HOUSE SPECIAL COMMITTEE ON OIL AND GAS March 24, 1998 10:10 a.m. MEMBERS PRESENT Representative Scott Ogan Representative Norman Rokeberg Representative Joe Ryan Representative Con Bunde Representative J. Allen Kemplen MEMBERS ABSENT Representative Mark Hodgins, Chairman Representative Tom Brice COMMITTEE CALENDAR HOUSE BILL NO. 393 "An Act relating to contracts with the state establishing payments in lieu of other taxes by a qualified sponsor or qualified sponsor group for projects to develop stranded gas resources in the state; providing for the inclusion in such contracts of terms making certain adjustments regarding royalty value and the timing and notice of the state's right to take royalty in kind or in value from such projects; relating to the effect of such contracts on municipal taxation; and providing for an effective date." -HEARD AND HELD (* First public hearing) PREVIOUS ACTION BILL: HB 393 SHORT TITLE: DEVELOP STRANDED GAS RESOURCES SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR Jrn-Date Jrn-Page Action 2/11/98 2280 (H) READ THE FIRST TIME - REFERRAL(S) 2/11/98 2281 (H) OIL & GAS, FINANCE 2/11/98 2281 (H) 2 FISCAL NOTES (DNR, REV) 2/11/98 2281 (H) GOVERNOR'S TRANSMITTAL LETTER 2/19/98 (H) O&G AT 11:00 AM CAPITOL 124 2/19/98 (H) MINUTE(O&G) 2/24/98 (H) O&G AT 10:00 AM CAPITOL 124 2/24/98 (H) MINUTE(O&G) 2/26/98 (H) O&G AT 10:00 AM CAPITOL 124 2/26/98 (H) MINUTE(O&G) 3/03/98 (H) O&G AT 10:00 AM CAPITOL 124 3/03/98 (H) MINUTE(O&G) 3/05/98 (H) MINUTE(O&G) 3/09/98 2578 (H) RES REFERRAL ADDED 3/10/98 (H) O&G AT 10:00 AM CAPITOL 124 3/10/98 (H) MINUTE(O&G) 3/12/98 (H) O&G AT 10:00 AM CAPITOL 124 3/12/98 (H) MINUTE(O&G) 3/19/98 (H) O&G AT 10:00 AM CAPITOL 124 3/19/98 (H) MINUTE(O&G) 3/24/98 (H) O&G AT 10:00 AM CAPITOL 124 WITNESS REGISTER JOHN SHIVELY, Commissioner, Department of Natural Resources 400 Willoughby Avenue, 5th Floor Juneau, Alaska 99801 Telephone: (907) 4532400 POSITION STATEMENT: Testified on CSHB 393(O&G). ACTION NARRATIVE TAPE 98-26, SIDE A Number 0001 VICE-CHAIR CON BUNDE called the House Special Committee on Oil and Gas meeting to order at 10:10 a.m. Members present at the call to order were Representatives Rokeberg, Ryan, Bunde and Kemplen. Representative Ogan arrived at 10:11 a.m. HB 393 - DEVELOP STRANDED GAS RESOURCES Number 0068 VICE-CHAIR BUNDE announced the committee would hear HB 393, "An Act relating to contracts with the state establishing payments in lieu of other taxes by a qualified sponsor or qualified sponsor group for projects to develop stranded gas resources in the state; providing for the inclusion in such contracts of terms making certain adjustments regarding royalty value and the timing and notice of the state's right to take royalty in kind or in value from such projects; relating to the effect of such contracts on municipal taxation; and providing for an effective date." He stated that the committee had previously adopted CSHB 393(O&G), version B and Amendment 1. He stated that there is also Representative Rokeberg's Amendment 2 before the committee. Number 0135 VICE-CHAIR BUNDE stated that he had a technical amendment to Amendment 2. He stated that on page 24, line 16, note the phrase: "pay a portion of the periodic payments." He stated that in Amendment 2 on page 1, line 8, in order for the verbiage to conform, that phase would need to be added. Number 0158 REPRESENTATIVE NORMAN ROKEBERG stated that he would accept it as a technical amendment to Amendment 2. VICE-CHAIR BUNDE asked if there was an objection to the amendment to Amendment 2. Hearing none, it was so ordered. Number 0340 REPRESENTATIVE ROKEBERG stated that on page 24, line 17 of CSHB 393(O&G), he would insert a new section entitled "Sec. 43.82.505. Payments to economically affected municipalities." He stated that the concept is to create, by definition, two forms of municipalities; those that tax bases are affected and those that have other economic impacts as a result of the construction of the pipeline. He stated that areas such as the Mat-su borough and the municipality of Anchorage, which clearly has impacts from the development of the pipeline, have a right to be at the table when impact monies are under consideration. He stated that he would assume that the advisory group would develop a matrix to give greater weight to those communities that are revenue and economically affected. He asked for the support of the committee on Amendment 2. Number 0511 REPRESENTATIVE SCOTT OGAN stated that he conceptually supports the amendment, as his district would be affected largely but positively from the pipeline, although there are problems that come from economic growth such as demands for services. He stated that his concern is that Amendment 2 is too broad and that a non-affected community could make a claim. He asked if there was a protection for this in the amendment. Number 0648 REPRESENTATIVE ROKEBERG stated that the commissioner of revenue would have to make the findings and determinations based on the application made by the municipality. He stated that he would not be adverse to tightening the language up if someone offered it. VICE-CHAIR BUNDE asked if he anticipated that the communities that would be excluded from the table would file suit to have access to the table. Number 0734 REPRESENTATIVE ROKEBERG replied that he assumed they would file an application first and then if denied... VICE-CHAIR BUNDE asked if there were too many sideboards would that cause increased litigation. REPRESENTATIVE ROKEBERG replied that he is not sure that if there are greater obstacles, if it would dissuade people from filing a cause of action or generate one. He stated that he would not exhibit the right of any municipality to file a cause of action for a pay day gain. (INDISCERNIBLE -- static on tape) Number 0815 REPRESENTATIVE ALAN KEMPLEN stated that he would like to understand the difference between revenue affected municipality and economically affected municipality. A revenue affected municipality would be the public entities that would have make adjustments in their property taxes. Number 0861 REPRESENTATIVE ROKEBERG replied that is correct. Number 0871 REPRESENTATIVE KEMPLEN stated that with the revenue affected municipalities, he might want to think about the notion of linking it with an employment variable. The number of people from an area employed on the pipeline could be reflected back to the affected municipality. Number 0917 REPRESENTATIVE ROKEBERG stated that is a meritorious suggestion, however, he does not see anything here that would restrict the commissioner from developing a matrix. He stated that at this point, he did not want to complicate the issue. Number 0958 JOHN SHIVELY, Commissioner, Department of Natural Resources, stated that the Amendment 2, as drafted, could be workable. Whenever money is allocated it would have to be appropriated by the legislature. Number 0996 REPRESENTATIVE ROKEBERG stated that he has submitted to the committee along with the amendment, a memorandum from Legal Services regarding "periodic payments in lieu of taxes" dated March 16, 1998. The memorandum indicates that there is no necessity to change any of the information in the bill in order for the payments to occur at the time of the impact. Number 1050 VICE-CHAIR BUNDE (INDISC. -- static on tape). Number 1082 VICE-CHAIR BUNDE asked if there is an objection on Amendment 2. REPRESENTATIVE OGAN asked if there was an objection when it was moved. VICE-CHAIR BUNDE stated that he assumed there was for discussion purposes. Hearing no objection, Amendment 2, as amended was adopted. Number 1205 REPRESENTATIVE RYAN referred the committee to his packet of amendments. He made a motion to adopt Amendment 3, 0-GH2006\B.8, which reads: Page 2, lines 8-11: Delete all material. Renumber the following paragraphs accordingly. Page 2, lines 23-28: Delete all material. Insert "tankers;" Page 3, lines 7-15 Delete all material. Renumber the following paragraphs accordingly. Number 1126 REPRESENTATIVE OGAN objected for discussion purposes. Number 1205 REPRESENTATIVE RYAN stated that since there is already the infrastructure in Cook Inlet, they already have developed means of moving gas production and there is no stranded gas that we know of, that section is not germane to stranded gas. He stated that he did not want it to relate to all the gas in the state. (INDISC -- static on tape). He stated that since the technology is not there, there is no need to include the gas-to-liquids(GTL) portion in the bill. He stated that he did not see the relevancy of page 3, line 7-15, other than for general information. He stated that they hired Dr. Pedro van Meurs to tell us what we hired him to tell us. Number 1327 COMMISSIONER SHIVELY responded that they hired Dr. van Meurs to make an analysis of what he thought the situation was, as the answer was unknown. Number 1351 VICE-CHAIR BUNDE referred to page 2, lines 23-28, and stated that his concern of GTLs is continuation (INDISC.) pipeline. Once the amount of oil in the pipeline is no longer economically viable, the pipeline will have to be dismantled. He stated that it might extend the life of the pipeline if it was used to transfer GTLs. He asked if that was a possibility. Number 1390 COMMISSIONER SHIVELY responded that any additional liquid put into the pipeline would increase its life and ability to operate. He stated that a lot of the gas reserves have not been explored. Number 1435 REPRESENTATIVE ROKEBERG made a motion to divide Amendment 3 by taking the following out of the amendment: Page 3, lines 7-15 Delete all material. Renumber the following paragraphs accordingly. Number 1465 VICE-CHAIR BUNDE stated that Amendment 4 would then read: Page 3, lines 7-15 Delete all material. Renumber the following paragraphs accordingly. REPRESENTATIVE OGAN removed his objection. Number 1586 VICE-CHAIR BUNDE objected and asked for a roll call vote on Amendment 3, as amended. Representatives Kemplen, Ogan, Rokeberg and Ryan voted in favor of the motion. Vice-Chair Bunde voted against it. Representatives Hodgins and Brice were absent. Amendment 3, as amended was adopted. VICE-CHAIR BUNDE stated that would bring the committee to Amendment 4. REPRESENTATIVE RYAN stated that he would withdraw Amendment 4. REPRESENTATIVE RYAN made a motion to adopt Amendment 5,0-GH2006\B.9 which reads: Page 10, line 26, following "AS 43.82.210;" Insert "however, the terms concerning payments in lieu of taxes must also include payment of interest at the rate specified in AS 45.45.010(a) for suspended taxes;" Number 1624 VICE-CHAIR BUNDE objected for discussion purposes. Number 1650 REPRESENTATIVE RYAN stated that it was possible that the state would have to adopt a back-end loaded system, which would mean that the state would receive its payments 10-15 years in the future. He stated that the investors would receive (Indisc. -- static on the tape). He stated that the statute sets the interest rate. He stated that it is only fair if the state gives this rate of interest, the state should receive the same rate back. Number 1748 REPRESENTATIVE ROKEBERG stated that he had some concerns about that, he felt that the amendment would tie the hands of the commissioner in bargaining the contract. Number 1797 COMMISSIONER SHIVELY stated that he is opposed to Amendment 5. He stated that Dr. van Meurs never said that the state would not get any money for 15 years. He was suggesting a progressive tax policy where the state would get less amounts earlier on and greater amounts at the end. He stated that this amendment would put a burden on the project and is counter productive. He stated the rate should be left to the negotiations and not preset in the legislation, so as to not pre-guess the deal. Number 1862 VICE-CHAIR BUNDE stated that this bill would not preclude the administration from negotiations (INDISC -- static on tape). Number 1865 COMMISSIONER SHIVELY responded that as part of the economic observations one could look at what they gave up at the beginning and take that into account in terms of the payments at the end. Number 1875 REPRESENTATIVE RYAN stated that there is no place in the world where one can use someone's money without paying rent. He asked why would the legislature want to give up the state of Alaska's just return. He stated that the investors will recoup their money, so why shouldn't the state. He stated that he saw this legislation as a wish list of industry asking for everything that they desire. He stated that if the legislature does not look out for the people that it represents, the store is going to be given away. Number 1967 REPRESENTATIVE ROKEBERG stated that he agrees what Representative Ryan is saying regarding economic rent. However, interest and market rates vary and the time-frame is not specific. He stated that to tie this to a 10.5 percent statutory rate is not applicable in this case. He stated that it is something that should be done in the bargaining but should not be stipulated now. Number 2020 REPRESENTATIVE OGAN stated that he believed the administration would have the latitude to take into consideration the value of deferred payments and will have the ability to negotiate a new rate. Number 2040 COMMISSIONER SHIVELY replied that is correct. REPRESENTATIVE OGAN asked if it would be subject to legislative approval. COMMISSIONER SHIVELY replied that it would, depending on how the bill was passed. Number 2059 REPRESENTATIVE OGAN stated that Representative Ryan's points are well taken and he believed the state should be duly compensated, but he does not expect that to happen. Number 2079 REPRESENTATIVE RYAN stated that since the state has paid this, what is wrong for getting back what was paid. (INDISC. -- static on the tape) Number 2104 VICE-CHAIR BUNDE stated that he would be embarrassed if it was limited to a 10 percent rate and the prime at the time, happened to be 20 percent. Number 2143 VICE-CHAIR BUNDE asked for a roll call vote. Representatives Bunde, Ogan and Rokeberg voted against Amendment 5. Representative Ryan voted in favor of it. Amendment 5 failed. Number 2164 REPRESENTATIVE RYAN made a motion to adopt Amendment 6, 0- GH2006\B.10 which reads: Page 10, line 28: Delete "(A)" Page 10, lines 29-30: Delete "or (B) royalty value" Insert "however, the terms modifying the state's right to royalty in value or in kind must include payment of interest at the rate specified in AS 45.45.010(a) for delayed or suspended payments". REPRESENTATIVE RYAN explained the amendment (INDISC. -- tape static). VICE-CHAIR BUNDE stated that this is basically a penalty clause. Number 2183 COMMISSIONER SHIVELY stated that Amendment 6 does not make much sense to the administration. He stated that what they are talking about is the right to take the royalty "in kind" as opposed to "in value". He stated that they would always be getting something for royalty, it would just be how they would (INDISC.). Either it would be received as money or "in kind", there would not be a delay so there would not be anything to have interest on. Number 2212 REPRESENTATIVE RYAN stated that in the bill they talked a lot about delaying the payment until the investors armortized their investment. (INDISC.-- tape static) He stated that he thought if one was to use somebody's money they should pay them for the use of that money. Number 2240 VICE-CHAIR BUNDE stated that this would just be a technical amendment but the word "or" on page 10, line 29, has been changed to "and". Number 2263 COMMISSIONER SHIVELY stated that they are not talking about a delayed payment for a royalty. The section talks about when they could exercise the option to take the gas or money or take the gas and use it or market it ourselves. He stated that the gas will be sold as it comes out, there would be no delay in the actual royalty. The amount that is taken can be changed on a monthly basis. If the industry builds the gas line and assumes that they would have a certain amount of gas to market but then the state, four years into the contract, takes 12 percent of the gas, that would violate the contract. He stated that if "in kind" gas is used up-front then it would be taken into account upon the contract's design. Number 2328 REPRESENTATIVE ROKEBERG stated that would be a possibility that the design of the pipeline would have a maximum capacity before constructed, therefore a surplus capacity would be designed into it depending on the contract. He stated that its conceivable that a royalty share would not have to be given up if it was taken in kind. He stated that this might be one area where the state might benefit because if there is excess capacity the cost of using the royalty gas and the ability to take it at full value may be there with minimal marginal costs to the projects sponsor. He asked if that would be a possibility. Number 2374 COMMISSIONER SHIVELY stated that it is possible but unlikely. He stated that the main disadvantage in the market place is the cost of the pipeline which other competing countries don't have. He stated that there would be ways to increase capacity but it would have to be at a cost. The challenge to the industry is to drive the cost down in order to have a competitive product. Number 2407 REPRESENTATIVE RYAN stated that he is looking at a long term commitment on the state's portion of the gas as the markets change over time and we could be stuck in a contract that turns out to be unfavorable to the state's interest. He stated that he would withdraw Amendment 6 and come back with an index that would allow the state to commit its royalty and have a guaranteed index that if the price was over the index, a premium would be received. Number 2452 VICE-CHAIR BUNDE asked if there was an objection to withdrawing Amendment 6. Hearing none, it was so ordered. He recessed the meeting to the call of the chair.