Legislature(2015 - 2016)BUTROVICH 205
03/02/2016 03:30 PM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| HB100 | |
| SB125 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 125 | TELECONFERENCED | |
| += | HB 100 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 100-UREA/AMMONIA/GAS-LIQ FACILITY; TAX CREDIT
3:31:16 PM
CHAIR GIESSEL announced consideration of HB 100. [CSHB 100(FIN)
was before the committee.]
REPRESENTATIVE MIKE CHENAULT, Alaska State Legislature, sponsor
of HB 100, explained that the bill establishes a credit against
the income tax for an in-state processing facility that
manufactures urea, ammonia, or gas-to-liquid products. The [tax
credit] is related to the value of the state's royalty share of
gas production based on contracts with certain processing
facilities. He said there will be wide reaching effects for
agriculture in the [Matanuska-Susitna] valley and "toward
Fairbanks."
3:33:29 PM
REPRESENTATIVE CHENAULT said the "first section came on line" in
1968, and "the second process came in the 70s." The bill
proposes to help bring back an aged facility that still has
meaning for the State of Alaska, and there will be about $275
million invested by the corporation that is looking to bring
this facility back up. It would supply about 140 high-paying
jobs that will go to Alaskans, he said. These were historically
Alaskan jobs, mostly based in the Kenai area, and 300 to 600
workers will be hired to get the facility back on line. "For
some reason, tax credits are bad in the State of Alaska now," he
said. The state has a revenue problem, and Alaska is deficit
spending, he explained.
SENATOR WIELECHOWSKI joined the committee.
REPRESENTATIVE CHENAULT said he would like to change "the tone
of this into a tone that is about the state collecting more
revenue." He stated that the gas is not under production, and it
will be a long time before gas on state leases is developed,
"and possibly never." The bill provides an avenue where the
state can help a corporation bring a facility back up with no
upfront money, he said. The company will not receive a dime of
credit until it is using gas, and it could bring in $15 to $18
million a year if it uses the amount of gas that it can use with
one train, he explained.
3:37:02 PM
CHAIR GIESSEL asked if the $15 to $18 million per year refers to
royalty or production tax.
REPRESENTATIVE CHENAULT said, "It's royalty gas." He believes
that Cook Inlet royalty is 12.5 percent and said the amount is
based on the gas that would actually be used at the facility.
SENATOR COSTELLO noted that the sponsor statement for HB 100
mentions that the arrangement is for a limited time.
REPRESENTATIVE CHENAULT said he believes the credit would be
available for 6.5 years and cannot be stacked or rolled to the
following year. If [the processing facility] continues to
operate, the state would receive the full amount, or $18
million, he explained.
SENATOR COSTELLO asked if the credits are carry forward.
REPRESENTATIVE CHENAULT answered no.
3:38:49 PM
SENATOR COGHILL asked how the percentage of ownership interest
in that particular facility fits into that equation.
DON BULLOCK, House Majority Staff, Alaska State Legislature,
Juneau, explained that there may be several owners of the
facility, "and that was just a means for proportioning the
credit among different owners."
SENATOR WIELECHOWSKI asked how much gas Agrium Inc. (Agrium)
will use each year.
REPRESENTATIVE CHENAULT said he has seen numbers between 26 and
28 billion cubic feet.
SENATOR WIELECHOWSKI asked if [legislative consultant, Janak
Mayer] voiced potential concerns "if this opens up about the
Cook Inlet supply."
MR. BULLOCK answered that consultants Janak Mayer and Nikos
Tsafos of enalytica have testified that the Cook Inlet market is
constrained. There are very limited exports; most of the market
is for limited commercial and consumer use. As a result, he
said, it is difficult to encourage more exploration and
development. The consultants said that value-added processing by
Agrium would be an incentive for more exploration, "which would
correspond with increases in royalties to the state and
ultimately more tax after the current limitations expire."
3:41:26 PM
SENATOR COGHILL asked if the credit is renewable.
REPRESENTATIVE CHENAULT said his understanding is that it is a
6.5-year credit.
SENATOR WIELECHOWSKI asked if Agrium had approached the Kenai
Borough about property tax relief.
REPRESENTATIVE CHENAULT answered that Kenai Peninsula is a
second class borough and does not have that power.
3:42:40 PM
CHAIR GIESSEL opened testimony for invited witnesses.
3:42:51 PM
STEVE WENDT, Manager, Agrium Kenai Operations, Agrium Inc.,
Kenai, Alaska, said Agrium Inc. (Agrium) is headquartered in
Alberta, but it has numerous U.S. operations. The corporation
produces and mines the three primary agricultural nutrients of
nitrogen, potash, and phosphate, and it sells the products
wholesale and retail worldwide. He said the [Kenai] facility was
built in 1968 by Unocal because of the large supply of Cook
Inlet gas, and Agrium purchased the facility in 2000 to produce
urea and ammonia. The facility sold products mostly to Asia and
the Lower 48, but a small volume was sold in Alaska, which can
enable better agricultural economics and food security, he
stated. He said Agrium had been a significant player in the
Kenai Peninsula Borough economy; it was its largest taxpayer and
contributed to local nonprofit organizations.
3:45:24 PM
MR. WENDT stated that there were "gas curtailments" in early
2002, and after exploring multiple opportunities for new gas
supplies, it was forced to close the plant in 2007. He said that
Agrium partnered with the Alaska Department of Labor by funding
a transition center in Kenai for laid off employees.
3:46:16 PM
MR. WENDT said that the Cook Inlet "renaissance" has opened the
possibility that Agrium could restart its facility, so policies
passed by the legislature have had their intended impact.
Because of the explorer tax credits, Southcentral Alaska has
more energy security with new discoveries of gas in Cook Inlet,
he stated. With Agrium as a consumer, he expects new production
to come on line.
ADAM DIAMOND, Manager, Government Affairs, Agrium Inc., Calgary,
Alberta, Canada, added that HB 100 is designed to protect
Alaska, because it does not require any out-of-pocket spending
to the state, and it does not impact any existing state revenue
streams. The bill does not require any upfront state obligation,
and Agrium will first be required to invest up to $275 million
to get the plant running before it will receive incentives. He
said that the bill includes a sunset provision, and credits
cannot be carried forward or transferred, ensuring that it will
always be revenue positive for the state.
SENATOR WIELECHOWSKI asked if Agrium can get property tax relief
from the Kenai Peninsula Borough.
MR. WENDT said the legal finding is that a second-class borough
is unable [to reduce property taxes].
SENATOR WIELECHOWSKI expressed concern about Agrium using 25
percent of the Cook Inlet gas supply. He said that the LNG
[liquefied natural gas] plant has acted as a buffer, where if
gas is needed [by utility companies], it would reduce its
production. He asked if Agrium would do that.
MR. WENDT said that prior to shutting down and Conoco taking the
role as the swing for utility usage, Agrium acted as the primary
player for 40 years, and it cut rates or shut plants down "when
utilities made that call." He said Agrium will always be last in
line, and the utilities will always be first.
3:50:12 PM
MR. WENDT said this is the only facility that Agrium has had to
shut down and lay people off, and Agrium does not want it to
happen again. There will be extreme due diligence before ever
starting it up. "They want to ensure gas reserves are there
first and foremost for the utilities, other industries, and,
finally, Agrium, for a minimum 10-year term," he stressed, and
that is a very difficult hurdle.
3:51:00 PM
SENATOR WIELECHOWSKI said the likely cost, according to the
fiscal note, will be $3 to $4 million per year, and it could go
up to almost $15 million per year-or twice that if there are
multiple trains. Typically, if a business needed tax relief, it
would open its books and show Alaskans why they should give up
millions of dollars each year. He said he would be open to the
relief if the corporation needed it. He asked if Agrium would
provide information on its rates of return and net present
values, with the tax relief and without it, so legislators can
see if the relief is really needed.
MR. WENDT said he could provide a current financial statement.
This is a very difficult project, and there is not "an extremely
high hurdle rate for projects, being in the agricultural sector,
but even so, commodity prices are down," including urea and
ammonia. He stated that this is a very difficult project, and $3
million is significant to the project and an opportunity for the
state to participate in opening the plant.
SENATOR WIELECHOWSKI noted that an Agrium financial statement
might not be that helpful, but he would like to see some
modeling based on rates of return and net present value.
CHAIR GIESEL asked Mr. Wendt to provide it to the committee.
3:53:31 PM
SENATOR WIELECHOWSKI asked about Agrium's history of local hire.
MR. WENDT replied that permanent, full-time employees will be
Alaskans, because workers have a week-on, week-off schedule, so
travel [outside] would be difficult. Additionally, Agrium
requires workers to be available for overtime during their weeks
off. He said that Agrium has a history of employing over 99
percent Alaskans "as far as our 140 are concerned." He said that
the company brings in specialty contractors, from time to time,
but it always has a long-term maintenance contract with a local
company.
MR. DIAMOND added that Agrium is considering a single train,
which will likely create 140 full-time jobs. During the 30-month
construction period, "we're looking at upwards of 400 direct
construction jobs," he stated.
SENATOR WIELECHOWSKI asked what gas price will make the facility
economic considering the higher price of Cook Inlet gas.
MR. WENDT agreed that [Cook Inlet gas] would be the costliest
gas the company will be buying, and it might be higher than what
competitors pay. The only way this project can work is that "the
iron is sitting there; the facility is there; we've kept it in
good shape." Gas price yesterday was $1.70, and that is why
state assistance is important, he stated.
3:56:05 PM
SENATOR MICCICHE joined the committee.
MR. DIAMOND said it would cost about $2 billion to build a new
facility, so the existence of the plant makes the idea viable.
SENATOR WIELECHOWSKI asked if there are big markets for Agrium's
product in Alaska and Asia and if being in the state has that
advantage.
MR. WENDT confirmed that transportation costs to Asia from
Alaska are favorable. Prices for Agrium's product are low, but
accessing the Asia market is advantageous.
MR. DIAMOND said Alaska's [market] will be a small percentage of
what Agrium produces, but when the plant shut down previously,
fertilizer prices in Alaska increased by a factor of four.
3:58:26 PM
CHAIR GIESSEL opened public testimony.
LANCE NELSON, Iron Workers Local 751, Fairbanks, Alaska, spoke
in support of HB 100. With a poor capital budget for the next
few years, this [bill] would be a bonus to the state. During
construction, there will be 200 people working six days a week
for $45 per hour, plus overtime, so there will be $630,000 per
week in payroll, and most of that would go back into the Nikiski
community. In the long term, maintenance jobs would employ 140
people, so 140 families would get good pay and hopefully good
benefits, he stated. "This is costing the state no money; it's a
little tax credit," he added.
SENATOR STOLTZE recalled that the facility had contentious labor
issues and "is maybe decertified." He asked Mr. Nelson if he has
expectations that the legislature does not know about. He added
that he had no position on the issue, but he is curious, and it
would be in the public's interest.
MR. NELSON said he could not speak about the company's past, but
he would just like to see Alaskan jobs for Alaskan families.
4:02:25 PM
THOM PELLEGROM, Cook Inlet Asset Manager, Peak Oilfield Service
Company, Nikiski, Alaska, spoke in support of HB 100. He said he
worked with Agrium before it shut down. The industry in Cook
Inlet is slowly fading with the [declining] price of crude, and
HB 100 is a job-creating bill. A year ago his company had about
525 Alaskans on the payroll, and now there are 220 with more
layoffs to come. He said Agrium is a great operator and treated
their people well.
4:04:43 PM
AARON PLIKET, President, Building and Construction Trades
Council of Southcentral Alaska, and Business Agent for Plumbers
and Steamfitters local 367, Anchorage, Alaska, said the Agrium
plant was put on the Kenai Peninsula for one reason: cheap and
abundant natural gas. Today the cheap, easy gas is gone, he
said, and when Agrium closed in 2007, he thought he would never
see it open. With new technology and the discovery of new gas,
he is more hopeful that the facility will restart. He said the
bill is about jobs, and it is important to look for ways to put
Alaskan to work, which will help keep a pool of skilled workers
in Southcentral Alaska and ready for the next project. He noted
that this is not the year to be talking about tax credits, but
this is different because it does not cost the state "unless
they use the gas," and then "they would pay the appropriate tax
assessment, creating revenue for the state." He said it is fair
for Agrium to ask for help in getting things going. Regarding
Senator Stoltze's comments, this is not a union/nonunion issue,
this is about jobs, he stated.
4:07:28 PM
PAUL GROSSI, Lobbyist, Plumbers and Pipefitters and Ironworkers,
Juneau, Alaska, said HB 100 is about jobs for us and revenue for
the state. No taxes are being paid now, so this is an
opportunity for the state to get additional revenue. The credit
is for 6.5 years, but construction will take 2 to 3 years, so
the tax credit is only for a few years. After that time, the
state will get royalties and taxes. "So is it really a tax
credit? I don't know," he said. It seems like the tax credit is
misnamed. He noted that future capital budgets will be very
minimal, and this is a way to help private industry and promote
jobs for Alaskans. The credit will soften the blow if there is a
recession. This is a value-added industry, and it is needed to
diversify Alaska's economy. He recalled the last recession when
construction workers left for the Lower-48. Some came back, he
stated, but the younger ones made a life someplace else, so the
skilled labor was lost. This project will bridge that gap "until
we get to the pipeline or some of these other large-scale
projects where we need the kind of talent that these people who
will be working on this project will provide."
4:12:57 PM
SENATOR STOLTZE said that in 1988 there was a jobs bill, and he
believes it was for under $10 million, and organized labor was
an enthusiastic supporter. He said, "You can't fight for a union
contract unless you create the job first, so I appreciate that
perspective." He said he will ask Speaker Chenault to fill him
in on the history of "some of the range wars."
4:14:24 PM
TOM BRICE, Business Representative, Alaska Laborers Local 341,
Anchorage, Alaska, said his group supports HB 100.
4:15:19 PM
MAX MIELKE, Business Manager, Plumbers and Pipefitters Local
262, Juneau, Alaska, testified in support of HB 100 and said,
"we are all about jobs, and these are probably going to be some
good Alaskan jobs," although he is not sure if his members will
have access to them. He said he is unsure of Alaska's future
beyond next year, which is a little scary, but he strongly
supports the bill.
4:16:13 PM
BRANDON MCGUIRE, Plumbers and Pipefitters, UA Local 367,
Anchorage, Alaska, said Agrium has the potential to have a
positive impact on Alaska's economy, because capital projects
are going to become scarce. Many Alaska construction workers
rely on capital projects. As part of his job, he said, he speaks
with skilled union and nonunion craftspeople. Both groups agree
on the need to work, and this project can employ a wide range of
labor for recommissioning the plant and for running it, he
stated. Giving a tax break comes at a time when Alaska cannot
afford it, but the return should allow the state to recoup much
more. The tax credit provides $3 million per year for about 10
years, and the return can be worth more than $17 million yearly.
He likened it to an investment return of several hundred
percent. He added that skilled labor "does not have the tendency
to sit around on its haunches and wait for something to happen;
the term 'baby boomers' did not come from people not willing to
work outside of their immediate region." He reminded the
committee that if there are no employment opportunities in the
state, people will move elsewhere. He said that he speaks with
people every day from different states who are willing to move
to Alaska. His fear is not that he will have to tell them that
he does not have anything now, but that it will be Alaskans
doing the same thing in the near future, he concluded.
CHAIR GIESEL said she will keep public testimony open.
4:20:29 PM
SENATOR MICCICHE said ratepayers are concerned about utilities
having an adequate supply of Cook Inlet natural gas.
MR. WENDT answered that Enstar just signed a contract with
Hilcorp "that provides them 70 percent" into March, 2023. He
said that Chugach Electric [Association, Inc.] has "100 percent
out through 2022; HEA [Homer Electric Association, Inc.] is
satisfied, I believe, through 2019." He said ML&P [Anchorage
Municipal Light & Power] just purchased properties from
ConocoPhillips, and he assumes it is satisfied for the near
term. He noted that prior to Agrium shutting down, it had the
role of "swing" and would cut rates or shut down when requested
by the utilities. He said that "without question that's what we
would do, and we would expect to do the same in the future."
This is the only facility Agrium has ever shut down, and Agrium
will not be put in the same position of having a fully staffed
plant with no gas. He explained that Agrium is setting high
standards of due diligence and requiring proven reserves for at
least ten years for utilities, other industries, and for Agrium.
"If we can satisfy all of that, then we will go ahead and fund
this project," he stated.
SENATOR MICCICHE said his first oil field job was at Agrium. The
community misses the company, which was generous, and Agrium
retirees are still active in the community. When the facilities
shut down, "the really quality oilfield service providers go
away," which makes it more expensive for the utilities. It takes
more than one "employee unit" to do a job when the employees are
newer and less experienced, he said, and the cost to our
ratepayers "becomes significant." He asked about balance: "We
really have too little for starting up all of the facilities but
too much to keep oil and gas companies looking hard in Cook
Inlet." He asked how "that 80 million-a-day demand" would affect
exploration and development in Cook Inlet.
4:25:35 PM
MR. WENDT answered that incentives have resulted in numerous
significant discoveries of gas. Agrium is working with all
producers in the inlet, and it has seen a lot of confidential
information. There have been several significant discoveries, he
said, but they won't be delineated and developed without a
market. Agrium will provide a summer season [of demand], which
is lacking now. The extremes in the utility market make things
difficult for producers, he explained. Agrium will help the
discoveries be developed.
SENATOR STOLTZE said he did not hear mention of the Matanuska
Electric Association, which is a major customer of Hilcorp.
MR. WENDT apologized for that oversight but said he is not as
familiar with its contract situation.
SENATOR STOLTZE said it [serves] about 130,000 people. He asked
about emergency storage.
MR. WENDT explained that the ConocoPhillips LNG facility next
door has acted as "swing" during the summer. "We understand that
utilities will always come first."
4:29:19 PM
SENATOR STOLTZE said that the previous mayor of Anchorage had a
proactive energy policy committee, and he asked if it continues,
or "did that go by the way, so we could spend more time on
diversity?"
MR. WENDT said he was not familiar with an energy committee.
SENATOR WIELECHOWSKI said the oil and gas industry testified in
the House that if tax credits decline in Cook Inlet there will
be decreased investment.
MR. WENDT said he agrees. Tax credits in Cook Inlet need to
remain for two years for the Agrium project to be viable. More
than one producer has told him that. He said Agrium might be
able to assist in reducing those credits once it is operating,
he added.
SENATOR WIELECHOWSKI asked if Agrium's position is that oil and
gas tax credits in Cook Inlet must remain for two years.
MR. WENDT said he was not familiar with all credits, but the
producers have said that the credits that do not expire in 2016
need to remain for two years to make their projects viable.
SENATOR MICCICHE said he managed the [Agrium] facility for many
years, and Mr. Wendt is used to dealing with him.
4:32:33 PM
CHAIR GIESSEL held HB 100 in committee.