Legislature(2009 - 2010)
04/16/2010 02:55 PM Senate FIN
| Audio | Topic |
|---|---|
| Start | |
| HB126 | |
| HB184 | |
| HB421 | |
| HB412 | |
| HB226 | |
| Presentation by Dnr on Agia Regulations | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CS FOR HOUSE BILL NO. 226(TRA)
"An Act renaming Seldon Road and that portion of
Bogard Road that extends between Palmer and Meadow
Lakes as Veterans' Way."
3:25:12 PM
REPRESENTATIVE WES KELLER discussed the legislation as an
opportunity to honor veterans. He described the need for
the signage as the current situation proves confusing to
drivers.
Co-Chair Stedman mentioned the fiscal note from Department
of Transportation and Public Facilities for $8,500 in
general funds to install signs.
Senator Huggins supported the legislation and spoke to the
popularity of the bill.
3:27:14 PM
YUKON TANNER, TALKEETNA, VETERANS AND FAMILY (via
teleconference) stated that the opportunity to rename the
signs on the street was supported by the community. He
noted further support from the veterans.
Representative Keller affirmed the positive support for the
legislation expressed to him during his travels between
Palmer and Meadow Lakes.
HB 226 was HEARD and HELD in Committee for further
consideration.
3:29:05 PM AT EASE
4:07:27 PM RECONVENED
^Presentation by DNR on AGIA regulations
KEVIN BANKS, DIRECTOR, DIVISION OF OIL AND GAS, DEPARTMENT
OF NATURAL RESOURCES, explained that the presentation
includes regulations regarding oil and gas and the Alaska
Gas Inducement Act (AGIA) as a potential inducement for the
calculation for the royalties for oil and gas. The
presentation includes regulations designed to establish
value for natural gas and other royalty issues. He stated
that he had colleagues available to answer questions. He
spoke to the challenges in statute and regulations.
4:11:48 PM
Mr. Banks began with the "Proposed AGIA Royalty
Regulations" (copy on file). He presented the overview
beginning with Slide 3, "Overview of the AGIA Royalty
Regulation."
zPurpose of the regulation is to make offer to modify
state lease contracts, consistent with requirements of
the Alaska Gas Inducement Act (AGIA)
zEstablish method to determine "fair market value"
(FMV) of the state's royalty share of gas
production that increases clarity and
predictability of royalty value
zEstablish terms under which the state will modify
its ability to exercise current rights to switch
between taking royalty in value (as money) or in
kind (as gas), that reduces lessees exposure to
stranded or insufficient transportation
zLessee who qualifies for royalty inducements can
elect either (or both) Valuation or Royalty
Switching provisions
4:15:33 PM
Mr. Banks continued with Slide 4: "Requirements in AGIA"
zValuation regulations must:
zMinimize retroactive adjustments in royalty value
zEstablish FMV based on reliable trade
publications
zAllow reasonable and actual deductions for
transportation and processing
zAllow for reasonable share of unused capacity
zAllow deductions under the 1980 settlement
agreement
4:18:44 PM
Mr. Banks addressed Slide 5: "Dynamic North America Natural
Gas Market" He explained that oil travels down a pipeline
and is evaluated at "pump station one," Valdez, or
refineries on the west coast. The oil values are reported
effectively. He noted that the North Slope adds complexity
with the assumption that the gas will flow into Alberta. He
noted that the gas might bypass Alberta to go into the West
Coast. He pointed out that other areas exist within the
pipeline system to capture value for the purposes of
calculating royalty and to provide relevant and correct
transportation tax deduction. Thirty years ago, gas in the
United States was under strict regulation by the federal
government. He spoke of a current liquid market for gas
throughout the country. He observed that the market of the
changes include the development of a royalty system that
captures enough flexibility and allows for understanding of
the expectations.
4:22:10 PM
Mr. Banks described Slide 6: "Overarching Principles"
1. Reduce lessee uncertainty
2. Maintain state's full royalty value
3. Incorporate natural gas industry practices to the
extent doing so is consistent with (1) and (2)
He stated that the lessees account for royalties using the
same accounting systems and marketing tools already
established. He explained that a prediction of the
royalties is not possible.
4:24:29 PM
Mr. Banks discussed "Overarching Principle: Reduce
Uncertainty" on Slide 7.
· Eliminate "higher-of" lease valuation terms
· Establish value based on published prices
· Minimize or eliminate retroactive adjustments
· Allocate volumes Pro rata to increase clarity of gas
value and costs of transportation and processing
Mr. Banks elaborated on the various slides. The published
prices will be a mechanism to capture full fair market
value. He commented on the need for regulations to allow
updates of the price publications, destination markets, and
location differentials as the market evolves.
4:27:31 PM
Mr. Banks elaborated on Slide 8: " Overarching Principle:
Full Value Under Lease"
z"Full Value" without gross proceeds
Gas components are valued for residue gas, gas
plant products, unprocessed gas, LNG
Published prices in destination markets establish
value
Ability to update price publications, destination
markets, location differentials
Valuation backstop "basket" ensures
unrepresentative destination market published
price doesn't distort reasonable value
No negative royalty
Pro rata allocation of value and costs back to the
lease establishes fair distribution and ensures full
value
4:29:31 PM
Mr. Banks Slide 9: "Overarching Principle: Incorporate Gas
Industry Practices"
zUse well established regulatory structure and
methodology where practical to determine
transportation costs (i.e. FERC)
zIncorporate use of published indices based on
commercial practices
zUsed elements of MMS regulations
Used as baseline; modified where necessary to
reflect differences in circumstances of Alaska
project
North Slope producers have extensive experience
in complying with MMS gas regulations in Lower 48
FRED HAGEMEYER, MANAGING DIRECTOR, BLACK AND VEATCH CORPS,
discussed Slide 10: "Key Valuation Concepts and Approaches"
1. Destination where gas is valued
2. Publishing value at destination
3. Backstop measure of FMV for residue gas
4. "Actual and reasonable" transportation and processing
deductions
5. Appropriate deductions for unused capacity
4:33:09 PM
Mr. Hagemeyer commented on Slide 11: "How to Determine
Destination"
zA lessee's gas is valued for royalty at "Destination"
zA lessee's qualified gas is generally considered to be
at "Destination" when it first:
1. Enters a first destination market;
2. Has been sold in an arm's length
transaction; or
3. Has been processed to extract residue gas
and gas plant product
z"Destination values" are determined with reference to
"first destination markets"
zFirst destination market is the first liquid market
where ANS gas is physically transported to and bought,
sold, processed, or regasified that has a reliable and
widely available published price
4:34:20 PM
Mr. Hagemeyer discussed Slide 12: "Department to Publish
Information Necessary to Determine Destination Value"
zThe department will publish on its website prior to
the royalty reporting period:
zThe location of all First Destination Markets
zThe name of the source of the published price for
residue gas, gas plant products at the First
Destination Market
zAppropriate location or quality differentials to
establish FMV with reference to First Destination
Market
zReasonable gas treatment, processing, or re-
gasification cost allowances
4:36:15 PM
Mr. Hagemeyer discussed Slide 13: "Alternative Destination
Value for Residue Gas"
zBasket of published indices used to calculate a
"backstop" fair market value to published index prices
at destination markets
zBasket is relied upon only when the published price at
a destination market is less than 95% of the basket
price; i.e. a safety valve
zThe alternative destination value protects the State
from being locked in to a valuation rule that fails to
reflect fair market value
zPricing elements making up the basket determined by
market liquidity criteria
zBasket reflects the volume weighted average of value
received by the market.
4:37:44 PM
Mr. Hagemeyer discussed Slide 14: "Actual and Reasonable
Cost of Transportation and Processing- Non Arms Length
Transactions"
zNon-arm's length transportation cost allowance for
Alaska and Canadian mainline is based on the terms
proposed in the Open Season offer
zIf affiliated lessee negotiates a lower rate,
then the transportation cost allowance will be
based on this negotiated lower rate
zOther pipelines - Cost deductions calculated using
FERC based cost of service methodology
zGenerally follow MMS methodology to establish non-
arm's length processing deductions
4:39:13 PM
Mr. Hagemeyer discussed Slide 15: "Deductions for Unused
Transportation Capacity"
zUnused capacity deductions were designed to balance
the need to mitigate producers risk, but not expose
the State to bearing unintended costs
zDeductions are allowed for Unused Capacity on Alaska
and Canadian mainlines
zUnused Capacity = Allocated Capacity - Allocated
Shipments
zAllocated Capacity - Portion of firm
transportation capacity acquired by lessee in
first binding open season to transport production
from state leases; measured with reference to
actual state lease production
zAllocated Shipments - greater of shipments of
production from state leases or a pro-rata
allocation of total shipments from all sources
4:40:46 PM
Mr. Hagemeyer acknowledged Slide 16: "RIK/RIV Switching
Issue"
zUnder lease the State has the option of taking its
royalty share of production either in kind (RIK) or in
value (RIV). This option creates a risk for shippers.
zIf the State switches from RIV to RIK, shippers
may have stranded capacity corresponding to the
royalty volumes
zIf the State switches from RIK to RIV, shippers
may not have sufficient capacity on a timely
basis
zAdditionally, shippers' marketing arrangements
need to be reconciled with the State's RIK/RIV
election
zGiven the substantial tariffs on the Alaska project,
the potential exposure associated with the State's
RIV/RIK option is significant
4:42:27 PM
Mr. Hagemeyer noted Slide 17: "RIK/RIV Solution: "Capacity
Follows the Gas"
zSwitching from RIV to RIK:
zState obligated to seek capacity corresponding to
the State's RIK share ("RIK Capacity") from the
Producers via a pre-arranged deal
zReleased capacity will be acquired at original
contract rates (state forgoes opportunity to get
a better deal)
zSwitching from RIK to RIV:
zCapacity corresponding to the State's RIK share
("RIK Capacity") reverts back from the State to
the Producers at contract rates
zState requested and FERC approved a waiver to allow
pre-arranged deals for FT capacity at contract rates,
consistent with these terms
zIncrease notice period for RIK/RIV switching
z120 days when between 100,000 & 200,000 MMbtu/d
z180 days when quantity is greater than 200,000
MMbtu/d
4:45:18 PM
Mr. Hagemeyer detailed Slide 18: "Value of Royalty
Inducement to Producers"
zThe AGIA regulations provide value to producers while
protecting State interests
zSome of the key provisions that provide value to
producers include:
zValuation - moving away from "higher-of"
provision
zTransportation -
zAdopting FERC-like approach for
transportation deductions, rather than MMS-
like approach
zAllowing deductions for unused capacity
zRIK/RIV switching - FERC waiver allows capacity
transfer deal at contract rates
4:47:54 PM
Mr. Banks discussed Slide 19: "Aggressive Assumptions were
made to Establish Upper Bound of Value to Producers"
zRecognize that the value of and need for these
provisions may be lower depending on the facts of the
project going forward:
zMethane valuation - Assumed impact of moving
away from "higher-of" provision is not offset by
market basket concept
zTransportation deduction for non-arm's length
transactions - Assumed that alternative was MMS
methodology
zUnused capacity deduction - Assumed that no YTF
gas is found
zRIK-RIV switching - Assumed that entire royalty
volume is switched from in-value to in-kind
zVery approximate estimates of the value to producers
from provisions in the 1980 Royalty Settlement
Agreement have also been shown here to provide a more
complete picture of royalty value to producers
4:52:41 PM
Co-Chair Stedman wished to communicate the amount of money
discussed and the potential liability exposure.
Mr. Hagemeyer noted that the assumption shown on Slide 20:
"Estimated Value or Range of Value to Producers from Key
Provisions in AGIA Regulations and 1980 RSA." The
assumption is that the state takes the RIK for the entire
25 year period without a waiver or regulatory element. The
exposure exemplified in the graph is to the producer with
RIK RIV switching.
Mr. Hagemeyer noted that the exposure to the producer could
equal either zero or $17 billion. He spoke to the agreement
that fuel cost allowances, gas treatment plant allowances,
and the central compressor plant allowances combined over
twenty five years equal $6 billion. He highlighted that the
calculation encompasses 25 years. He pointed out that the
assumptions are aggressive.
4:56:17 PM
Mr. Banks clarified that "higher up" is a retroactive
calculation involving auditing to capture the "higher up"
value. Transportation deduction is a comparison of a
methodology. He estimated that approximately 127 trillion
cubic feet of undiscovered economically recoverable
reserves exist on the North Slope, which means that if any
gas is found the number for unutilized capacity is altered.
Co-Chair Stedman clarified that the RIK-RIV switching is on
the industry side of the ledger with a $7 billion exposure
to the state. Mr. Hagemeyer agreed, in a worst case
scenario.
4:58:49 PM
Co-Chair Stedman asked about the mid-range expected. He
referenced Slide 16 and asked about the comment regarding
significance to switching. He asked if the industry's
liability was $17 billion. Mr. Hagemeyer clarified that the
reference on Slide 16 exhibits the exposure to the
producer.
Mr. Banks pointed out that it is as if one eighth of the
pipeline is empty regarding the industry's exposure. He
explained that the state's royalty share equals one eighth
of total production.
5:01:10 PM
Co-Chair Stedman asked for an estimation of current gas
consumption with five hundred as the royalty share. He
estimated that the current natural gas consumption in Cook
Inlet is 250 million cubic feet per day. He advocated for
in-state development of our gas resources.
Co-Chair Stedman stated that 500 is a large amount of gas
for the state. Mr. Banks agreed.
Mr. Banks pointed out that RIK oil is not sold in spot
sales as long term contracts are preferred allowing for the
development of local refineries.
Co-Chair Stedman asked if the regulations lock the state
down under AGIA. Mr. Banks responded that the
transportation deduction might provide an entitlement in
terms of an interpretation of actual and reasonable.
Co-Chair Stedman asked about a deadline of May first
regarding regulations. Mr. Banks responded that the comment
period is over and the regulations will be published by the
end of the open season. Co-Chair Stedman asked if the AGIA
lock down date was May first. Mr. Banks did not agree. He
explained that regulations must be promulgated during the
open season.
Co-Chair Stedman asked if the tax structure is locked down
in statute instead of the regulations. Co-Chair Stedman
asked how confident Mr. Banks was about his answer. Mr.
Banks responded that he would return to the committee with
a confident answer.
Co-Chair Stedman understood that regulations allow the
ability to expose the state to billions of dollars and lock
the state down.
5:06:20 PM
Mr. Banks responded that commitments are defined in the
regulations. The access to the regulations is made in the
open season commitments. The lessee is required to provide
an open bid in the open season to have a precedent
agreement within 120 days. The lock down occurs in the
acceptance of the state's offer. The qualification for the
offer is defined in the regulations. The transportation
services agreements allow for the open season and the
regulations accepted in the offer. The qualification for
the offer depends on the commitment to the pipeline.
Co-Chair Stedman clarified that the lock down is a
contractual bind beginning on May first, but there may be
ability for the state to change the regulations in
September. He expressed concern about the ability to expose
the state to up to $7 billion without much input from the
legislature. When low gas and high oil prices occur, a
substantial offset to our revenue stream exists. He claimed
that he asked to have a cash flow analysis run regarding
expected outcomes for the state. He requested a net cash
flow analysis for a worst case scenario. He stressed that
the policy calls were sizeable.
Mr. Banks stated that there is an approximate indication of
the cash flow analysis in the graph shown on Slide 20.
5:09:51 PM
Mr. Banks noted the consequences of making decisions during
the development of regulations designed to strike middle
ground. He cited fiction in the valuation number because of
the assumption that the state will acquire greater than
fair market value.
Co-Chair Stedman stated his concern involving $7 billion of
exposure without any state input. He discussed the idea of
a cash flow analysis for the state. He asked about the net
cash flow in the worst case scenario. He expressed great
concern that $7 billion is a sizable policy call.
5:12:48 PM
Co-Chair Stedman voiced that the legislature was not privy
to the full exposure of the treasury. He observed that the
presentation included only small snapshots of the analysis
run. He stressed that his comfort level with the
information provided is low.
5:15:09 PM
Co-Chair Stedman alleged that the legislature receives only
bits and pieces of information from the administration. He
asserted that the state might face a fully subscribed
gasline while the ability to maneuver under AGIA remains
restricted.
Mr. Banks responded that if the department was attempting
to obscure the downside risk assumed by the state, he would
not have offered the presentation. He noted the regulations
mitigate for a balance and resolve the exposure problem for
the companies. He did not believe that the presented
assumptions would be the outcome. Co-Chair Stedman
responded that worst case scenarios occasionally
materialize. He wished to see a worst case scenario run on
the proposal.
Mr. Banks commented on past proposals. Co-Chair Stedman
added that the past proposals were thoroughly discussed
with the legislature. Mr. Banks clarified that the current
proposal was to build a pipeline as opposed to merely
planning one.
5:20:46 PM
Senator Thomas asked about the mitigating factors on Slide
17. He asked about the assumptions regarding the reasons
for switching that led to the chart on Slide 20. Mr.
Hagemeyer explained that Slide 17 explains the actions to
mitigate the risk perceived by the producers. He continued
that Slide 20 suggests the potential of a lack of
mitigation of risk.
Senator Thomas asked about the concerns regarding the
reasons for switching and its frequency. Mr. Banks
responded that concerns raised include unused capacity.
Another concern was that a producer may have midterm or
long term contract commitments and gas taken in the form of
RIK would compromise those commitments.
5:24:36 PM
Co-Chair Stedman appreciated the presentation. He
maintained that the magnitude of the state's exposure must
be discussed. He stressed the hope for a gasline and a
successful open season. He hoped for the success of AGIA,
but wanted to ensure ample revenue.
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