02/08/2010 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB195 | |
| SB208 | |
| SB228 | |
| SB203 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 208 | TELECONFERENCED | |
| *+ | SB 203 | TELECONFERENCED | |
| *+ | SB 228 | TELECONFERENCED | |
| += | SB 195 | TELECONFERENCED | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
February 8, 2010
3:33 p.m.
MEMBERS PRESENT
Senator Lesil McGuire, Co-Chair
Senator Bill Wielechowski, Co-Chair
Senator Charlie Huggins, Vice Chair
Senator Hollis French
Senator Bert Stedman
Senator Gary Stevens
Senator Thomas Wagoner
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
SENATE BILL NO. 195
"An Act relating to the repeal of the establishment of the
Goldstream Public Use Area."
MOVED SB 195 OUT OF COMMITTEE
SENATE BILL NO. 208
"An Act requiring the Department of Natural Resources to
evaluate current incentives and recommend additional incentives
that would increase gas exploration, development, and production
in the Cook Inlet sedimentary basin; and requiring the
Department of Natural Resources to evaluate the means by which
the department may explore for, purchase, and sell natural gas
from newly proved gas reserves in the Cook Inlet sedimentary
basin."
HEARD AND HELD
SENATE BILL NO. 228
"An Act providing for an industrial incentive investment tax
credit and including a gas- to-liquids facility as an eligible
investment; and providing for a production tax limit on gas used
as a raw material for producing liquids or petrochemicals from
gas in the state."
HEARD AND HELD
SENATE BILL NO. 203
"An Act relating to a tax credit for a facility to store Cook
Inlet gas for sale and delivery in the state; relating to an
exemption from the oil and gas exploration, production, and
pipeline transportation property tax for a facility that stores
Cook Inlet gas for sale and delivery in the state; and providing
for an effective date."
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 195
SHORT TITLE: MAKE GOLDSTREAM PUBLIC USE AREA PERMANENT
SPONSOR(s): SENATOR(s) THOMAS
01/19/10 (S) PREFILE RELEASED 1/8/10
01/19/10 (S) READ THE FIRST TIME - REFERRALS
01/19/10 (S) RES
02/03/10 (S) RES AT 3:30 PM BUTROVICH 205
02/03/10 (S) Heard & Held
02/03/10 (S) MINUTE(RES)
02/08/10 (S) RES AT 3:30 PM BUTROVICH 205
BILL: SB 208
SHORT TITLE: DNR STUDY ON NATURAL GAS
SPONSOR(s): SENATOR(s) WIELECHOWSKI
01/19/10 (S) PREFILE RELEASED 1/8/10
01/19/10 (S) READ THE FIRST TIME - REFERRALS
01/19/10 (S) RES, FIN
02/08/10 (S) RES AT 3:30 PM BUTROVICH 205
BILL: SB 228
SHORT TITLE: TAX INCENTIVES FOR GAS-TO-LIQUID
SPONSOR(s): SENATOR(s) MCGUIRE
01/19/10 (S) READ THE FIRST TIME - REFERRALS
01/19/10 (S) RES, FIN
02/08/10 (S) RES AT 3:30 PM BUTROVICH 205
BILL: SB 203
SHORT TITLE: COOK INLET GAS STORAGE FACILITIES
SPONSOR(s): SENATOR(s) FRENCH, WIELECHOWSKI
01/19/10 (S) PREFILE RELEASED 1/8/10
01/19/10 (S) READ THE FIRST TIME - REFERRALS
01/19/10 (S) RES, FIN
02/08/10 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
SENATOR JOE THOMAS
Alaska State Legislature
Juneau, AK
POSITION STATEMENT: Sponsor of SB 195.
MICHELLE SYDEMAN
Staff to Senator Wielechowski
Alaska State Legislature
Juneau, AK
POSITION STATEMENT: Commented on SB 208 for the sponsor.
KEVIN BANKS, Director
Division of Oil and Gas
Department of Natural Resources (DNR)
POSITION STATEMENT: Available to answer questions on SB 208.
JOHN IVERSON, Director
Tax Division
Department of Revenue (DOR)
POSITION STATEMENT: Commented on SB 208.
JERRY MCCUTCHEON, representing himself
Anchorage, AK
POSITION STATEMENT: Commented on SB 208.
MIKE PAWLOWSKI
Staff to Senator McGuire
Alaska State Legislature
Juneau, AK
POSITION STATEMENT: Presented the CS to SB 228 for the sponsor.
RICHARD PETERSON, President
Alaska Natural Gas-to-Liquids
POSITION STATEMENT: Supported SB 228.
JIM DODSON, President
Fairbanks Economic Development Corporation
POSITION STATEMENT:
SENATOR FRENCH
Alaska State Legislature
Juneau, AK
POSITION STATEMENT: Sponsor of SB 203.
JOHN IVERSON, Director
Tax Division
Department of Revenue (DOR)
POSITION STATEMENT: Commented on SB 203.
JIM GREELEY, State Petroleum Property Assessor
Department of Revenue (DOR)
POSITION STATEMENT: Answered questions about SB 203.
JOHANNA BALES, Deputy Director
Tax Division
Department of Revenue (DOR)
POSITION STATEMENT: Answered questions about SB 203.
BRADLEY EVANS, CEO
Chugach Electric Association
POSITION STATEMENT: Didn't think SB 203 was needed at this time.
ACTION NARRATIVE
3:33:18 PM
CO-CHAIR WIELECHOWSKI called the Senate Resources Standing
Committee meeting to order at 3:33 p.m. Present at the call to
order were Senators Stedman, French, Wagoner, McGuire, and
Wielechowski. Senator Stevens arrived shortly after the meeting
started.
SB 195-MAKE GOLDSTREAM PUBLIC USE AREA PERMANENT
3:34:19 PM
CO-CHAIR WIELECHOWSKI announced SB 195 to be up for
consideration. He noted that the committee heard no opposition
to it last week.
SENATOR JOE THOMAS, sponsor of SB 195, commented that he didn't
want people to think that he had overstated the situation in
saying that the Goldstream Public Use Area is the Central Park
of the Goldstream Valley. There are no facilities that anyone
needs to maintain and it gets passively managed by the
Department of Natural Resources (DNR). All the work that gets
done, like grooming the trails, is on a volunteer basis and no
money gets spent on it.
SENATOR WIELECHOWSKI said the bill has had nothing but unanimous
support.
SENATOR WAGONER moved to report SB 195 from committee with
individual recommendations and attached fiscal note(s). There
were no objections and it was so ordered.
SB 208-DNR STUDY ON NATURAL GAS
3:36:40 PM
CO-CHAIR WIELECHOWSKI announced SB 208 to be up for
consideration.
MICHELLE SYDEMAN, staff to Senator Wielechowski, sponsor of SB
208, explained that many share a growing concern over the
dwindling reserves of natural gas in Cook Inlet. Last year the
committee heard testimony on this topic from Kevin Banks,
Director, Division of Oil and Gas, and Bob Swenson, Director,
Division of Geological and Geophysical Survey, both with the
DNR. They were all shown a chart that is in their packets today
that is known as "The Waterfall Chart," which depicts declining
production from Cook Inlet wells. Unless there is additional
exploration and identification of new reserves by 2012 the
possibility exists of homes and businesses in Southcentral
Alaska not having sufficient gas.
She said that earlier this year the DNR completed a new
assessment of known possible and probable reserves in Cook
Inlet. The review concluded that if sufficient investing in the
Inlet were made, supplies could last a great deal longer,
certainly into the next decade. This would be especially good
for the local economy since gas produced locally would not be
subject to expensive tariffs or other transportation costs.
MS. SYDEMAN said the challenge still remains of deciding what
actions the state should take if any at all to encourage more
natural gas exploration and production in the Inlet.
3:37:34 PM
SENATOR HUGGINS joined the committee.
3:37:43 PM
MS. SYDEMAN remembered the June 4 meeting in Anchorage when
producers from Cook Inlet were asked what could be done to help
them feel more comfortable investing there. So, she said, this
bill examines which incentives are most likely to work and which
would simply transfer precious state dollars from the state
treasury to companies that otherwise might have sufficient
incentive to invest in the Inlet if proper market conditions
exist. It asks if the state can take steps other than lowering
tax rates or increasing credits that might have a greater effect
on private sector behavior. This question is particularly
compelling in light of the very modest tax rates and generous
tax credits the producers in the Inlet already enjoy, and the
fact that the Legislature has gone to lengths to encourage more
gas production in the Inlet. It asks to what extent those
incentives are working, because that is not exactly known now.
Before the state leaps to offer additional incentives, Ms.
Sydeman stated, this bill seeks to answer questions like what
other jurisdictions are doing to promote more investment. If the
small size of the market in Alaska is an impediment to new
exploration and production, which they all heard last June, are
can the state take steps to enhance the market to ensure that
producers see a return on their investment in a reasonable time
frame? Could it commit to buying proven reserves upfront so
investors don't have to wait years to realize their investment,
for instance?
MS. SYDEMAN said last week they heard testimony that the state
already reimburses companies for roughly 45-65 percent of their
exploration costs. Given this fact, how can the state partner
more effectively with industry to ensure that the needs of
Alaskans for a long-term, affordable and reliable source of gas
are met? Would it be worthwhile to consider establishment of a
state entity like ANGDA to partner with the private sector to
explore in areas where a critical need for gas exists? She said
this bill calls for a speedy analysis of these questions before
new incentives are enacted. It asks Department of Natural
Resources (DNR) and the Department of Revenue (DOR)to assess the
effectiveness of existing incentives, propose new incentives
they believe will be useful and then look more broadly at what
other strategies the state might employ to make sure Alaskans
don't tumble down the cliff depicted in the waterfall chart.
Most importantly, it calls for this work to be done
expeditiously - by November 1 of this year, so the legislature
can act swiftly next year once the foundation for more informed
decisions has been laid.
3:41:39 PM
KEVIN BANKS, Director, Division of Oil and Gas, Department of
Natural Resources (DNR), said he was available to answer
questions on SB 208.
SENATOR WAGONER said he wanted Mr. Banks to talk about how
important the market is versus the incentive to explore. He
thought they had already incentivized gas exploration in Cook
Inlet as much as possible some years ago.
3:42:45 PM
MR. BANKS responded that was a good point and that the waterfall
chart is as much a function of decline in demand in the
marketplace as it is a decline in production. The real challenge
in the Cook Inlet market is that it has essentially three large
sellers of gas and three or so consumers of gas in the form of
the electric utilities and the local distribution company,
EnStar. As a consequence, the marketplace has few players. So he
likes to say, "The market is free, but it's not necessarily
competitive."
3:44:10 PM
Furthermore, he remarked, it's challenged because the
contracting arrangements among all of the parties don't always
come due at the same time. So, one contract will expire and it
may be the only time that buyers and sellers are interacting in
the marketplace until another contract is negotiated. There are
very few indicators of what the market price is or should be,
and it's difficult to know what market incentives exist to
encourage new production in the kind of "surplus production"
that the Inlet has enjoyed for so long - the lack of which is
creating some anxiety about future supplies.
3:44:59 PM
SENATOR STEDMAN asked if he has seen any changes since the PPT
was passed and if they need to review that work.
MR. BANKS answered that at the moment, the tax rate that applies
to gas in the Cook Inlet is only about $17.07/mcf, and as prices
for gas change in time, that number will remain the same under
the current tax regime. Tax credits can be used in Cook Inlet,
but he didn't know how the credits and tax rate interact with
each other; DNR might better respond to that. It was his
impression that the tax and royalty provisions that apply in the
Cook Inlet exert kind of a light touch on production there.
Several fields have only a 5-percent royalty as result of
legislation that was done 10 years ago. He mentioned that
Armstrong is developing the North Fork Unit - one of those 5-
percent royalty fields. So in a sense, a lot of the stimulus in
terms of tax and royalty incentives is already in place. Then to
follow on from Senator Wagoner's point, it would behoove
legislators to try to get a better understanding of how the
market interacts, so they might considering doing something to
expand it.
CO-CHAIR WIELECHOWSKI said this is one of the first things he
looked into when elected over three years ago and they still
don't have an answer. Some of the lowest tax and royalty rates
in the nation are in Cook Inlet; so that looks like the
incentives that are in place are not working and his thought is
to step back and get some experts to evaluate how exploration
can be spurred.
3:48:40 PM
SENATOR WAGONER said no one will explore and drill for gas
without a market or a place to put it. Right now there is no
place to put it; the only outlet is the LNG plant. Has any
producer other than ConocoPhillips or Marathon put any gas into
the LNG plant?
MR. BANKS said he didn't know.
3:49:48 PM
JOHN IVERSON, Director, Tax Division, Department of Revenue
(DOR), said that exploration in Cook Inlet is very heavily
incentivized from a tax credit perspective.
SENATOR HUGGINS stated that it appears that this area is a
victim of a lack of effort and the subject gets just probed
whenever it comes up. He has listened to the department talk
about all the gas there and he has seen the charts and all we
have to do is go get it. The two jack-up rigs the Murkowski
administration talked about "just went away." Right now the
state has an in-state gas coordinator that is supposed to be
working on things like this. Enstar and ANGDA have been working
on it, the Railbelt consolidation is going on, and then there's
the RCA that no matter what solution they come up with, they
tend to be able "to just screw it up" because long term
contracts can't be used. He asked Mr. Banks if he was "Mr. Cook
Inlet," programmatically, what three things would he do in Cook
Inlet?
3:53:19 PM
MR. BANKS answered that he looks at the problem from different
perspectives. Number one, the size of the market is pretty
small; number two, the Cook Inlet region has enjoyed relatively
low gas prices because it had a surplus of productive capability
- people looking for oil found large gas fields. It was actually
cheaper to just drill another producing well than to do anything
else. If we want to go back to the time where we had this kind
of surplus productive capacity, then that tends to mean there
are different kinds of problems to solve. First of all, the
market must be bigger. It has to have some kind of support
either in exports or some other kind of demand. The issue, then,
is if gas can be found for prices that are attractive for those
kinds of projects.
3:55:21 PM
MR. BANKS said he is convinced that Cook Inlet has a fair amount
of gas in the ground, and the trigger to get it to market is not
just a matter of price, although that is important. A place to
put it is also needed; and this requires increasing costly
investments.
He said the he would look for ways to expand the market, ways to
export, and create situations within the market today that will
solve some of the more critical problems. For instance, the
supply on an annual basis as indicated in the supply studies is
part of the problem, but gas supply is also needed in the winter
when it's cold and consumption rates are high. Storage will be
needed for that. They also need to make sure that the
infrastructure for supplying gas to homes will not break down -
so reliability is another factor. Also some kind of mechanism
should be considered so that a lessee or a producer doesn't have
to strand his supply of gas in order to give the state peace of
mind knowing that it has a sufficient supply of gas - whatever
that means.
3:56:46 PM
SENATOR HUGGINS said effort are going on right now to work LNG
imports and he characterizes that as - okay we can't solve our
problems, so we'll buy somebody else's product and invest in
their jobs. He hangs his head when he thinks about it. He asked
Mr. Banks if he was aware of those efforts.
MR. BANKS answered no.
SENATOR HUGGINS remarked, "Call the Railbelt Consolidation guys,
because they're doing it."
MR. BANKS asked if he was referring to the integrated resource
development plan.
SENATOR HUGGINS said that is part of it.
CO-CHAIR WIELECHOWSKI agreed with him and said that all these
groups have been studying these problems for years, but no
comprehensive plan has been developed for it.
3:58:22 PM
SENATOR STEDMAN asked Mr. Banks to clarify what he means by
expanding and "unstranding" the Cook Inlet area.
MR. BANKS replied that he means if the goal is to be where we
used to be with excess gas supply, the only way to have that is
to have a larger market. But the industrial LNG market was
created to take up excess supply. When consumers needed the gas,
there was an opportunity to direct production into the local
market. To the extent that the reserves on the graph are
"stranded" it means that people are not drilling for these kinds
of supplies of gas because they know that unless they can enter
into some kind of agreement with a local utility, there is no
point in drilling today. So, a producer will wait until it has a
supply contract with certain supply requirements that must be
met and then make the drilling commitments to satisfy those
requirements. It seemed to him that a broader market with more
players would create conditions for more production.
4:00:27 PM
SENATOR STEDMAN asked what part the long term pricing contracts
play into this and how do they incentivize producers to drill if
they aren't able to get a long term contract to make it worth
their while to go drill.
MR. BANKS replied that he was hitting on all the issues that
surround the problems with getting more production out of the
Cook Inlet, and he didn't disagree with anything he said. Even
the possibility of LNG exports from Cook Inlet in the future, a
new industrial use, or the reestablishment of Agrium's plant
will truly depend on the price of gas. How the marketplace with
so few players gets to that price is a real challenge. He said
he shares everyone's frustration that he has heard here today
about how the market itself doesn't seem to be taking care of
what residents' expectations are for that region - that new
supplies will be produced there. So, something else needs to be
examined as a possibility. A structure like ANGDA should be
explored and that is what that kind of study is doing.
4:02:49 PM
SENATOR WAGONER suggested the he discuss the Armstrong re-
drilling on the North Fork of the Anchor River and talk about
the history of that gas field where oil was explored in the
early '70s, but gas was found. The wells were capped, because
there was no market or transportation for it.
MR. BANKS explained that North Fork and several other fields
that are now under way in the last several years are an example
of fields that had been discovered very early on in the search
for oil, but because of the lack of transportation and the
technology that existed in those days the gas wasn't produced.
Now Armstrong is bringing in different technologies that weren't
even available when the gas was discovered and they have a
commitment to sell 10 bcf to Enstar. Presumably the price will
be satisfactory to Armstrong to encourage their development, and
those are a bit higher than what the weighted average cost of
gas is today in the Cook Inlet.
4:05:25 PM
SENATOR HUGGINS recalled that the state has one lease for gas
storage.
MR. BANKS answered that three gas storage facilities exist now
in the Cook Inlet - one is on federal land at Swanson River and
two are on state land.
SENATOR HUGGINS said one is proposed by ANR, a subsidiary of
TransCanada, and it appears that it has been put in limbo by the
Regulatory Commission of Alaska (RCA) and their connotation that
there potentially has to be legislation before it will go
forward.
MR. BANKS said he wouldn't say that judging by the level of
activities his division is entering into and that the department
is involved with in terms of permitting the project and
developing the storage lease. It is correct that the RCA ruled
that it regarded its jurisdiction as muddled over the question
of whether or not they would regulate storage there, but he
wasn't sure to what extent that is going to hold up a project
that still has an 18-month timeframe before production goes into
it.
4:07:31 PM
SENATOR HUGGINS said if modifications have to happen
legislatively, would he be correct in assuming the
administration would bring forward some legislation. Does there
have to be a fix?
MR. BANKS replied that he didn't know what the administration is
planning on doing on that issue, but he knew some discussions
were going on in the other body with the chairman of the RCA
now.
SENATOR HUGGINS said he is supportive of his efforts to get some
things done. Lawmakers need some answers, because they can't
just "dilly dally on the sidelines" while people end up without
any gas.
CO-CHAIR MCGUIRE asked what kind of outreach his division does
or how it interfaces with potential commercial consumers in the
Cook Inlet. For instance, she said, Alberta has an active
portion of its department looking for those industrial anchors
that will be a part of developing these basins and trying to
match them up with potential explorers.
4:09:05 PM
MR. BANKS replied that the department doesn't have a specific
outreach to that kind of consumer, but it does spend a lot time
with the potential producers and potential new producers. It was
an attempt of theirs in licensing the LNG plant where exports
are now occurring to encourage the operators of the plant to
offer the services of the LNG plant to other suppliers as part
of an RFP that they were to publish just prior to the export
license period to begin. They did that without much success.
When the opportunity arises the department steps up, but it
doesn't do that kind of advertising and promoting that she is
thinking about.
4:11:04 PM
CO-CHAIR MCGUIRE asked who is leading the charge in developing
Cook Inlet, and said perhaps the administration is the better
branch of government to do this. She remembered last year that
no one was interested in gas storage in the Interim and then she
started hearing rumors that TransCanada had been in
conversations with the department and is on the fast track to a
storage facility. How is the department participating in those
negotiations?
4:12:54 PM
MR. BANKS thanked her for the encouragement to develop new
markets for the state's gas. He said that he went to China in
December and met with petrochemical companies along with Harold
Heinze and some legislators as part of his "ongoing duties as
assigned" in trying to find potential gas markets in general.
With respect to the TransCanada project, they are thought of as
the applicant for the AGIA pipeline, but their subsidiary, ANR,
has a lot of storage capacity in facilities in the Midwest,
particularly in Michigan. So becoming a potential sponsor of a
storage facility whose role it is only to provide the
warehousing of the gas and pumping it out when it is needed
hasn't been done yet in the state of Alaska. ANR came to the
department about six months ago and they are working through a
process to gain the appropriate permits and the land they will
need for the surface operations, and the DNR is helping them
prepare the lease agreements that will make it possible for them
to operate a storage facility on the state's mineral estate.
That company and the current lessee have agreements; some of
those discussions are ongoing and confidential so he couldn't
say too much. He related that the department has had other
sporadic conversations with other sponsors in the Cook Inlet
region; he has gotten the sense that the sponsors have gone back
to do some more homework and he full expects them back as time
goes on. He said, "There are more than just the TransCanada ANR
proposal that may come to fore here in the next couple of
years."
CO-CHAIR MCGUIRE said a second example occurred to her - the
first one being AGIA - of when the government decides to really
fast track and put together a series of permits, advice,
authority, and bring suppliers together. She would like to see
Alaskan companies coming forward and maybe the department could
come up with a process to get more information out to them about
the opportunities.
SENATOR STEDMAN went to page 3, line 1, that said, "identify,
evaluate and recommend additional incentives that may be enacted
by the legislature for increasing exploration and development of
gas" and suggested softening it to "that may be enacted by the
legislature" because they are really trying to come up with a
solution.
He went to a similar item on line 4 says, "determine the cost,
feasibility, and a proposed organizational structure for a new
state entity". He said some are a little gun shy about
continually creating new state entities; Cook Inlet already has
too many entities running around. This issue has been going on
for several years and it seemed more like a long-term price
issue to him.
4:19:08 PM
MR. BANKS said on that last point, their supply study had an
observation that bringing in the new resources will cost more
than in the past and that the right kind of price signal will
have to be available to producers to do it. He agreed that an
"organizational structure" might be a "long reach" and that they
should look at all possibilities. However, he thought this bill
intended to look for a more active role by the state to achieve
some new supply.
SENATOR STEDMAN said he still thought that until the long-term
price issue is solved, they can do everything including paying
an explorer directly to explore and even that wouldn't solve the
problem. He said lowering the tax rate in Cook Inlet three years
ago didn't produce the results they were hoping for then and he
did not want to create another state bureaucracy that would not
lead to a solution.
CO-CHAIR WIELECHOWSKI said Cook Inlet has some of the lowest
taxes in the country and very low royalty rates, but it's not
getting exploration. If the producers who have the leases are
not willing to develop the leases they have, he said, let's do
it ourselves.
4:22:55 PM
SENATOR WAGONER said if they really want the "free market" to
work, they should have a five year sunset and keep RCA from
having oversight on gas contracts. Basically that gas has one
major user, Enstar, and with the RCA controlling the market,
they won't see much exploration in Cook Inlet other than what
can be put under contract. Taking RCA out of the picture would
stimulate some exploration and production.
CO-CHAIR MCGUIRE said she and Senator Wielechowski diverged
philosophically on this particular method of solving the
problem, but they don't diverge on the need for it. That sense
of frustration is pretty unanimous, but the need in Cook Inlet
is "dire." She thought in a state that depends so much on this
resource someone should be tasked with bringing people to the
table to chat with other folks - like the tourism and fisheries
industries do.
SENATOR STEDMAN said he supported the concept of the bill, but
they need to look back at what incentives they have already done
in Cook Inlet over the last decade - reducing taxes, increasing
credits, and ring-fencing Cook Inlet - that were supposed to
address this issue.
CO-CHAIR WIELECHOWSKI said that is a good point and he also
thought they should look at what has been done in the past and
not repeat themselves on something that isn't working.
4:29:31 PM
JERRY MCCUTCHEON, representing himself, Anchorage, Alaska, said
this is a Kevin Banks problem. They don't need to encourage
further Cook Inlet gas production with tax breaks or whatever;
they need to enforce the leases in Alaska's constitution.
4:31:12 PM
CO-CHAIR WIELECHOWSKI announced a recess.
4:31:17 PM
CO-CHAIR WIELECHOWSKI called the meeting back to order at 4:31.
He closed public testimony and announced that SB 208 would be
set aside for further work.
SB 228-TAX INCENTIVES FOR GAS-TO-LIQUID
4:31:49 PM
CO-CHAIR WIELECHOWSKI announced SB 228 to be up for
consideration.
MIKE PAWLOWSKI, staff to Senator McGuire, sponsor of SB 228,
explained that he would give a brief introduction of the bill
and then address the committee substitute (CS) that members have
in their packets. He said the basic premise behind SB 228 is to
look at the end market for gas and to look at what other
jurisdictions have done to build an industrial base around their
supply and to use it to create a valued-added liquid through the
Fischer-Tropsch process. SB 228 started off with a
reauthorization of an old industrial incentive tax credit that
existed in statute for petrochemical oil and gas facilities that
expired in 1999. The sponsor updated and reauthorized it in
sections 1-6 of the original bill. The second part of the bill,
was written with the understanding that these plants might be
the downstream facility and that the upstream might be the
producer selling to the facility.
4:33:33 PM
MR. PAWLOWSKI said the definition of gas used in-state for heat
and power in the ACES bill was expanded in SB 228 to include gas
used for raw materials for producing liquids or petrochemicals.
This was the beginning of the bill and the idea was to
incentivize both the downstream and the upstream.
4:34:07 PM
He explained that after talking to the Department of Revenue and
Legislative Legal, the sponsor discovered several problems in
the approach. The first one was that the original intent was to
incentivize any Fischer-Tropsch process - looking at coal-to-
liquids, biomass-to-liquids, and gas-to-liquids. But either coal
or biomass has to first be synthesized into a gas and then
turned into a liquid and the definition of gas-to-liquids in the
original version of the bill wasn't broad enough to include the
whole world of possibilities for this type of development in
Alaska. So CSSB 228 (), version 26-LS1324\S, changes the
definition on page 1, lines 10-11 to say a facility that
produces liquids from gas, coal or biomass - thus including the
world of Fischer-Tropsch fuels.
MR. PAWLOWSKI said secondly the original industrial incentive
tax credit couldn't be reauthorized because the provisions it
referenced in federal law had changed. So, an entirely separate
industrial incentive was designed within the CS. Sections 1-6
became section 1 that simply says if you make this investment
you get a descending capital credit against your corporate
income taxes up to the first billion dollars. He said that
technical issues still need to be corrected to limit that
credit; for one thing multiple entities could claim credit on
the same investment, which is not the sponsor's intent.
4:36:10 PM
So, language on page 2, lines 24-28, has the important credit
limits to protect the state's downside, he said. The first
provision is that the tax credit can never be more than 60
percent of the tax liability in a year. This assures that the
state is accruing some revenue and that it is just foregoing
revenue when the facilities are getting built. The second part
on line 28 says that the credits cannot be carried forward past
2025.
4:37:24 PM
RICHARD PETERSON, President, Alaska Natural Gas-to-Liquids, said
he had been looking at this particular concept in Alaska since
1997. He said he didn't care who built the gas-to-liquids plant,
but the idea is to put the mechanism in place for anybody to
compete for that type of project. In this respect they
wholeheartedly support this bill. Through the years of their
looking at gas-to-liquids in Alaska, the one thing that seemed
to be apparent is that Alaska isn't interested in the Fischer-
Tropsch process. This bill is the first sign of support for
Fischer-Tropsch.
4:39:53 PM
SENATOR WAGONER asked if he is here to promote some other
company to do the Fischer-Tropsch process.
MR. PETERSON responded that he hopes to be the successful party
to do it and he has been working on it with Sasol and Shell, the
two leaders in Fischer-Tropsch technology and the only two major
companies in the world that actually have operating Fischer-
Tropsch plants. However, he said, Exxon has the ability to do
this and if they want to take advantage of the energy credits,
that's great.
He said the whole purpose in 1997 was to introduce Fischer-
Tropsch technology to the US to help it reduce its dependence on
imported energy. Most of his time has been spent putting federal
legislation in effect that would help this process.
MR. PETERSON said he also has a more personal reason. His son is
a career Marine who came back in April from his sixth tour in
Iraq, and he didn't want him to have to go back. But that won't
happen unless the US as a nation creates a national energy
policy to reduce its dependence on imported energy - "and that's
what Fischer-Tropsch can do." It can do it across natural gas,
coal, and biomass including garbage.
4:42:24 PM
SENATOR WAGONER asked how Alaska can compete in a worldwide
market when Shell can buy its gas for $0.50/mcf at tidewater for
their 140,000-barrel/day plant that is being built in Qatar.
MR. PETERSON replied that is why he worked to enact federal
legislation that would provide energy credits and lower excise
tax rates on domestic Fischer-Tropsch fuels sold in the US.
These energy credits when combined will amount to about $700
million/year towards a plant in Alaska, or in Montana or in any
other state in the US. That translates into about $4/mmbtu. The
federal legislation makes them competitive; the sole purpose of
enacting it is so that the plant is competitive around the
world.
MR. PETERSON also stated that when Senator Stevens enacted the
energy credits for Fischer-Tropsch fuels made from coal and
biomass, every coal-rich state in the United State "beat a path"
to South Africa and to Shell, every state except Alaska, and he
wants to make sure that Alaska leads this type of technology in
the US.
CO-CHAIR WIELECHOWSKI asked Mr. Peterson if he still thought
Alaska could be competitive at $24/barrel for oil - with the
federal tax credits.
MR. PETERSON replied yes - in theory - assuming a plant can get
built for $5 billion and a lot of other assumptions. The
combined credits amount to $34/barrel. So that makes these
projects competitive at $55-60/barrel. This means in theory that
even at $28-30/barrel, they can be price competitive. From a
pure marketing point of view he hoped the numbers stayed up
around $60-70/barrel.
SENATOR WAGONER asked what size plant could get built for $700
million.
MR. PETERSON answered a 70,000 barrel/day plant.
SENATOR WAGONER asked the difference between the Fischer-Tropsch
process and the Bixby-something process in Virginia.
MR. PETERSON said he didn't know, but Fischer-Tropsch is a
generic name from the two German scientists who commercialized
the process in the 1930s.
4:49:01 PM
SENATOR WAGONER said he mentioned that everyone but Alaska went
to South Africa to look at that plant and he asked how many of
those are building those plants now.
MR. PETERSON answered that at least 8 or 10 of those states
passed legislation enabling price support tax credits, loan
guarantees, municipal bond funding, et cetera. All of them are
moving forwarding, including Alaska that did a $2 million pre-
feasibility study for an 80,000 barrel/day coal-to-liquids plant
in Cook Inlet. The numbers worked, but the big issue was the
2
cost of sequestering CO and how "cap and trade" would affect it.
CO-CHAIR MCGUIRE said the idea behind this credit is much like
her geothermal production tax credit from last year that later
grew to include hydro, solar, wind, biomass, carbon capture and
sequestration, but from that Alaska has invited the world in to
talk about geothermal prospects. This bill is another attempt at
incentivizing these projects that might otherwise be marginal.
She said that she and Senator Wielechowski came back from South
Africa trying to get Fischer-Tropsch facilities built in Alaska.
She said Alaska is unique with respect to this technology
because it has all three of the natural resources that are
needed as the feed stock in spades; we have the quantities of
gas that would be needed as well, but they are stranded. The
main thing is to make sure we're not double and triple dipping
in on the tax credits. She also believed that developing
Alaska's resources was very important because of the war we are
fighting "largely over crude oil."
4:55:54 PM
SENATOR STEDMAN added that a fundamental concern a lot of people
have is that Alaska doesn't get a major export line out of the
state into Alberta, or LNG export with vast stores of gas just
sitting everywhere, or that we end up with an export line to
Alberta with no base jobs in Alaska except for a couple of
hundred compressor station operators. He didn't know if income
tax was the right thing to incentivize.
He also said that he wanted the committee to get educated on the
possible impacts this technology could have on the state in case
the big pipeline didn't go through and also in the event that we
do get a pipeline that something could be created in the state
that would generate some jobs.
CO-CHAIR WIELECHOWSKI remarked that this plant could be a big
job creator and could potentially be a huge anchor for a bullet
line or spur line into Southcentral. It has tremendous
potential.
SENATOR WAGONER asked if he had been looking at a coal plant for
gasification earlier and asked what kind of study he did in
2
terms of sequestering CO.
MR. PETERSON said they did a very preliminary study looking at
2
existing wells in Cook Inlet with the idea of using CO for
enhanced oil recovery. That was a good idea five years ago, but
as time goes on those wells in the existing oil fields are
getting to the point where it might not make any economic sense
to do that. So, they primarily looked at storing gas in the
depleted oil and gas fields as a pure cost to the project of
about $50-75 million/year, but it could be more like $500
million/year with cap and trade.
He said the two best Alaska places to sequester CO were Prudhoe
Bay and Cook Inlet. Every other place in the country would have
an issue with where to put it. Both Sasol and Shell in 1995 said
they would not consider locating a coal-to-liquids or gas-to-
liquids program in the US unless there was a viable place to put
2
CO.
CO-CHAIR WIELECHOWSKI said they heard that in South Africa, too,
2
where the plant is located next to an oil field where the CO
could be injected right into the ground.
SENATOR HUGGINS said the Pentagon wanted to get into a
cooperative effort with the state of Alaska to produce a blended
jet fuel a while ago and asked where that was and how confident
he felt they could pull it off.
5:01:50 PM
MR. PETERSON replied if they can build a GTL/CTL plant in Alaska
they can easily meet that criterion.
5:02:09 PM
2
SENATOR WAGONER said he was not sure CO injection would work in
the Cook Inlet because the fields have been water flooding for
so long.
5:03:13 PM
JIM DODSON, President, Fairbanks Economic Development
Corporation, said they have done an extensive feasibility study
on a coal/biomass/natural gas-to-liquids facility in Interior
Alaska. He noted copies of "The Hatch Report," a 2005-DOE report
2
on enhanced oil recovery using CO, and Dr. Paul Metz's paper on
2
the value of using CO for enhanced oil recovery on the North
Slope and said the issue to Alaskans is the possibility of
turning relatively low-valued natural resources including
biomass, coal and natural gas into high-value product synthetic
fuel - produced in Alaska by Alaskans. He said the size of the
plant is enormous as is the $5-6 billion to build it.
MR. DODSON said that Dr. Metz's paper states that sequestering
2
CO on the North Slope could potentially return Alaska an
additional $100 billion from existing oil fields.
5:06:23 PM
CO-CHAIR WIELECHOWSKI announced that SB 228 would be set aside
for future discussion.
SB 203-COOK INLET GAS STORAGE FACILITIES
CO-CHAIR WIELECHOWSKI announced SB 203 to be up for
consideration.
5:06:59 PM
SENATOR FRENCH, sponsor of SB 203, said it is targeted at
solving a specific problem in Cook Inlet by creating an
emergency store house of natural gas for times of shortage
during peak demand winter months when the current gas
deliverability doesn't keep up with demand. Should there be a
valve or compressor problem, brown outs might be seen in
Anchorage and across the Anchorage Bowl.
About a week ago the Regulatory Commission of Alaska (RCA) took
up the question of whether such a facility would be regulated by
itself, Senator French said. It was brought by a company known
as Sing's Cook Inlet Natural Gas storage, a subsidiary of
TransCanada. Sing's asked for a declaratory judgment that they
not be regulated by the RCA, who came back saying that their
statutes did not provide explicit authority to regulate natural
gas nor did they definitively set natural gas storage outside of
their jurisdiction. They were puzzled and said either the
Supreme Court would have to decide or the Legislature would have
to act. So, this bill has a provision that says, yes, those
facilities will be covered by the RCA just like practically
every other well or production facility is in the Southcentral
Basin.
He pointed out that on page 8 of the Order the commissioners
wrote that all interested persons agreed that storage in the
Cook Inlet area is a serious or even critical need even though
they didn't agree, 50/50, on the RCA's jurisdiction. They also
agreed that the time available to meet that need through
construction of a storage facility is short. The bill
essentially works with a tax credit much as the one they just
looked at, but at 20 percent against capital expenditures which
is smaller.
SENATOR FRENCH said he thought it was important to do something
although there wasn't any point in extending a 20-percent tax
credit to a company that is ready to push on through to the goal
line, but he is concerned that ideas like this get half way down
the field and then suddenly the industry loses interest and
wanders off.
5:10:39 PM
SENATOR WAGONER commented why give someone a tax credit when
they are already going forward with their project and they
haven't asked for one, yet. He wanted to know how the 20 percent
tax credit was different from the 20 mil levy on industrial
capital improvements and how that would affect the city and
borough's ability to get revenue.
5:12:35 PM
JIM GREELEY, State Petroleum Property Assessor, Department of
Revenue (DOR), explained that the bill has two incentive
provisions, one for corporate income tax and one for property
tax. The property tax incentive exempts state property tax by
defining gas storage property as not taxable. Therefore, he
suspects the local jurisdiction, in the case of the Kenai
Peninsula Borough, would still be able to tax locally up to the
1.4 percent; and the difference between the 1.4 percent and the
2 percent state levy would be the incentive.
5:13:17 PM
JOHANNA BALES, Deputy Director, Tax Division, Department of
Revenue (DOR), explained that the provision exempts the gas
storage facility from the oil and gas property tax, but the tax
credit itself in this bill is against the corporate income tax.
There is no effect on the state's property tax and no effect on
the borough's tax either.
SENATOR WAGONER asked to have that clarified in writing.
5:14:12 PM
SENATOR STEDMAN said just in general, creating an incentive when
it's not clear that one is needed in all cases needs to be
looked at.
5:15:34 PM
BRADLEY EVANS, CEO, Chugach Electric Association, said the
association is heavily dependent on Cook Inlet natural gas to
fuel its thermal power plants; about 90 percent of the kilowatt
hours are produced from gas. They have approximately the same
usage level as Enstar. Through their own analysis and contract
negotiations they have concluded that storage is needed in Cook
Inlet for security of deliverability and reservoir enhancement -
where gas could be "parked" in the low usage months of the
summer to keep the wells at or above their minimum producing
level. He said they had been working with Enstar, Municipal
Light and Power, and Sing's for the gas storage facility and
they intend on executing a contract for that.
MR. EVANS said however, they need to get timely approval of
storage contracts. Delays in the regulatory process can
discourage people from doing business. He explained that as a
utility they need to ensure that they will be able to recover
their costs; that also needs to be addressed in the regulatory
environment. And if they do contract for volume of storage, they
need certainty that it will be there for the long-term.
He said the timeline for Sing's project is critical because they
may have winter deliverability problems as soon as 2012. They
are on record with the RCA saying that they think the gas
storage facility should be regulated under AS 42.05. Chugach
Electric doesn't like the disruption of the regulatory process,
but they like the protection that it provides.
CO-CHAIR WIELECHOWSKI asked if he thought this incentive package
was needed or will they go ahead without it.
MR. EVANS replied that putting this facility into service is
relatively expensive, and maybe the subsidy should flow through
to the consumer rather than into the corporate end of the
arrangement. "It doesn't seem to make sense at this point." He
also said he would like to revisit that if it becomes apparent
that an incentive is the only way it will happen.
5:19:55 PM
SENATOR WAGONER said when he talked about Enstar being the
customer he meant for residential uses, but he also said "and
other industrial users." He asked if it was true that three
different places are being looked at for storage in Cook Inlet -
one of them being Cannery Loop.
MR. EVANS said he didn't know for sure, but very probably. The
problem is with the size of the facility and the risk of going
it alone. He has joined forces with Enstar and Municipal Light
and Power to share the risks, but they are all on a parallel
track to evaluate other places because it is a prudent thing to
do.
SENATOR WAGONER asked if one was Cannery Loop.
MR. EVAN answered no.
SENATOR WAGONER asked which storage facility he was talking
about.
MR. EVANS said he was bound by confidentiality agreements from
discussing that.
CO-CHAIR WIELECHOWSKI noted there were a lot of raised eyebrows
in the room. Finding no further comments, he closed public
testimony and adjourned at 5:21 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 203 Bill Packet - Part 1.pdf |
SRES 2/8/2010 3:30:00 PM |
SB 203 |
| SB 203 Bill Packet - Part 2.pdf |
SRES 2/8/2010 3:30:00 PM |
SB 203 |
| SB 228 Bill Packet - Part 1.pdf |
SRES 2/8/2010 3:30:00 PM |
SB 228 |
| SB 228 Bill Packet - Part 2.pdf |
SRES 2/8/2010 3:30:00 PM |
SB 228 |
| SB 195 - Bill Packet - Part 1.pdf |
SRES 2/8/2010 3:30:00 PM |
SB 195 |
| SB 195 - Bill Packet - Part 2.pdf |
SRES 2/8/2010 3:30:00 PM |
SB 195 |