02/09/2012 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB153 | |
| Judge Gleason's Decision: an Alternative Perspective by Bradford Keithley, Perkins Coie, Llp, | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 153 | TELECONFERENCED | |
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
sponsor.
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
first.
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
delivery.
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
purposes.
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
Cantwell.
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
said:
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
Slope.
MR. KEITHLEY answered no.
CO-CHAIR PASKVAN said he just wanted to know the support for his
position.
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
Norway.
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
mid-range).
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
environment.
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
p.m.
| 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 |