction if it does not want
to move ahead with its pipeline investment - not its firm
transportation (FT) investment, - it can put its share back to
the other pipeline owners and receive reimbursement for
everything it spent to that point. That's a way of reducing the
state's exposure and ending up with the money that was put in,
he said.
MR. CLARK said if the contract is signed soon, then the
owner/marketers would figure out where the gas is going. Compare
that with the situation where there's a several year delay
before trying to put a contract together. The market uncertainty
could create demand destruction that Representative Gatto's
horror scenario raised. As Representative Crawford said,
legislators recognize the urgency to get a contract signed so
reservations are made in the market under the open season, which
is two or three years after the contract is signed.
MR. GRIFFIN said the future is uncertain in many respects, but
once the contract is signed the process is very systematic and
orderly. The world will see what is happening and the market and
the state's competitors will respond accordingly. The sooner the
state gets on deck the better, he emphasized.
REPRESENTATIVE SEATON asked if the high transportation costs
related to the gas being stranded have to do with building a $20
billion to $30 billion pipeline or the operational costs of
transporting the gas.
COMMISSIONER CORBUS replied the high costs for constructing a
pipeline translates to high tariffs so it's both.
3:12:39 PM
MR. CLARK said the project is so monumentally large and has such
huge asymmetrical risks that smaller less risky projects tend to
cycle in ahead of this one.
MR. MARKS added he believes the issue of project size is under
appreciated. It's hard to comprehend $20 billion to $25 billion
so it might help to consider that it took about $25 billion to
put the first man on the moon and that the insurance industry
estimates that Hurricane Katrina payouts will amount to about
$25 billion. That's how much has to be paid before the first
molecule of gas is sold, he said. If something goes wrong prior
to that point it could well be a financial catastrophe for the
company. In terms of financial symmetry, John Maynard Keynes put
it very succinctly when he said, "Markets can remain irrational
longer than you can remain solvent." A company could diversify
its risk exposure if it builds 25 $1 billion projects compared
to one $25 billion project. That is the prime reason that the
administration believes the gas is stranded, he said.
CHAIR WAGONER asked if he would agree that the companies aren't
afraid of the $25 billion construction costs it's the unknown
cost overruns that are frightening.
MR. GRIFFIN said yes.
REPRESENTATIVE SEATON asked whether the gas would no longer be
stranded if gas to liquids technology was economic and the TAPS
was used for transportation.
MR. CORBUS replied he did not have an answer because he did not
know about the feasibility of liquefying.
REPRESENTATIVE SEATON said a concern of his is that the
administration didn't analyze and present gas to liquids to the
legislature. If that had been done it probably would have
elicited more than just the one public comment. A 2001 analysis
that was mentioned in the 2006 report said that is the best
alternative of: going through Canada, LNG through Valdez, or
converting and using the TAPS. It would extend the life of the
TAPS by 20 years and the gas would be pumped as a single-phase
liquid. TAPS is not designed to pump the heavy North Slope oil
but gasifying it would work. The producers are doing gas to
liquid technology now and have planned projects of 8.1 Bcf per
day yielding 690,000 barrels of liquids. The state's 6 Bcf would
yield about 520,000 barrels per day that would go into the TAPS.
Another concern is that after the contract is signed the state
won't have any say if the LLC changes the project from a gas
line to gas to liquids technology and injects it. It's inherent
upon the legislature to look at liquefying in the public
comments, address whether or not the gas is stranded, and
whether all the economic uses of gas are evaluated, he said.
MR. LOEFFLER responded it wouldn't be the end of the world if
North Slope gas left in a gas to liquids form, but the down side
is there would be no in-state use of gas.
MR. CLARK said he didn't want it to appear as though anything
was withheld. The administration pursued the stranded gas
process that was developed in 2003. It analyzed the applications
it had and it didn't have a gas to liquids application. The
administration isn't resisting looking at another idea, it is
simply reporting on the comments received on the project.
CHAIR WAGONER commented this administration doesn't have time to
look at another proposal.
MR. GRIFFIN explained that gas to liquids (GTL) and LNG are very
different processes. Gas to liquids essentially makes diesel or
gasoline out of gas in an expensive and low efficiency process.
Then it is mixed with crude oil and many of the advantages of
the product are lost. The other problem relates to the market
issues of to dumping a single narrow product on the West Coast.
The projects in Qatar are LNG projects similar to Cook Inlet,
which can't be used in the TAPS because it's incompatible.
That's why the plan was to have a gas pipeline to Valdez and
then manufacture LNG there. The producers have reviewed and
dismissed LNG and GTL projects in the past. Right now we have
the Stranded Gas Act and the issue is how to move forward.
3:25:11 PM
CHAIR WAGONER reminded everyone of the purpose and topic of the
meeting today.
MR. GRIFFIN said the administration is simply laying the
foundation for declaring North Slope gas uneconomic. He is
considering whether or not to declare it stranded - not based
this contract, but based on the fact that it is stranded, thus a
contract could go forward and be negotiated on that basis.
3:26:15 PM
SENATOR DYSON asked if it is true that the governor could not
sign the contract until small but important modifications are
made to the Stranded Gas Act.
COMMISSIONER CORBUS responded he would interpret it that way.
MR. CLARK agreed and noted that all the Stranded Gas Act
amendments the administration presented previously and those
that will be provided in the Interim Fiscal Interest Finding are
those necessary to allow the legislature to authorize oil fiscal
certainty in this contract, he said.
MR. GRIFFIN said Mr. Marks would address the key issue of the
state taking gas in-kind.
3:28:32 PM
ROGER MARKS, Economist, Department of Revenue, related that the
key goal was to improve the status quo fiscal system to fit the
large, costly and uniquely risky project. Modeling indicated the
project had a low rate of return thus the focus for
restructuring the fiscal system was to improve the rate of
return.
MR. MARKS explained that the status quo fiscal system takes tax
or royalty in-value, which means the producers sell the gas and
give the state its proportion in cash. In that system the state
gets about 20 percent of the gas and pays for its share of the
pipeline over time through tariff deductions on taxes and
royalties. Basically, the producers pay up front for 100 percent
of the cost of the pipeline and receive about 80 percent of the
gas.
DOR determined that if the state were to take its gas in-kind
and the commitment to ship the gas, which is financially the
same as owning it, then the producers would pay 80 percent of
the cost of the pipeline up front and the state would pay 20
percent. That significantly increases the rate of return and
also addresses the criticism that the contract has no agreement
about in-state gas sales. Twenty percent of 4.5 Bcf per day is
more than enough gas to cover all the anticipated in-state
needs, he said.
3:31:47 PM
MR. CLARK said Mr. Loeffler would address the issue of project
description and pipeline route.
MR. LOEFFLER directed attention to the statements of concern on
pages 48 and 49. The categories of concern include whether or
not the southern route is locked in and whether or not the size
of the pipeline is adequately described. He noted that he
previously testified about why the provisions are adequate, but
he would concede that the explanation could be simplified.
Therefore language will be added to further clarify that the
southern route will be followed. Also, a new provision will
require legislative approval to amend the contract in certain
ways. Examples are a change from the southern route and a change
in the key fiscal terms. Finally, more specific language
relating to the project description will be included as the
public comments requested.
REPRESENTATIVE SEATON asked if the administration would consider
including language saying that switching to a gas to liquids
project is not possible.
MR. LOEFFLER responded he doesn't recall any testimony that
under the contract or the LLC the project could be switched to a
gas to liquids project. He asked Mr. Clark to give the
administration's point of view.
3:34:29 PM
MR. CLARK said he would agree with what Chair Wagoner said,
which is that the discussion today is not about gas to liquids;
the topic today is about this project. If the chair wishes to
hold a hearing on gas to liquids that would be fine, but not
today, he said.
CHAIR WAGONER clarified that he did not say he wanted to hold a
gas to liquids hearing.
MR. CLARK said what he means is that the administration is not
prepared to discuss that today.
CHAIR WAGONER said he appreciates Mr. Loeffler reiterating that
the over the top route isn't an option. Not only is it precluded
by the state it's also precluded by federal law.
REPRESENTATIVE SEATON clarified that he wants to make sure the
contract and the stranded gas amendments will apply to a gas use
phase pipeline and that the project that goes forward provides
economic impetus to Alaska. It seems that this is the
appropriate place to put in that restriction, he said.
MR. LOEFFLER responded the administration believes the contract
already requires a gas pipeline.
MR. CLARK added this clearly contemplates a gas contract.
REPRESENTATIVE SEATON said he would appreciate working with the
administration to clarify that.
3:37:46 PM
MR. CLARK asked Mr. Loeffler to address fiscal certainty.
MR. LOEFFLER said the administration continues to believe the
original terms of fiscal certainty is consistent with
international practice and consistent with what the legislature
authorized in the Stranded Gas Act. Furthermore, it was
justified. He noted that the administration is quite sensitive
to legislative and public views and is prepared to shorten the
period of fiscal certainty. For gas that means reducing the
contract period by 10 years. Oil is more complex in that there
would be no fiscal certainty until project sanction. Also,
whatever the scheme of oil fiscal certainty is, it would be
frozen as of the end of the legislative session in 2011. He
reminded members that in the PPT statute there is opportunity
for the legislature to look at how the PPT is functioning or the
FERC application date, whichever is later. Then there would be a
14-year period from project sanction after which there would be
a small period for balancing.
He emphasized that the administration has not discussed this
with the companies, but the idea is to shorten the period of
fiscal certainty and start later for oil fiscal certainty.
CHAIR WAGONER remarked he didn't believe the legislature would
wait to review whether PPT is working or not until 2011. In
fact, he asked the DOR to submit a quarterly report.
MR. LOEFFLER responded that date was taken from the PPT
legislation.
CHAIR WAGONER agreed the date is in the legislation, but the
Finance Committee and the Legislative Budget and Audit Committee
will be requesting a quarterly report.
3:42:05 PM
REPRESENTATIVE SEATON said when the House Resources Committee
looked at that issue the agreement related to project sanction
and then 12 or 14 years. Fiscal balancing beyond that point was
specifically deleted.
3:42:38 PM
DAN DICKENSON, CPA, Consultant to the Governor, directed
attention to page 107 and reported that 142 comments dealt with
fiscal certainty so it received a great deal of focus. There
were more comments on what was inappropriate than there were
positive suggestions so part of the challenge is to find what
works.
MR. CLARK asked Mr. Loeffler to address the issue of work
commitments.
MR. LOEFFLER said the administration looked at the comments and
feels that the original work commitment clause is sensible and
could work. Comments on the issue included: there is no
timetable, no one will understand how this applies, why is the
prudent operator standard used, and why aren't there penalty
clauses.
MR. LOEFFLER explained that the diligence standard requires that
the project be advanced as diligently as is prudent under the
circumstances. It contains a lot of the prudent operator
standard, which was addressed in the Preliminary Fiscal Interest
Finding. Prudent behavior considers what is reasonable in the
circumstances. What people miss is that it's not applied in a
vacuum. As of May 10 companies provided a project summary that
includes scheduling dates that will be incorporated into the
contract. Basically, the contract requires the planning phase
that leads to the pre-filing phase that leads to the open season
phase that leads to the FERC application process. All that
activity is known measurable and understandable.
MR. LOEFFLER mentioned the presentations by Independent Project
Analysis, Inc. (IPA) and noted that the problems associated with
schedule driven projects provide a powerful lesson. The
administration believes that the balance that was struck with
the work commitments in the original contract was right. At the
same time there was testimony about considering some sort of
letter of credit scheme. That is that if activity had not
progressed some measurable point in time, the company would
forfeit a large sum of money. So it's sort of a penalty scheme.
That seems to run counter to the teaching of IPA, but the
administration would be willing to discuss that concept because
it appears to satisfy a number of public concerns. He clarified
just one of the three companies put forward this suggestion. It
would be an alternative approach, he said.
3:48:40 PM
MR. CLARK asked Mr. Loeffler to address dispute resolutions.
MR. LOEFFLER said some people have questioned using arbitration,
but every royalty agreement the state has entered into has
provided for arbitration to deal with royalty reopener issues.
That works much better than fighting out royalty tax issues in
the courts. Another point is that if this contract succeeds,
there won't be tax and royalty disputes as in the past because
the gas is taken in-kind under the royalty statutes and the tax
payments are taken in a fixed formula under the tax statutes.
It's a novel change to get a tax payment in gas, he said.
A number of comments related to the Alaska Arbitration Act
versus Uniform Arbitration Act, the number of strikes in certain
circumstances, and discovery limitations. A package of changes
was put together to address each of those. The administration
proposes going to the Alaska Arbitration Act and that an award
would be enforceable only by appropriation from the legislature
- not in court. Strike provisions were clarified so that there
would be no discovery limitation in any dispute.
MR. CLARK asked Mr. Loeffler to address the expansion process.
MR. LOEFFLER said the three ways for expansion are voluntary
expansion, state initiated expansion under the fiscal contract,
and the FERC power of expansion. Most, but not all, of the
explorers prefer the new FERC power to order expansion and the
voluntary expansion provisions of the LLC. Because of criticism,
the administration is ready to drop the state initiated
expansion in favor of the voluntary expansion provisions of the
LLC. Any member, including the state, can put in an expansion
proposal to the LLC. The proposal is evaluated, put out for
study, and then voted on. Whether the pricing is rolled in or
incremental is a decision that is made later on. Also, any
affected shipper that is outside the LLC membership can approach
the LLC and propose an expansion if it thinks it would succeed
at the FERC. So there are really two different options within
the voluntary expansion.
MR. LOEFFLER expressed enthusiasm with the new FERC powers and
the ruling on rolled in pricing as a presumption. He reiterated
that the administration listened when the people said the state
initiated expansion might complicate the choice and that either
the voluntary or the FERC powers might be better.
MR. CLARK said Alaska hire received considerable public comment
and Commissioner O'Claray would talk about that.
3:55:40 PM
GREG O'CLARAY, Commissioner, Department of Labor and Workforce
Development (DOLWD), reported that the 174 comments related to
Alaska hire primarily suggested that the language is not strong
enough. The administration decided that the easiest way to
constitutionally guarantee Alaska hire was to promote the
adoption and negotiation of project labor agreement covering
this particular project. That would include recommendations for
hiring halls in rural areas to promote rural access to these
jobs. The negotiations would begin as soon as the contract is
approved.
The administration continues to maintain that a trained
available workforce is the key to maximizing Alaskan access to
these jobs. The state's financial commitment of $35 million to
$45 million would be a combination of step grants. That is in
addition to the federal funds that will be available once the
project is under way. The legislature has already moved in the
direction of a trained Alaska workforce in construction so the
state is well on its way to achieving its goals. Also, there is
a proposal about how to incorporate the reference to the project
labor agreements in the contract.
3:57:57 PM
MR. CLARK mentioned that the Special Committee on Natural Gas
Development dealt with that subject. He said Commissioner Menge
would address the issue of process in Canada and whether it
would cause delays.
3:58:25 PM
MICHAEL MENGE, Commissioner, Department of Natural Resources
(DNR), said the administration believes the existing Canadian
process is designed to handle all the complexities associated
with permitting a pipeline through Canada. Canadian counsel was
hired and did a tremendous amount of research and it boils down
to the fact that the Canadian government will act in the best
interest of the Canadian citizens. In doing so it will have
acted in the best interest of the project as well as Alaska and
U.S. consumers.
CHAIR WAGONER related that he's had discussions with
authoritative and knowledgeable Canadians and it sounds as
though there's a battle brewing regarding which province will
pull the liquids off and manufacture product with the liquids in
Canada. But unless the liquids are kept in Alaska, it's beyond
the state's control.
COMMISSIONER MENGE agreed and said his belief is that it will
all turn on whether or not the affected governments decide to
subsidize the production of a product because that would skew
the economics. If straight economics rules, the highest value
obtained will be the process that is embraced. The rest is
simply saber rattling.
CHAIR WAGONER said he didn't discuss subsidies; he discussed the
cost of shipping and market location and he was simply noting
there will be some problems.
REPRESENTATIVE SAMUELS said he would agree that Canada is
benefited if the project moves forward. The problem he has with
Canada is that the producers aren't dealing with Canada at the
same time they are dealing with Alaska. He suggested that the
potential for delay would come in the contractual agreements in
the private sector. He said he was really talking to "the guys
in the back of the room."
COMMISSIONER MENGE remarked that the committee members could
certainly appreciate that the Canadian government doesn't have a
strong majority and so asking it to make a controversial
decision when there isn't a whiff of gas is asking too much.
That being said he stated the belief that the Canadian
government will make decisions once a decision has been made on
this side of the boarder.
MR. CLARK asked Mr. Griffin to address the question of PPT and
whether oil ought to be included in the contract.
4:05:20 PM
MR. GRIFFIN corrected a previous statement and said several
major gas to liquids plants are under development notably in
Qatar.
MR. GRIFFIN explained that oil and gas businesses are
fundamentally integrated in that when exploration is undertaken,
there's generally some chance of finding oil in the ground and
some chance of finding gas. When the values of both options are
added, the total value of the exploration project is increased.
Imagine, he said, if one arm has zero value due to no market
then the value of the exploration project changes dramatically
such that it's more likely that the explorer will decide that
the project isn't worth undertaking. That is basically what
brought the companies to the table to negotiate fiscal certainty
that extends to oil. When the state looked at the idea it was
clear that it had to be considered under a more appropriate tax
system than ELF, that is PPT. Extending fiscal stability helps
encourage exploration in both sectors and minimizes risks for
this project and projects to come.
REPRESENTATIVE SAMUELSON commented he would agree to an extent,
but for this project there is little to no exploration risk for
a number of years because the gas reserves are known to exist.
4:08:46 PM
MR. GRIFFIN directed attention to page 99, which addresses
capacity management and access. He explained that the state
doesn't control development decisions, production decisions, or
exploration decisions upstream, which is different than the
producers. In light of this, the state negotiated for three
principles. First, guarantee that the state can get its gas to
market when it is produced just like the producers. Second, if
the pipeline is not full, the state will not bear a
disproportionate risk of empty capacity. Third, the state has
access to gas and capacity rights for in-state use.
Various comments suggested the state reserve capacity for the
explorers or for in-state shippers, but both suggestions would
shift cost risk to the state and are inconsistent with FERC
requirements for managing capacity by regulation. However,
provisions of the capacity management article assure that in-
state capacity is reserved separately from the full haul
capacity to Alberta, or wherever, and that shippers can reserve
that capacity and make sure there is gas dedicated to state use.
The suggestion of posting unused state capacity also falls under
FERC regulations for fixed capacity commitments and in his view
the state has a capacity management article that has a
reasonable chance of receiving FERC approval. If it isn't
acceptable, then FERC will offer recommendations. In any event,
FERC provides explorers equal access to gas through its process
and it's not something that can be dealt with contractually.
He recapped that the contract and the capacity management
article do a good job of meeting these needs while not shifting
undue risk burden on the state.
4:13:01 PM
REPRESENTATIVE SEATON asked if that means that the entire
contract would fall if FERC doesn't approve the capacity
management article.
MR. GRIFFIN said no, but the state will need to explain to FERC
how it is different from the other shippers and how the state's
capacity management provisions provide an equal playing field
that FERC regulations are intended to provide. History has shown
that if FERC doesn't approve the state's capacity management
article, it will explain why not and offer recommendations.
REPRESENTATIVE SEATON asked if the FERC portion is severable
such that the rest of the contract would stand.
MR. LOEFFLER said if the capacity management article falls, the
contract remains. An additional clause says the companies will
work with the state in good faith to develop a substitute that
conforms to FERC that achieves the same purpose.
4:15:15 PM
MR. GRIFFIN highlighted in-state use issues found on pages 87
and 91. He explained that the concerns include: getting gas off
the pipeline for in-state use, what it will cost, and where the
gas may be needed. To begin with the Natural Gas Pipeline
Act (NGPA) contains provisions requiring reasonable access for
gas use in state, so the contract contains eight provisions
specific to that. First the pipeline must go through Alaska so
that the gas gets into the center of the state. The pipeline is
about 20 percent longer so it will cost more. Second, there is a
timetable for studying in-state gas needs. Third, there is a
requirement to study in-state liquids opportunities. Fourth, the
mainline project must construct and pay for off-take points.
Potential tie-in points include the Yukon River, Fairbanks,
Delta, and perhaps one near the Canadian border. Fifth, the
contract requires mileage sensitive rates and segmented service
so the state won't underwrite shipping gas to Canada and the
Lower-48. Sixth, in-state capacity is offered and is awarded
separately from full-haul capacity so the state won't compete
with shippers that want to go to Alberta, for example. That
portion of the pipeline will be sized for in-state service and
that increment will be there for Alaskans. Seventh, there is a
commitment to cooperate with the entities that will take gas off
for in-state use. Eighth, the contract assures the opportunity
to develop a true natural gas market so all parties, not just
the state, can sell gas in Alaska.
CHAIR WAGONER asked Mr. Griffin if he got the sense that quite a
few people feel the state should provide in-state gas at less
than market value.
MR. GRIFFIN acknowledged there were several comments to that
effect, but there is a constitutional requirement to manage
resources for the benefit of all Alaskans. Discussion did take
place about a policy to round out statewide needs and balance
the benefits in different areas. That isn't addressed further
because in-state gas use is an Alaskan issue and not the
producer's call.
MR. GRIFFIN said the issue of in-state use falls into three
broad categories. First are the needs for gas in Southcentral.
Second is the opportunity for power and gas supplies at a
reasonable cost in the Fairbanks North Star area. Third are
reasonably priced energy supplies for other Interior areas. He
noted that a fourth category might be the in-state liquids
industry.
Near term needs fall into two general areas. The first is to
identify and encourage development of in-state infrastructure
for gas storage issues, for power generation issues, and for gas
distribution issues. Second, other state entities as well as
public corporations need to be involved in building the in-state
infrastructure to dovetail with this project when it comes
together.
MR. CLARK asked him to discuss the state marketing its own gas.
Some of the concerns that were raised stem from the belief that
getting gas in value is free, but that isn't really the case.
4:23:02 PM
MR. GRIFFIN said he already touched on market uncertainty. The
second issue is the state marketing its own gas and that issue
is the result of the decision to take gas in kind. He noted that
some concerns about this stem from the belief that taking gas in
value is free. He mentioned the past royalty oil valuation
disputes and said that isn't entirely true. Because gas
marketing is much more complicated than oil marketing, valuation
controversies would be much more extensive for gas than they
were for oil.
The marketing issues are that the state will be competing with
very agile marketers in a very expensive environment. Another
issue is uncertainty because for gas the state has to make the
sale to get paid. To address these issues the state has to build
an organization and the opportunity. It can do that in a number
of ways ranging from selling at spot in Alberta or Chicago to
having an intensive marketing organization that uses financial
tools to manage risk and gain return. Also the state could go it
alone or enter into a joint venture arrangement with companies
that range from financial institutions to astute gas marketers.
Right now DNR is working to develop marketing alternatives.
MR. GRIFFIN asserted that the administration did a good job of
conservatively looking at the costs of marketing the gas once it
is taken in kind.
4:27:38 PM
MR. CLARK said he'd like Mr. Dickenson to discuss payments in
lieu of taxes (PILT) and the impacts on communities.
MR. DICKENSON explained that a Fairbanks company conducted a
study that concluded that the impacts on the state, in 2004
dollars, would be roughly $121.6 million. That number was
rounded up to $125 million and considerable comment questioned
why the numbers didn't jib and what would happen if the pipeline
were delayed. Other comments said the money should go directly
to the impacted communities rather than through the legislature.
That isn't possible, but more than likely the recommendation
will be to start with that 2004 dollar amount and then reflect
inflationary increases if there are delays. The issue did
receive a surprising number of public comments and a technical
fix might be preferable to what was in the contract, he said.
Comments on the tax issues included: why not more quid pro quo,
why are taxes occurring, and why are the tax benefits or
detriments occurring early in the process rather than at project
sanction. He noted that Mr. Loeffler discussed the PPT and
allowing a couple years to evaluate the tax since it's new.
Similar periods might be created for other oil-based taxes such
as the income tax or the property taxes on TAPS for example.
MR. CLARK asked him to address the questions that were received
regarding payments in lieu of taxes.
MR. DICKENSON said a lot of the comments focused on the question
of the tradeoff. Some entities around the state questioned who
would benefit from this. He noted that the idea was to not
change the status quo very much and to that end a number of
mechanisms were imported. Clearly the folks along the pipeline
corridor where the work will occur are going to experience both
the positive and negative effects, but it's important to look at
the big picture. He referenced Commissioner O'Claray's
discussion about outreach programs, but in terms of creating a
structured answer through the PILT he said the state would need
to educate the public in this area rather than the other way
around.
4:32:36 PM
MR. CLARK added Mr. Dickenson and his crew redid part of the
contract on three different occasions to try and make PILT work
so the administration has certainly invested a lot of time
trying to figure this out. He suggested the ultimate construct
is pretty good and they do meet the requirements of the Stranded
Gas Act.
MR. DICKENSON pointed out that the legislature would be the
final determinant about where the impact payments would go and
for the other PILT there is a formula so the legislature can
speak to what mil rates are permitted.
The administration met the concerns of the Stranded Gas Act in
terms of back loading, stability, and transparency. Also the
legislature the right to control those in terms of distribution
within the state.
MR. CLARK concluded the presentation and said there was good
response from the public and thoughtful response from the
legislature and he believes the document reflects how the
administration's thinking has matured on these issues.
CHAIR WAGONER asked if the administration would be prepared to
present answers to the questions that were raised sometime in
November.
COMMISSIONER CORBUS drew attention to Table 15, on page 180,
that contains comments by group and article.
REPRESENTATIVE SEATON asked that the administration be prepared
to address: the comment about Qatar, gas to liquids, and the
availability of feedstock from comment 0724. He also asked that
consideration be given to the three studies he submitted.
There being no further business to come before the committee,
Chair Wagoner adjourned the meeting at 4:36:24 PM.
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