Legislature(2011 - 2012)BUTROVICH 205

02/09/2012 03:30 PM RESOURCES

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03:32:49 PM Start
03:33:34 PM SB153
04:08:09 PM Judge Gleason's Decision: an Alternative Perspective by Bradford Keithley, Perkins Coie, Llp,
05:02:13 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Gleason Decision Alternate Perspective
Uniform Rule 23 Waived
Heard & Held
Bills Previously Heard/Scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                        February 9, 2012                                                                                        
                           3:32 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Senator Joe Paskvan, Co-Chair                                                                                                   
Senator Thomas Wagoner, Co-Chair                                                                                                
Senator Bill Wielechowski, Vice Chair                                                                                           
Senator Bert Stedman                                                                                                            
Senator Lesil McGuire                                                                                                           
Senator Hollis French                                                                                                           
Senator Gary Stevens                                                                                                            
MEMBERS ABSENT                                                                                                                
All members present                                                                                                             
OTHER LEGISLATORS PRESENT                                                                                                     
Senator Cathy Giessel                                                                                                           
COMMITTEE CALENDAR                                                                                                            
SENATE BILL NO. 153                                                                                                             
"An Act relating  to a gas storage facility; relating  to the tax                                                               
credit for  a gas  storage facility; relating  to the  powers and                                                               
duties  of  the  Alaska  Oil  and  Gas  Conservation  Commission;                                                               
relating to the  regulation of natural gas storage  as a utility;                                                               
relating  to  the  powers  and  duties of  the  director  of  the                                                               
division of  lands and to lease  fees for a gas  storage facility                                                               
on state land; and providing for an effective date."                                                                            
     - HEARD & HELD                                                                                                             
Judge Gleason's Decision: An  Alternative Perspective by Bradford                                                               
Keithley, Perkins Coie, LLP                                                                                                     
     - HEARD                                                                                                                    
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: SB 153                                                                                                                  
SHORT TITLE: NATURAL GAS STORAGE TAX CREDIT/REGULATION                                                                          
SPONSOR(s): SENATOR(s) THOMAS                                                                                                   
01/17/12       (S)       PREFILE RELEASED 1/13/12                                                                               
01/17/12       (S)       READ THE FIRST TIME - REFERRALS                                                                        
01/17/12       (S)       RES, FIN                                                                                               
02/09/12       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
WITNESS REGISTER                                                                                                              
SENATOR JOE THOMAS                                                                                                              
Alaska State Legislature                                                                                                        
Juneau, AK                                                                                                                      
POSITION STATEMENT: Sponsor of SB 153.                                                                                        
GRIER HOPKINS, Staff                                                                                                            
Senator Joe Thomas                                                                                                              
Alaska State Legislature                                                                                                        
Juneau, AK                                                                                                                      
POSITION STATEMENT: Explained SB 153, version I, for the                                                                      
LUKE HOPKINS, Mayor                                                                                                             
Fairbanks North Star Borough                                                                                                    
Fairbanks, AK                                                                                                                   
POSITION STATEMENT: Supported SB 153.                                                                                         
JIM DODSON                                                                                                                      
Fairbanks Economic Development Council                                                                                          
Fairbanks, AK                                                                                                                   
POSITION STATEMENT: Supported SB 153.                                                                                         
BRIAN NEWTON, President and CEO                                                                                                 
Golden Valley Electric Association (GVEA)                                                                                       
Fairbanks, AK                                                                                                                   
POSITION STATEMENT: Supported SB 153.                                                                                         
DOUG ISAACSON, Mayor                                                                                                            
City of North Pole, AK                                                                                                          
POSITION STATEMENT: Supported SB 153.                                                                                         
DAN BRITTON, President and CEO                                                                                                  
Fairbanks Natural Gas                                                                                                           
Fairbanks, AK                                                                                                                   
POSITION STATEMENT: Supported SB 153.                                                                                         
BRADFORD KEITHLEY, Partner and Co-head                                                                                          
Perkins Coie, LLP                                                                                                               
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Presented an alternative perspective  to the                                                             
Judge Gleason decision.                                                                                                         
ACTION NARRATIVE                                                                                                              
3:32:49 PM                                                                                                                    
CO-CHAIR  JOE  PASKVAN  called   the  Senate  Resources  Standing                                                             
Committee meeting  to order at 3:32  p.m. Present at the  call to                                                               
order were  Senators Stedman,  Stevens, French,  Co-Chair Wagoner                                                               
and Co-Chair Paskvan.                                                                                                           
        SB 153-NATURAL GAS STORAGE TAX CREDIT/REGULATION                                                                    
3:33:34 PM                                                                                                                    
CO-CHAIR PASKVAN announced SB 153 to be up for consideration.                                                                   
3:33:38 PM                                                                                                                    
SENATOR JOE  THOMAS, sponsor of SB  153, said the cost  of energy                                                               
in  much  of Alaska  is  crippling  communities' economies.  It's                                                               
still  the middle  of  winter in  Alaska,  and more  specifically                                                               
Fairbanks  pays  $4/gallon for  heating  oil;  they are  spending                                                               
approximately  $666  million  annually   on  energy  costs.  This                                                               
averages  out to  about $6,667  for  every man,  woman and  child                                                               
annually. Much of  this money leaves the  community. Fairbanks is                                                               
currently paying  $23.35 for 1000  cubic feet of natural  gas and                                                               
$.23/kilowatt  hour.  Individual bills  run  $1,000  to $1,500  a                                                               
month  during   the  heating  season  (September   through  April                                                               
generally). Natural gas  is the lowest cost fuel,  but it's three                                                               
times  the price  of gas  in Southcentral  and only  available to                                                               
approximately  1,100  customers. No  more  gas  is available  for                                                               
Fairbanks Natural Gas,  the local distributor, due  to Cook Inlet                                                               
contracts that provide  for Cook Inlet towns being  taken care of                                                               
He said that  lines that have been built to  various parts of the                                                               
town  in Fairbanks,  but have  not  been able  to be  distributed                                                               
because gas isn't contemplated being  available. SB 153 addresses                                                               
this  problem   by  incenting  the  private   sector  to  deliver                                                               
additional trucked  natural gas to  Fairbanks in the next  two to                                                               
three years.  SB 153 would also  extend up to $15  million of tax                                                               
credits to  an LNG trucking project  such as the one  proposed by                                                               
partnerships  between Golden  Valley Electric  Association (GVEA)                                                               
and  Flint Hills  Resources. This  is  the same  $15 million  tax                                                               
credit that  is applicable to  Cook Inlet's gas  storage projects                                                               
(CINGSA),  but  in Fairbanks  it  would  be above-ground  storage                                                               
rather  than  filling depleted  wells  (because  they don't  have                                                               
any). He said  GVEA and Flint Hills are the  two largest Interior                                                               
tenants for  gas and it  makes sense for them  to buy the  gas to                                                               
make use of it, but they  may also be willing to accept someone's                                                               
3:38:22 PM                                                                                                                    
SENATOR  THOMAS  said  the  credits   are  limited  to  regulated                                                               
utilities, so the savings will  be passed through to consumers as                                                               
the RCA looks at their business  plans. GVEA and Flints are still                                                               
narrowing down their  cost estimates and once they get  to a plus                                                               
or minus  30 percent estimate,  their board will make  a decision                                                               
when to  go forward and that  is expected this spring  or summer.                                                               
If  that doesn't  happen, it's  possible that  an entity  such as                                                               
Fairbanks  Natural Gas  or Enstar  and/or  their Canadian  parent                                                               
company,   AltaGas,  might   move   on  the   project.  He   said                                                               
negotiations  between Foot  Hills and  GVEA are  ongoing and  are                                                               
positive, and  that is another reason  that the timing of  SB 153                                                               
is important.                                                                                                                   
He said this  will also ensure that the North  Slope producers or                                                               
LNG export  facilities that  are not  regulated utilities  and do                                                               
not provide for  consumption of gas in state will  not be able to                                                               
access  these credits.  Further, with  the gas  line still  years                                                               
away, it appears  the only project that could bring  gas into the                                                               
Interior in a quick manner is  trucking projects such as this one                                                               
that would be an expansion of an existing trucking project.                                                                     
CO-CHAIR WAGONER  moved CSSB 153( ),  27-LS1187\I, for discussion                                                               
CO-CHAIR PASKVAN objected for discussion purposes.                                                                              
3:41:56 PM                                                                                                                    
GRIER HOPKINS, Legislative Aide to  Senator Thomas, said there is                                                               
a  fundamental  difference between  storing  natural  gas in  its                                                               
gaseous  form and  storing it  in  its liquid  form; the  volumes                                                               
don't match. He explained that the  credits in HB 280 had a floor                                                               
of 500  mmcf because Cook  Inlet has underground  reservoirs, but                                                               
Fairbanks  is looking  at storing  approximately 240  mmcf/gas in                                                               
two separate  tanks. The sponsor  found a  way to apply  the same                                                               
$15 million in  gas storage tax credits that Cook  Inlet has to a                                                               
Fairbanks  project or  50  percent of  construction  costs for  a                                                               
storage  facility, whichever  is  less.  Storage facilities  have                                                               
been estimated to cost about $30 million.                                                                                       
He said  the changes between version  M and version I  are rather                                                               
simple. The  project is  still up  in the air,  but they  want to                                                               
make  sure  that any  project  bringing  gas to  Fairbanks  would                                                               
receive those credits. Therefore,  language was included allowing                                                               
for the  expansion of an  existing facility that was  in business                                                               
before 2011.  It removes  the date  restrictions that  a facility                                                               
must start commercial operations for the same reason.                                                                           
A new  subsection in AS  42.05.990 says only  regulated utilities                                                               
can  take advantage  of the  tax  credits so  their benefits  get                                                               
passed  on to  the customers,  but it  currently doesn't  include                                                               
LNG, and that language is being worked on now.                                                                                  
CO-CHAIR PASKVAN asked him to go through the bill by section.                                                                   
MR.  HOPKINS  said section  1  establishes  that the  AOGCC  must                                                               
certify  the 1  million  gallon  threshold for  a  project to  be                                                               
eligible to  receive the credits.  Section 2 addresses  the lease                                                               
exemption  and makes  it the  same as  Cook Inlet  provisions. It                                                               
might be  applied differently for  the North Slope, but  GVEA has                                                               
been in contact  with the administration and  they understand how                                                               
it is moving forward.                                                                                                           
3:46:55 PM                                                                                                                    
Section  3   amends  the  definition  of   "natural  gas  storage                                                               
facility" and "facility"  in AS 42.05.990(3) to  assure that tank                                                               
storage  or storage  in a  depleted or  nearly depleted  well can                                                               
apply for this  tax credit (as opposed to Cook  Inlet Natural Gas                                                               
Storage Association's project).                                                                                                 
3:47:27 PM                                                                                                                    
Section 4 amends the existing  gas storage facility tax credit by                                                               
bifurcating  it  into two  separate  credits:  a nontank  storage                                                               
facility and a tank storage  facility. The nontank storage uses a                                                               
volumetric  equation  that  is   necessary  for  the  underground                                                               
storage, but the  tank storage uses $15 million or  50 percent of                                                               
the  cost of  building  an LNG  storage facility  of  at least  1                                                               
million gallons, whichever is less.                                                                                             
Section 5  amends the terms  of what  storage qualifies as  a tax                                                               
credit  by  adding the  1  million  gallon threshold  similar  to                                                               
section 1.  Sections 6 and 7  added "or payment" to  the language                                                               
as opposed to  just a tax refund  in order to make  it easier and                                                               
clearer within statute that GVEA,  a non-profit that does not pay                                                               
any taxes to the state, could have access to that credit.                                                                       
3:48:29 PM                                                                                                                    
Section 8 sets forth how a  company not subject to tax under this                                                               
chapter would still be liable  to pay back any erroneous payments                                                               
made by the  state. So the state receives some  of its money back                                                               
if  the organization  stops commercial  operation of  the storage                                                               
facility or if an error  was made in calculating the construction                                                               
cost for  the facility as  determined by  the Alaska Oil  and Gas                                                               
Conservation Commission (AOGCC).                                                                                                
Section 9  amends AS 43.20.046(i)  to clarify that a  person that                                                               
receives the  payment under this  title must also  repay interest                                                               
to  the  state  as  the  determined  under  AS  43.05.225  (under                                                               
calculation of  erroneous payment). Sections 10-13  make a number                                                               
of  conforming language  changes, especially  including the  word                                                               
"payment" going  back to the  non-profit status of  GVEA. Section                                                               
14 establishes an effective date.                                                                                               
CO-CHAIR PASKVAN opened public testimony.                                                                                       
3:50:00 PM                                                                                                                    
LUKE HOPKINS,  Mayor, Fairbanks North  Star Borough, said  SB 153                                                               
is very important for Fairbanks.  Increasing storage capacity for                                                               
the  community would  allow more  people to  take advantage  of a                                                               
resulting increased gas supply. He said  cars are lined up at the                                                               
lowest-priced  gas  pump for  home  heating  oil and  people  are                                                               
buying it 5  gallon cans, because they may not  have enough money                                                               
to make to the next delivery. He  said this is one of the fastest                                                               
short term improvements  in space heating fixes that  can be seen                                                               
and that GVEA  and Flint Hills are  already considering expanding                                                               
an existing trucking project with Fairbanks Natural Gas.                                                                        
3:53:20 PM                                                                                                                    
JIM  DODSON, Fairbanks  Economic Development  Council, Fairbanks,                                                               
said he supported SB 153.  It's a crucial component to Fairbanks'                                                               
infrastructure in moving from staggering  home heating fuel costs                                                               
($4 gallon) to  a natural gas system. He said  the high costs are                                                               
devastating families,  homes and businesses and  making Fairbanks                                                               
an economically unsuccessful community.                                                                                         
3:54:45 PM                                                                                                                    
BRIAN  NEWTON,   President  and   CEO,  Golden   Valley  Electric                                                               
Association  (GVEA), said  it the  largest  producer of  electric                                                               
power in  Interior Alaska and  serves roughly  44,000 residential                                                               
and industrial customers. Their  service territory covers greater                                                               
Fairbanks and the North Pole  area, extending down the Richardson                                                               
Highway  to Delta  Junction, and  down  to the  Parks Highway  to                                                               
He said  the cost of  electricity is extremely high  in Fairbanks                                                               
and  now it  is being  exacerbated by  the high  cost of  oil. It                                                               
produces only 36  percent of their power needs, but  in 2011, oil                                                               
accounted  for  60 percent  of  their  fuel bill.  Although  they                                                               
secure  as much  gas fire  generation out  of the  Cook Inlet  as                                                               
possible, and purchase  and spin as much power from  coal as they                                                               
can, they  still rely on  oil for  35-40 percent of  their yearly                                                               
fuel needs.                                                                                                                     
He said  that GVEA is  aggressively pursuing ways to  replace its                                                               
oil-fired  generation  with  alternative  sources  of  power.  In                                                               
anticipation  that  affordable  natural   gas  would  someday  be                                                               
available in  the Interior they installed  an "LM6000," basically                                                               
a 737  jet engine at  their North  Pole expansion plant.  This 60                                                               
megawatt unit  is currently run  on naphtha  (Jet A), but  it can                                                               
easily be converted to natural gas  and SB 153 may help determine                                                               
whether such a conversion is economically feasible.                                                                             
MR. NEWTON said  GVEA watched as the Cook Inlet  Recovery Act was                                                               
debated  and passed  in  2010; it  established  an incentive  for                                                               
creation  of natural  gas  storage around  the  state to  satisfy                                                               
regional  energy needs.  At the  time  of its  passage, GVEA  was                                                               
investigating  trucking LNG  to Fairbanks  from the  North Slope,                                                               
but the trucking concept for a  large volume of gas was not fully                                                               
developed at the time. Despite  this fact, the Interior relied on                                                               
statewide  provisions in  the legislation  and  hoped that  would                                                               
accommodate future  Interior energy needs. As  GVEA established a                                                               
partnership with  Flint Hills  to advance  the development  of an                                                               
LNG  project, they  reviewed the  provisions of  the gas  storage                                                               
incentive statutes and determined  some slight modifications were                                                               
needed to be applicable to their proposed project.                                                                              
He explained  that at  the time  HB 280 was  passed in  2010, the                                                               
primary focus  was on  creating an  incentive that  would trigger                                                               
the development of  geologic storage in the Cook  Inlet to handle                                                               
seasonal peaks of natural gas  demand. The legislation referenced                                                               
both  geologic  below  ground  storage   and  tank  above  ground                                                               
storage. SB  153 clarifies  the same level  of support  for above                                                               
ground tank storage facilities.                                                                                                 
3:58:51 PM                                                                                                                    
MR. NEWTON said GVEA didn't  consider the establishment of an LNG                                                               
trucking project  from the  North Slope  as being  in competition                                                               
with a  future pipeline.  In fact, they  believe that  bringing a                                                               
large  volume of  natural gas  to  the community  via truck  will                                                               
allow a local  distribution and customer base  to develop thereby                                                               
underpinning the  economics of the future  pipeline. He concluded                                                               
that GVEA  is prepared to  work with  the committee to  make sure                                                               
that  natural gas  incentives are  available to  the Interior  as                                                               
well as to other areas of the state.                                                                                            
3:59:50 PM                                                                                                                    
DOUG  ISAACSON,  Mayor,  City  of North  Pole,  Alaska,  said  he                                                               
supported SB  153 for all  the reasons already mentioned,  but he                                                               
wanted  to add  that  natural  gas do  something  else for  their                                                               
communities that  no one had mentioned.  He said that there  is a                                                               
need for  clean air; North Pole  has been rated the  dirtiest air                                                               
this  winter  - largely  because  they  have two  refineries  and                                                               
GVEA's  180 megawatts  of diesel  powered  generation along  with                                                               
many wood stoves. He said people  are paying on average of $1,500                                                               
each month  for fuel,  space heating  and electricity  during the                                                               
winter.  This is  not sustainable;  there  is pain  and they  are                                                               
asking for  solutions both  immediate and  long term.  This would                                                               
show people that something credible was going to happen.                                                                        
MR. ISAACSON  said they  have been told  that the  handshake from                                                               
the municipalities to the legislature  looks like a hand out, but                                                               
this  project will  mitigate  that by  allowing  them to  attract                                                               
larger stores that presently won't  come to North Pole because of                                                               
the high cost  of space heating. Then they would  have more of an                                                               
economy and be able to do more for themselves.                                                                                  
4:04:16 PM                                                                                                                    
DAN BRITTON,  President and CEO,  Fairbanks Natural Gas,  said he                                                               
supported SB 153 for the reasons already stated.                                                                                
SENATOR  STEDMAN  said  he  wasn't sure  this  wasn't  a  regular                                                               
capital  appropriation  request  being   coined  in  a  piece  of                                                               
legislation. It sounds similar to  conversations with hydros that                                                               
want help  with 50 percent  of their costs.  He said he  would be                                                               
concerned   if  they   started  legislating   appropriations  and                                                               
reimbursements on capital projects  in legislation in general and                                                               
that energy issues should be addressed through other processes.                                                                 
CO-CHAIR PASKVAN thanked him for  the comments and indicated that                                                               
SB 153 would be held in committee.                                                                                              
^Judge   Gleason's  Decision:   An  Alternative   Perspective  by                                                               
Bradford Keithley, Perkins Coie, LLP,                                                                                           
 Judge Gleason's Decision: An Alternative Perspective by Bradford                                                           
                  Keithley, Perkins Coie, LLP,                                                                              
4:08:09 PM                                                                                                                    
CO-CHAIR PASKVAN  transitioned to Mr. Keithley's  presentation of                                                               
his alternative perspective of the Gleason decision.                                                                            
4:08:22 PM                                                                                                                    
At ease from 4:08 p.m. to 4:10 p.m.                                                                                             
4:10:17 PM                                                                                                                    
BRADFORD KEITHLEY, Partner  and Co-head, Oil and  Gas Practice of                                                               
Perkins  Coie, LLP,  said  they  are a  firm  of  750 lawyers  in                                                               
offices all  over the U.S.,  Shanghai and  Hong Kong. He  said he                                                               
started in  the late  1970s with  a regional  law firm  in Tulsa,                                                               
Oklahoma, and Congress passed the  Natural Gas Policy act of 1978                                                               
which  launched  his  career.  During his  six  years  there,  he                                                               
represented consumers and producers and  went on to become senior                                                               
vice  president  and general  counsel  of  Arcla, a  Fortune  500                                                               
integrated  utility  that  was   headquartered  in  Little  Rock,                                                               
Arkansas.  He learned  many things  during that  period where  he                                                               
worked for Mack McLarty, Bill Clinton's first chief of staff.                                                                   
After that  he became partner  and subsequent co-head of  the oil                                                               
and gas  practice law firm  called Jones Day, with  2,500 lawyers                                                               
spread  throughout  the  globe.  The oil  and  gas  practice  was                                                               
centered  in Dallas  and Houston,  but they  also had  lawyers in                                                               
Washington, New York, London, Moscow,  Sydney, Hong Kong, Beijing                                                               
and L.A. That  gave him the opportunity to understand  a lot more                                                               
about the  global oil  and gas  industry. In  the early  1990s he                                                               
started working Alaska issues and  over the next several years he                                                               
went from  a point where he  was coming to Alaska  once a quarter                                                               
to coming once a  week to coming three and a  half weeks a month.                                                               
During  the  period  he  has   gained  a  substantial  amount  of                                                               
understanding of  Alaska issues  and finally,  four years  ago he                                                               
decided to move up here.                                                                                                        
4:14:03 PM                                                                                                                    
SENATOR WIELECHOWSKI and SENATOR MCGUIRE joined committee.                                                                      
MR.  KEITHLEY said  his  opinions  are entirely  his  own and  he                                                               
wasn't  speaking on  behalf of  any client.  It's simply  because                                                               
these  issues are  significantly important  to the  state and  he                                                               
wants to  help get it  right. He  monitored the case  and studied                                                               
the Gleason decision  closely because of its  potential impact on                                                               
Alaska; he was not here to  challenge or dispute the logic of the                                                               
opinion. But he  was concerned about the context of  the case and                                                               
wanted to talk  about what the decision says and  what it doesn't                                                               
say and those implications.                                                                                                     
4:17:38 PM                                                                                                                    
He  said  the  case  involves  a state  court  dispute  over  the                                                               
valuation  of TAPS  for property  tax purposes.  While some  have                                                               
said that  the judge had  no business  talking about oil  and gas                                                               
issues,  he completely  understood why  she  did and  he had  the                                                               
highest respect for Judge Gleason.                                                                                              
MR. KEITHLEY explained that the  parties were Alyeska on one side                                                               
and  the  North  Slope  Borough, Fairbanks  North  Star  Borough,                                                               
Valdez and  the Alaska Department  of Revenue (DOR) on  the other                                                               
side. He also  believed that the life of TAPS  is relevant to its                                                               
economic  value  and  the   accumulated  depreciation  and  Judge                                                               
Gleason had every  right to weigh in and valuate  the evidence on                                                               
these decisions  in reaching her  decision with respect  to TAPS'                                                               
economic life. He said if TAPS  were going to close down tomorrow                                                               
it would have  one value and if  it would close down  a number of                                                               
years from now it would have  an entirely different value; so she                                                               
had to  take that into account  as well as the  period over which                                                               
depreciation  would be  calculated. This  decision is  subject to                                                               
appeal in  the Alaska Supreme Court  where an appeal of  her last                                                               
decision regarding valuation is being heard.                                                                                    
Judge  Gleason's  decision  says  that  the  value  of  TAPS  for                                                               
property tax  purposes was $8.94  billion in 2007,  $9.64 billion                                                               
in 2008 and  $9.24 billion in 2009. In the  course of determining                                                               
those values she  concluded that the life of TAPS  - based on its                                                               
proven   reserves   and   incorporating  its   minimum   capacity                                                               
throughput limitations  as of 2007, 2008  and 2009 - is  at least                                                               
until  2065.  She also  concluded  that  TAPS could  continue  to                                                               
accommodate  flows as  low as  70,000 barrels  a day  (bbl/d). He                                                               
explained  that   she  used  100,000  bbl/d   as  the  mechanical                                                               
limitation  in deciding  on  2065, but  found  that the  evidence                                                               
supported going deeper.                                                                                                         
CO-CHAIR PASKVAN said 70,000 bbl/d  wasn't solely her conclusion;                                                               
a BP study also reached that same conclusion.                                                                                   
MR. KEITHLEY replied that the year  2065 was in the BP study that                                                               
she took as having evidentiary value  and he didn't know what the                                                               
volumes were.                                                                                                                   
CO-CHAIR PASKVAN asked where the 70,000 bbl/d came from.                                                                        
MR.  KEITHLEY  replied that  there  was  evidence in  the  record                                                               
relating to 70,000 bbl/d.                                                                                                       
4:21:35 PM                                                                                                                    
SENATOR FRENCH  said the 70,000  bbl/d stood  out to him  as well                                                               
and  he was  on page  150 of  the decision,  paragraph 438,  that                                                               
     For   the   foregoing   reasons   and   after   careful                                                                    
     consideration of  all the evidence presented  at trial,                                                                    
     the court finds  it more likely than not  that TAPS can                                                                    
     effectively transport  throughputs at  least down  to a                                                                    
     minimum flow rate of 100,000.                                                                                              
So he  didn't know if  it was fair to  say she concluded  that it                                                               
could accommodate flows as low as 70,000 bbl/d.                                                                                 
4:22:05 PM                                                                                                                    
MR. KEITHLEY  replied he wouldn't  argue the 70,000  bbl/d versus                                                               
the 100,000 bbl/d, because her decision  was that it can go for a                                                               
long time  and he agreed with  that. But, he said  it's important                                                               
to keep in  mind that there are things the  decision doesn't say;                                                               
it doesn't  say anything about current  or reasonably foreseeable                                                               
production levels. The decision  simply says "production tail" is                                                               
the  length of  time that  there  will be  production. It  didn't                                                               
discuss  current   production  levels  or  forecasts   of  future                                                               
production levels  - the  level of production  as opposed  to the                                                               
length  of production.  It also  doesn't say  anything about  the                                                               
effect of declining production on  the state's economic wellbeing                                                               
- and that is an extremely important factor to keep in mind.                                                                    
4:24:14 PM                                                                                                                    
MR. KEITHLEY remarked  that Joe Balash has it right  when he said                                                               
that a  300,000 bbl/d  throughput scenario  would be  a disaster.                                                               
His next bullet was a paraphrase  from James Carville when he had                                                               
to  get Bill  Clinton's  attention during  the 1992  presidential                                                               
campaign  by telling  him he  was  stupid. Mr.  Keithley said  he                                                               
thinks it's  one of  those points  where we need  to wake  up and                                                               
focus  on what  is  really  critical here.  "In  Alaska it's  the                                                               
production  rate  that's  important  to  our  economy....not  the                                                               
reserve life."                                                                                                                  
4:26:16 PM                                                                                                                    
SENATOR STEDMAN said everybody has  different views of the world,                                                               
but this issue is here because  of discussions heard in the state                                                               
that TAPS would  be shut down or removed within  10 years or less                                                               
because of lack of oil. He said:                                                                                                
     So to put  to rest that we have billions  of barrels of                                                                    
     proven  reserves as  we  sit here  today,  and we  have                                                                    
     billions  and  billions  behind that  number  into  the                                                                    
     future in other areas, if  it's shale and if it's heavy                                                                    
     oil,  if it's  offshore potential,  and that  the state                                                                    
     would have  to take an immediate  directional change to                                                                    
     prepare the state for the upcoming economic turmoil.                                                                       
He said the Finance Committee  asked the DOR commissioner if they                                                               
should  be turning  90 degrees  in addressing  that issue  and he                                                               
answered no. Senator Stedman said  there is no imminent demise or                                                               
stranding of  our basin  and the public  has the  perception that                                                               
there  is.  So  they  are   spending  time  going  through  these                                                               
documents  talking about  that  to  put that  issue  to rest.  He                                                               
stated that he was not interested  in scaring the public. He also                                                               
said they  had spent a lot  of time steering the  State of Alaska                                                               
out of the  financial ditch and they will continue  to do so. The                                                               
basin will not be  shut in and they will continue  to put some of                                                               
these things  to rest so  they can get  to the subject  matter at                                                               
hand, which is the tax structure.                                                                                               
MR. KEITHLEY said he appreciated that  and agreed with him on the                                                               
point  that  the  discussion  around TAPS  shutting  down  was  a                                                               
diversion. On  the other hand,  based on information that  is out                                                               
there, there is a need to move  in the very near term to increase                                                               
investment  and production  because  of the  consequences of  the                                                               
lack thereof. The correct motivation  for acting is not that TAPS                                                               
is going  to shut down, but  that doesn't mean there  isn't cause                                                               
for concern.                                                                                                                    
4:30:19 PM                                                                                                                    
SENATOR FRENCH repeated that some  of the pressure they have felt                                                               
in the public arena is that  the threat of a pipeline shutdown is                                                               
being used to extract a tax  concession. He pointed to a headline                                                               
on the  "Make Alaska Competitive"  website that  says, "Producers                                                               
tell  Alaska  to  become  competitive  or  pipeline  will  be  in                                                               
jeopardy." This  leads the public  to believe that taxes  have to                                                               
be lowered or  the pipeline will be shut down.  That is something                                                               
these hearings were designed to break.                                                                                          
MR. KEITHLEY said  it is also fair to  recognize that substantial                                                               
additional  investments are  going  to be  required  to keep  the                                                               
pipeline operational.                                                                                                           
SENATOR  STEDMAN   said  it's  not   a  "substantial   amount  of                                                               
investment"  to  keep  the pipeline  operating  relative  to  the                                                               
amount of  revenue that in  one fiscal  year is $14  billion. The                                                               
capital   expenditures  are   for  enhanced   oil  recovery   and                                                               
additional volume, not the operation of the line.                                                                               
MR. KEITHLEY said  it's not cheap either to  make the investments                                                               
necessary  to put  heaters in  and adjust  the operations  of the                                                               
line to accommodate lower flow along the way.                                                                                   
4:33:20 PM                                                                                                                    
SENATOR  STEDMAN said  he  didn't want  to draw  to  fine a  line                                                               
without numerics  in front  of them, but  they are  talking about                                                               
billions of profit  in oil. If they are talking  about $3 billion                                                               
in capital costs and $2.5  billion in operating costs, and you're                                                               
gross stock is  $20 billion, he said, "I think  you've got enough                                                               
room  to buy  a couple  of heaters  if they  are several  hundred                                                               
million dollars."                                                                                                               
MR.  KEITHLEY  responded  that   Judge  Gleason  found  that  the                                                               
economics  would justify  doing that,  but the  decision to  make                                                               
that investment still has to be made.                                                                                           
CO-CHAIR PASKVAN  asked if he agreed  that the value of  just the                                                               
proven reserves alone  is probably the greatest it's  been in the                                                               
history of oil relative to the ANS price at $110 to $120.                                                                       
MR. KEITHLEY replied that he had not looked at that analysis.                                                                   
4:34:43 PM                                                                                                                    
SENATOR  WIELECHOWSKI said  a couple  of things  came out  of the                                                               
Brenna  testimony that  were  important: one  was  a BP  document                                                               
written in 2004  entitled "Alaska's Role in BP's  Portfolio is to                                                               
Provide a  Stable Production  Base and Cash  Flow to  Fuel Growth                                                               
Elsewhere in  the Business." He  said that BP hasn't  explored in                                                               
years  in Alaska;  Exxon hasn't  explored  here either  (although                                                               
they   might   be   doing  something   at   Pt.   Thomson   now);                                                               
ConocoPhillips hasn't  explored either, and the  testimony from a                                                               
number of the majors has been that  even if they pass HB 110 they                                                               
still  don't plan  to  explore. Producers  have  been saying  for                                                               
years that  they are not exploring  in Alaska. So, why  would the                                                               
legislature give them a tax  break now to promote something which                                                               
they have  been saying  for years  they're not  going to  do? And                                                               
even now  they are saying they  won't do? He was  curious to hear                                                               
Mr. Keithley response to that.                                                                                                  
4:36:05 PM                                                                                                                    
MR.  KEITHLEY replied  in 2006  BP testified  to that  particular                                                               
point  and  it  was  basically  that  they  have  more  potential                                                               
opportunity sitting  in Prudhoe Bay,  Milne and Kuparuk  than you                                                               
can  reasonably find  by going  out and  exploring "ram  acreage"                                                               
outside of the existing basins. If  you look at 2006 numbers, the                                                               
estimates of  what is left  in existing units is  substantial and                                                               
the focus of the companies has  been to develop the technology to                                                               
get to the production in the existing units.                                                                                    
SENATOR  WIELECHOWSKI then  showed  him a  USDOE  chart that  was                                                               
produced  during the  trial of  the  decline curve  on the  North                                                               
Slope; it  flattened out  for 8  or so years  and then  spiked up                                                               
significantly.  He  remarked  that  even without  tax  breaks  it                                                               
showed production levels of 1 million bbl/d within a decade.                                                                    
MR. KEITHLEY asked if he read the DOE report that came from.                                                                    
SENATOR WIELECHOWSKI  said he  had read  prior reports;  this was                                                               
presented by Robyn Brenna and he hadn't read this specific one.                                                                 
MR. KEITHLEY said this particular  report came from a 2009 report                                                               
entitled "Alaska North  Slope Oil and Gas, a  Promising Future or                                                               
an Area  of Decline." This  comes from  a portion of  that report                                                               
that is entitled  "Undiscovered ANS Oil and  Gas Forecasts." It's                                                               
composed of  adding the estimated  but undiscovered  gas reserves                                                               
that some people  have estimated exist on the North  Slope to the                                                               
undiscovered oil  reserves that some people  have estimated exist                                                               
on the  North Slope and  coming up with  what the report  says is                                                               
"an ideal scenario  if all of the assumptions in  the report were                                                               
fulfilled."  That kind  of projection  is not  what the  State of                                                               
Alaska ought to be predicating its policies on.                                                                                 
CO-CHAIR PASKVAN said  that may be going a little  too far. Don't                                                               
all basins around  the world have a limited  definition of proven                                                               
reserves  -  some under  development,  some  undiscovered -  it's                                                               
pretty  standard terminology.  He asked  Mr. Keithley  if he  had                                                               
performed  an  economic analysis  of  the  present value  of  the                                                               
economic stream that  will be coming down from  the Central North                                                               
MR. KEITHLEY answered no.                                                                                                       
CO-CHAIR PASKVAN said he just wanted  to know the support for his                                                               
4:41:06 PM                                                                                                                    
MR. KEITHLEY  replied his position  is that the  production rates                                                               
are what  are critical to  Alaska's future. The support  for that                                                               
comes  straight out  of  the Alaska  government  reports, and  in                                                               
particular, the  Office of Management and  Budget's (OMB) 10-year                                                               
plan  that  was recently  published.    In  it, scenario  3,  the                                                               
Governor's  FY2013 budget,  assumed  a 4  percent annual  general                                                               
fund growth  and oil  prices in  the report,  and showed  that at                                                               
current production rates revenues are  below expenses in FY 2016,                                                               
and we stay in that position from 2016 onward through 2022.                                                                     
SENATOR MCGUIRE asked  the chairman to allow Mr.  Keithley to get                                                               
through his presentation before questioning him.                                                                                
CO-CHAIR PASKVAN responded that he was presenting.                                                                              
SENATOR  STEDMAN   said  he  had  questions   on  Mr.  Keithley's                                                               
presentation plus  he didn't  want to leave  the public  with the                                                               
impression that the Finance Committee  is not aware of this stuff                                                               
and is  now early in  the process of  taking action to  deal with                                                               
some of the forthcoming issues.                                                                                                 
MR.  KEITHLEY said  his  central point  is  that Judge  Gleason's                                                               
decision doesn't reach those issues.  It talks about how long the                                                               
production  life  is going  to  be,  but not  production  levels.                                                               
Scenario  3 in  the  OMB  report shows  us  hitting those  issues                                                               
already in 2015  even with good oil prices ($108  in FY2012 up to                                                               
$120 in FY  2022), and yet even with these  prices the red begins                                                               
in FY 2016. He said OMB also did  a report that relied on $90 oil                                                               
using the  same analysis. It  showed the state hitting  a deficit                                                               
as early as  2013. When that happens, we will  start drawing down                                                               
on Constitutional  Budget Reserve (CBR) and  the statutory budget                                                               
reserve  as our  backups to  funding state  expenditures. But  he                                                               
remarked that this report shows  that at $90/barrel not only does                                                               
the state  go into the red  in 2013, but the  two budget reserves                                                               
are both drawn down to zero by 2021.                                                                                            
4:45:17 PM                                                                                                                    
SENATOR  STEDMAN   said  it's  nice   to  have  these   types  of                                                               
projections,  but he  was  concerned that  they  don't ring  fire                                                               
alarms just  to ring them. When  he first started serving  in the                                                               
Senate he  received a chart  every year  showing how the  CBR was                                                               
going to  run out and  getting into  the Permanent fund  within a                                                               
handful of  years. Every  year that gets  changed and  pushed out                                                               
and  manipulated, and  as time  has  passed, they  have the  same                                                               
chart  delivered  to them  every  year,  but  now that  point  is                                                               
substantially in the future.                                                                                                    
With that, Senator  Stedman said, the CBR isn't going  to run out                                                               
of  money.  It's  been  fully  paid back  and  the  reserves  are                                                               
increasing. When you  have a budget shortfall  you don't continue                                                               
to allow  your operating account  to grow at  4 or 6  percent and                                                               
you don't drive the  car off the road until you  run out of cash.                                                               
"It's just  not going  to happen."  He said  that two  years ago,                                                               
when the state had a sharp  decline in oil, the Finance Committee                                                               
immediately  cut  a  half  billion dollars  out  of  the  capital                                                               
budget. After a spike up in  revenue in the following year, those                                                               
expenditures  were  picked up.  They  continually  look at  these                                                               
trends;  and, in  fact, the  legislature required  the governor's                                                               
office to do  a 10-year plan so everything would  be on the table                                                               
and they could deviate around some  of the outlooks, one of which                                                               
is the unfunded pension liability of $11 billion.                                                                               
CO-CHAIR WAGONER raised  a point of order saying  they were going                                                               
way off  the point of  the presentation. They could  listen about                                                               
the budget all year, but that wasn't why Mr. Keithley was here.                                                                 
CO-CHAIR PASKVAN said he believed the slide raised that issue.                                                                  
SENATOR STEDMAN summed up for the public that:                                                                                  
     These numbers  aren't going to happen!  We're not going                                                                    
     to be that  derelict in our duty to allow  the state to                                                                    
     fall off a  financial cliff immediately in  a few years                                                                    
     with our  eyes closed!  It's just ridiculous!  We don't                                                                    
     operate like that!                                                                                                         
SENATOR STEDMAN stated  that they work every year  to ensure that                                                               
the state moves forward financially.                                                                                            
4:48:16 PM                                                                                                                    
MR. KEITHLEY  said he  greatly appreciated that,  and one  of the                                                               
things the  state needs to  do in that  regard is to  address the                                                               
production levels. One  of the things that drive the  need to cut                                                               
expenses out  of the budget  is a  fall in production  levels; so                                                               
the best way to address that  is to get production levels up. But                                                               
Judge  Gleason's  decision  doesn't say  anything  about  current                                                               
production levels and to assume  that we're in okay shape because                                                               
she said we may go to 2065 is the wrong assumption.                                                                             
SENATOR  WIELECHOWSKI   said  they  all  agree   they  want  more                                                               
production, but have  different philosophies on how to  do it and                                                               
he asked  Mr. Keithley if  he felt comfortable sharing  his ideas                                                               
on how to increase production with them.                                                                                        
MR.  KEITHLEY said  that would  take  him completely  out of  the                                                               
presentation, but he  would be happy to come back  and talk about                                                               
CO-CHAIR PASKVAN asked him to continue.                                                                                         
4:50:50 PM                                                                                                                    
MR. KEITHLEY  said with  oil hovering  around $90  barrel, things                                                               
will have  to be  done to address  the significant  revenue drops                                                               
beginning as  early as next  year and if  we didn't do  that, the                                                               
CBR and  the statutory reserve  would run  out as early  as 2021.                                                               
His  hands went  cold over  the weekend  as he  caught up  on his                                                               
current  reading and  saw  that Shell  is seeing  lows  of $70  a                                                               
barrel in 2012. The presentation said  they are looking at $50 to                                                               
$90 a  barrel over  the course  of the year  (with $70  being the                                                               
4:52:04 PM                                                                                                                    
MR.  KEITHLEY  said  another  perspective   from  last  year,  in                                                               
addition to OMB's, was probably  one of the most important papers                                                               
on fiscal policy that has been done  in this state in a long time                                                               
by  Scott Goldsmith  of UAA's  Institute of  Social and  Economic                                                               
Research (ISER)  called "Web  Note No. 9."  In it,  Mr. Goldsmith                                                               
took the 10 year budget  forecast from last year and extrapolated                                                               
it out for  another 10 years. His point was  that by only looking                                                               
at a  10-year cycle we were  masking the effect on  ourselves and                                                               
not  looking out  for  the longer  term. It  showed  a 6  percent                                                               
expenditure  growth and  drawing  on the  CBR  and the  statutory                                                               
budget reserve  by 2018. After  2028 it didn't show  any revenues                                                               
to match  expenditures. Another extrapolation  looked a  lot like                                                               
the  OMB's $90  bbl/d  case; it  showed  revenues dropping  below                                                               
expenditures  as early  as  next  year and  drawing  down on  the                                                               
statutory  reserve and  CBR beginning  next year.  Neither budget                                                               
reserve got  contributions, because deficits were  happening next                                                               
year  with  and they  would  run  out by  2022  and  go into  the                                                               
twilight zone from there into the future.                                                                                       
4:56:32 PM                                                                                                                    
Other  consequences   of  Judge  Gleason's  decision   are  worth                                                               
mentioning Mr.  Keithley said,  because it's sort  of the  law of                                                               
unintended consequences.  They need  to factor through  what this                                                               
is going to  do. First, if they are concerned  about the level of                                                               
TAPS  rates,  this  decision   actually  increases  those  rates,                                                               
because roughly 25  percent of current TAPS rates  are to recover                                                               
ad valorem taxes.                                                                                                               
Secondly,   the   decision  disproportionately   benefits   three                                                               
boroughs -  the North Slope  Borough, Fairbanks and Valdez  - and                                                               
hurts  the  state.  Increased  TAPS   rates  reduce  royalty  and                                                               
production  taxes, because  TAPS rates  are a  deducted from  the                                                               
calculation of  net back,  and royalty  and production  taxes are                                                               
based  on net  back. So,  the state  as a  whole will  have lower                                                               
production tax and royalty revenues as a result of the decision.                                                                
Finally, it's a  significant tax hike on  industry and reinforces                                                               
the perception of an unpredictable  and litigious Alaska business                                                               
4:58:23 PM                                                                                                                    
In conclusion, Mr. Keithley said,  Judge Gleason's decision looks                                                               
well-reasoned  and he  didn't  argue with  it,  but says  nothing                                                               
about  the decline  curve  Alaska is  on, and  that  is the  most                                                               
important factor  that has to be  taken into account. It  is what                                                               
drives state revenue levels and  economic well-being. At most the                                                               
decision merely says  that the tail end of the  decline curve may                                                               
be extended longer than some  have previously forecast. He didn't                                                               
dispute that, but  that is not the important point.  It means the                                                               
person at  the end  gets to  stay a few  years longer  before the                                                               
lights get  turned off on  the Alaska economy, but  the remainder                                                               
will have long since left.                                                                                                      
5:00:03 PM                                                                                                                    
SENATOR STEDMAN  cautioned that people  should take some  of this                                                               
presentation  on finances  with  a  grain of  salt  and that  the                                                               
rating agencies  have triple-A-rated  the State  of Alaska  in an                                                               
economic time when  most of the other states  are going backwards                                                               
financially. He would  be very surprised if the state  was on the                                                               
edge  of a  financial abyss,  because the  Finance Committee  had                                                               
just  spent  several years  working  to  get the  state's  rating                                                               
upgraded. And while there will  continue to be challenges, Alaska                                                               
is one of the most solvent states in the union.                                                                                 
SENATOR FRENCH invited  Mr. Keithley to come by his  office if he                                                               
had time to discuss some of his questions.                                                                                      
CO-CHAIR WAGONER said they appreciated  Mr. Keithley meeting with                                                               
the committee and missing a basketball game.                                                                                    
5:02:13 PM                                                                                                                    
CO-CHAIR  PASKVAN also  thanked  Mr. Keithley  on  behalf of  the                                                               
committee  and adjourned  the Senate  Resources  meeting at  5:02                                                               

Document Name Date/Time Subjects
SB 153 - Application to Fairbanks of HB 280.pdf SRES 2/9/2012 3:30:00 PM
HB 280
SB 153
SB 153 - Sectional - Version I.pdf SRES 2/9/2012 3:30:00 PM
SB 153
SB 153 - Project Overview.pdf SRES 2/9/2012 3:30:00 PM
SB 153
SB 153 - Sponsor Statement.pdf SRES 2/9/2012 3:30:00 PM
SB 153
SB 153 - Legislation - Version I.pdf SRES 2/9/2012 3:30:00 PM
SB 153
SB 153_Backup_Deadhorse rendering with description.pdf SRES 2/9/2012 3:30:00 PM
SB 153
SB 153_Backup_NorthPole rendering with description.pdf SRES 2/9/2012 3:30:00 PM
SB 153
SB153-Fiscal Note-DCCED-RCA-02-03-12.pdf SRES 2/9/2012 3:30:00 PM
SB 153
Bradford Keithley Bio.pdf SRES 2/9/2012 3:30:00 PM
Gleason Decision Alternate Perspective
NEW_SB153-Fiscal Note-DOA-AOGCC-01-14-12.pdf SRES 2/9/2012 3:30:00 PM
SB 153
SB153-Fiscal Note-DOR-TAX-02-07-12.pdf SRES 2/9/2012 3:30:00 PM
SB 153
SB153-Fiscal Note-DNR-DOG-02-06-2012.pdf SRES 2/9/2012 3:30:00 PM
SB 153
SB153-Fiscal Note-DNR-MLW-02-07-2012.pdf SRES 2/9/2012 3:30:00 PM
SB 153
B Keithley Alternate Perspective.pdf SRES 2/9/2012 3:30:00 PM
Gleason Decision Alternate Perspective