Legislature(2015 - 2016)BILL RAY CENTER 208
05/28/2016 10:00 AM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| HB246 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 246 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 246-AIDEA: FUNDS; LOANS; PROGRAMS; DIVIDEND
10:09:54 AM
CO-CHAIR NAGEAK announced that the only order of business would
be HOUSE BILL NO. 246, "An Act creating the oil and gas
infrastructure development program and the oil and gas
infrastructure development fund in the Alaska Industrial
Development and Export Authority; relating to the interest rates
of the Alaska Industrial Development and Export Authority;
relating to the sustainable energy transmission and supply
development and Arctic infrastructure development programs of
the Alaska Industrial Development and Export Authority; relating
to dividends from the Alaska Industrial Development and Export
Authority; and adding definitions for 'oil and gas development
infrastructure' and 'proven reserves.'"
10:10:23 AM
CO-CHAIR NAGEAK opened public testimony on HB 246.
10:10:37 AM
KARA MORIARTY, President/CEO, Alaska Oil & Gas Association
(AOGA), testified that AOGA is opposed to HB 246 even though the
bill seems like a good idea on the face of it. She said AOGA is
a diverse group of members, ranging from producers and explorers
to refineries and pipeline companies. Despite the challenges
the industry has been facing the past few years, none of AOGA's
members has ever voiced concern about a shortage of state loans
to weather this downturn. She questioned why state loan
programs would be expanded when there is not a clear unmet need.
MS. MORIARTY recounted that AOGA as well as individual active
explorers and producers across Alaska have testified repeatedly
that the incentives and tax policies Alaska already has are
working and doing exactly what they were supposed to be doing.
They are accomplishing the very intent set out for HB 246
outlined in the Alaska Industrial Development and Export
Authority's (AIDEA's) presentation dated March 16, 2016. For
example, a slide in that presentation talks about AIDEA's intent
for the bill and the current system is already accomplishing
that. The current system is attracting small- and medium-sized
companies to Alaska, production has increased from last year to
this year, and new fields have come online. The current system
is attracting new investment, resulting in more jobs, more
production, and even more state revenue than there would have
been without that investment. Utilities have testified that
increased investment and production have resulted in short-term
energy supply contracts for Southcentral Alaska.
10:12:58 AM
MS. MORIARITY stated that, when necessary, small producers have
secured existing loans from third-party lenders and these third-
party [loans] were typically designed to cover the producer's
portion of development costs that would be in addition to the
amounts funded by the current tax credit laws. Even if more
state loans were beneficial for the state, the state would be
taking on greater risk about the creditworthiness of borrowers
and the soundness of the loans, she posited.
MS. MORIARITY said AOGA believes HB 246 is especially flawed in
its [proposed] definition of "proven reserves" under Section 13.
She related that the Securities and Exchange Commission (SEC)
has spent years developing a definition of "proven reserves"
that would work with respect to honest "proven reserves" and
that would prevent folks from scamming the public with oil and
gas "prospects" with no reserves or without any truly "proven"
ones as industry uses that term. This is said without intent to
disparage the character or motives of anyone who has been
supporting HB 246, she continued, rather AOGA wants to point out
that if the definition of "proven reserves" is not right and is
not consistent with the Securities and Exchange Commission
(SEC), folks could come to Alaska to try to borrow from AIDEA
with their own version of "proven reserves" as collateral. If
the state is going to make any of these loans at all, AOGA
believes the state must use the same definition that the SEC has
developed, which would also let the SEC investigate and
prosecute suspected abuses which would save the state money
because it would not have to hire state inspectors or
prosecutors to do it.
MS. MORIARITY concluded her testimony by urging that the state
retain its current fiscal system versus creating a new and
expanded loan program. Why create a new program when the
current system is already achieving the desired results of the
proposed oil and gas investment fund, she reiterated.
10:14:54 AM
REPRESENTATIVE HERRON requested Ms. Moriarity's opinion about
whether companies would utilize this legislation if it were to
become law.
MS. MORIARTY responded that it is hard to answer until it is
known exactly what the terms would be. There could be limits on
the loans as well as anything over a certain amount that would
require legislative approval, which does not provide a level of
certainty for the loan. She said it is too soon to tell, but
opined that the current system is working.
10:15:47 AM
REPRESENTATIVE TARR inquired whether when stating "the current
system" Ms. Moriarity is meaning the items that are proposed in
HB 247 in addition to this proposed concept of a loan program.
MS. MORIARITY replied that AOGA is saying the state already has
a fiscal system in place that is attracting new companies and
increasing production. She said AOGA suspects what the state
may do is use loans versus the current system of incentive
credits and AOGA does not know why the state would replace one
with the other when the state already has a system that it knows
is achieving the results that it wants.
REPRESENTATIVE TARR noted that AIDEA is currently making loans
to oil and gas infrastructure projects. On its own, HB 246
would set aside a fund that could do essentially the same thing
that is being done with AIDEA dollars, but just not run into the
problem of getting proportionally out of sync with the other
sectors that AIDEA is also supporting. She requested Ms.
Moriarity to comment on the bill as a stand-alone concept and
whether AOGA is opposed to what AIDEA is doing currently by
providing oil and gas infrastructure loans or the proposal to
have its own fund.
MS. MORIARITY answered that one AOGA member has a small AIDEA
loan, but it is not something that has been utilized very often.
Most of the time companies are securing loans and private
capital, so the AIDEA loan was something that BlueCrest Energy,
Inc., decided to do; however, it is not necessarily something
that the rest of AOGA's member companies utilize on a frequent
basis. The state already has the capacity to offer loans if
that is something the industry so desires and AOGA doesn't see
how an expanded loan program would be beneficial for the state.
Depending on how the bill passes, individual companies would
decide what to do. While a few loans are out there now, the
majority of AOGA members are not clamoring for more state loans
to help them in this downturn.
10:18:57 AM
REPRESENTATIVE JOSEPHSON related that the administration has
indicated for a second year in a row that it may not support an
appropriation of the entire amount due on the credit system
being talked about by Ms. Moriarity. If that happens and the
administration effectively gives an IOU, he asked how that would
compare to the level of certainty that AOGA's member
organizations are looking for.
MS. MORIARITY replied that that obviously does create a level of
uncertainty when investing state money in the industry whether
it is through the state's current system of credits or a loan
program. Why would the state expand a loan program when it
knows the credit system is already achieving the desired
results? Obviously [AOGA] would like to have certainty, but
[AOGA] is just testifying on the concept. As currently drafted
the bill has a very serious fatal flaw and folks may not even
apply for loans based on the current definition of proven
reserves, because it is not consistent with how companies
currently determine their reserves for SEC purposes.
10:20:42 AM
REPRESENTATIVE TARR observed that page 7, line 17, of the bill
talks about the reserves and that page 8, lines 3-4, state, "a
process for confirming the existence of proven reserves
sufficient to authorize financing". She posited that it does
not seem like it would be an insurmountable problem to have
those definitions be more in line. Regarding the definition of
"proven reserves" on page 8, line 31, she inquired whether Ms.
Moriarity could provide the committee with the language that Ms.
Moriarity is referring to.
MS. MORIARITY agreed to follow up with the requested information
so that it is consistent.
10:21:42 AM
REPRESENTATIVE CHENAULT, regarding AIDEA's classifications and
existing percentages of money in the current pool of dollars
available for loans, understood that about 14 percent was loans
to either oil and gas support or oil and gas companies. But, he
added, he does not know what the loan amounts are. Because
[AIDEA] is concerned that it is starting to get heavily weighted
into the oil and gas industry, there is apparently some interest
in those type loans. It seems this would be more of a tool in a
tool belt so that if an industry player decided it wanted to
look for capital this would be another option for them to look
at capital. It may not be the best option for the company, but
it certainly would be another option. He understood that the
folks at AIDEA and the Department of Commerce, Community &
Economic Development (DCCED) are concerned about going beyond 14
percent of the pie to one industry. Given today's [low oil
prices], he allowed AOGA members are not real interested in
going out for loans of any kind unless they are absolutely
necessary. He said he is not asking a question of Ms. Moriarity
but just stating how he sees what is going on with this proposed
loan application.
10:23:57 AM
REPRESENTATIVE JOHNSON recalled from the bill's first hearing
that it is kind of designed as a replacement for the tax credits
in anticipation of changes to [Senate Bill] 21 [the current law
passed in 2013, Twenty-Eighth Alaska State Legislature. So, he
continued, he does not disagree with Ms. Moriarity's assessment
that it is off the mark. He understood AOGA's concerns, but
said he does not think this would replace the credits that are
in the existing program and he is unsure how long the existing
program can survive.
10:25:01 AM
REPRESENTATIVE HERRON referred to the document in the committee
packet from AIDEA entitled, "Proposed ways to address concerns
expressed on HB 246". He asked whether Ms. Moriarity is aware
of this document and specifically Concern 3.
MS. MORIARITY responded that she distributed the document to
AOGA's member companies early this morning, but has not yet
heard back from anyone so cannot yet speak specifically.
Regarding the definition of "proven reserves" in Concern 3, she
said the administration's recommendation is still not consistent
with what is already currently used. She reiterated that she
will provide language to the committee that will be consistent
on "proven reserves and will get back to the committee regarding
the rest of the document.
10:26:27 AM
CO-CHAIR NAGEAK ascertained that no one else from the public
wished to testify on the bill.
10:27:07 AM
FRED PARADY, Deputy Commissioner, Office of the Commissioner,
Department of Commerce, Community & Economic Development
(DCCED), noted he serves on AIDEA's board as designee for the
DCCED commissioner. He said the origination of HB 246 came from
the AIDEA board meeting where it reviews the "dashboard" of its
loan portfolio and the board's concern with overweighting into
the oil and gas sector. While [AIDEA] has not reached a firm
conclusion as to whether that number is 14, 15, or 20 percent,
he advised that it is a concern when 15 percent of a portfolio
is in a single sector. The only other portfolio approaching
that is mining, which is the Ambler investment dating back 20-
plus years and is a stable, long-term income producer to AIDEA.
The bill would provide a tool in AIDEA's toolkit irrespective of
the tax credit issue.
10:28:08 AM
GENE THERRIAULT, Energy Policy and Outreach Director, Alaska
Energy Authority (AEA), Alaska Industrial Development and Export
Authority (AIDEA), Department of Commerce, Community & Economic
Development (DCCED), reiterated the concern is that that segment
of the pie becomes over-weighted and because oil and gas lending
is a little bit riskier it starts to impact the rest of the
lending to other sectors. The legislation would not create a
new source of lending, but would allow the existing type of
lending to continue given the concern that the portfolio may be
getting tapped out.
MR. THERRIAULT, in regard to valuation of the reserves, stated
that companies may have to adhere to SEC rule when selling stock
and ensuring the proper valuing of the company for the purpose
of selling stock on the open market. However, he pointed out,
what is being proposed in HB 246 is just a means by which AIDEA
would internally evaluate the value of a reserve, if those
reserves are to be part of the collateral that is offered for a
loan. He said AIDEA is open to suggestions for a revised
definition that would be potentially acceptable to the
companies. He explained that AIDEA tried to come up with a
definition that was conservative so as to not place more value
on a potential reserve than it should have, the effort is to err
on the side of caution.
10:30:24 AM
REPRESENTATIVE CHENAULT understood, then, that proven reserves
would only come into play if the corporation wanted to use that
as collateral for the actual loan versus some other mechanism
that the corporation may have, such is above ground equipment.
MR. THERRIAULT answered that there are two issues where reserves
would come into play. First, the lending is only supposed to be
done for infrastructure to actually bring to market proven
reserves. So AIDEA has to know that there is actually a
resource there of a size and quantity that can actually go to
market. Then, as the lending is being contemplated and AIDEA is
trying to collateralize the loan, the main collateral would be
the infrastructure itself - the machinery, the value of the
gravel pad, the camp, and so forth. Also, a component can be an
overriding royalty interest (ORRI) in the reserves themselves.
He reminded members about yesterday's conversation regarding
over-collateralizing the loan just to be on the conservative
side, and said the value of the reserves themselves plus the
value of the equipment that is actually being loaned on can be
put together to provide good solid collateral for the loan.
10:32:00 AM
REPRESENTATIVE HERRON referred to the amendment proposed for
Concern 3 at the top of page 2 in the document, which states in
part: "... the proven reserves shall be reduced by ten percent
in calculating the value of the proven reserves ...." He asked
what the magic is about 10 percent.
MR. THERRIAULT replied the 10 percent is a reduction of the
estimated volume and then the language that follows that
reduction is the calculation of the price that would be applied
to that reduced value. This is to err on the conservative side
so that more value is not placed on that overriding royalty
interest (ORRI) than really could present itself in the future
if AIDEA had to call on that as part of the collateral.
10:33:16 AM
REPRESENTATIVE JOHNSON inquired whether AIDEA would rely on the
Alaska Oil and Gas Conservation Commission (AOGCC), or someone
else, or AIDEA internally to determine the proven reserves. He
surmised that a SEC definition would clearly define proven
reserve and so AIDEA would not have to go through that, but if
it is not the SEC definition then AIDEA would need some
definition to verify the reserve data.
MR. THERRIAULT responded that AIDEA would certainly use the
resources of the state - the Division of Oil & Gas and AOGCC.
Also, the bill would allow AIDEA to hire consultants with
specific expertise on an as-needed basis.
10:34:23 AM
REPRESENTATIVE SEATON stated he is concerned about proven
reserves and the economics of those proven reserves, because the
economics of a project within a portfolio or a company could be
advantageous even if the economics as a stand-alone might not
be. He said he wants to ensure the definition includes the
economics of the project as a stand-alone project unless AIDEA
would be getting the collateral of the entire company's
portfolio, because it could be a situation of being a long ways
away. He recalled that the committee has looked at making sure
the gross value at the point of production is not below zero for
tax purposes. While that might be a beneficial part of a
company's portfolio, that could not stand alone economically if
AIDEA were financing 50 percent of a project. He urged that
this be worked into the proven reserves portion so it is not
just the Alaska North Slope (ANS) West Coast (WC) value of
proven reserves. He noted that yesterday AIDEA indicated it
would take that into consideration in the redefined definition.
MR. THERRIAULT answered that he has posed the question to the
Department of Law and is awaiting a response. He reiterated
that the proposed definition would reduce the estimated volume
by 10 percent and then the value of the proven reserve would be
calculated. He explained how the value would be calculated:
right now the price of oil is $50 per barrel on the West Coast;
but, the barrel being talked about is 2,000 feet underground on
the North Slope; so, the cost of getting that oil to the surface
and transporting it to the market would be deducted when
calculating the value of that barrel of oil in the ground in
that particular field. So, all of those production costs would
be subtracted out.
MR. PARADY pointed out that there is a distinction here: in
speaking of proven reserves, it is dealing with a
collateralization on evaluation of collateral; the actual
decision-making process relative to the loan is embedded in
slide 13 [of AIDEA's 3/16/16 presentation titled, "AIDEA Oil and
Gas Infrastructure Development Fund HB 246"].
10:37:30 AM
REPRESENTATIVE JOHNSON, in regard to a worst case scenario of
bankruptcy, recalled AIDEA's claim that it had no losses with
Buccaneer because AIDEA got back its $5 million. But, there was
$3 million in interest that was never paid. The state made out
okay but the private sector did not fare so well in that
bankruptcy, so at best it was a tie and maybe a loss for the
economy. He further recalled AIDEA talking about some kind of
surety bond and inquired whether there is any way in this loan
process to guarantee that the private sector that is invested in
this also has a position that is somehow protected. For
example, AIDEA's 700,000 shareholders are part of this and own
part of this company and those shareholders got stiffed for $3
million on the Buccaneer deal. In addition to protecting
AIDEA's shareholders, he further asked whether there is a way to
protect the people involved when there are loans and those loans
are used for vendors.
MR. PARADY replied he does not have that answer at his
fingertips, but the AIDEA board has been discussing both the
aftermath of the Buccaneer project as well as its own ongoing
process where it is working on "Brooks Range". He said he will
talk to Mr. Springsteen [AIDEA's executive director] and will
provide the committee with a more comprehensive answer at its
5/30/16 meeting.
REPRESENTATIVE JOHNSON pointed out that even if AIDEA has never
had a loss on a project, there are still vendors suffering and
going out of business and people not being paid.
10:40:03 AM
REPRESENTATIVE JOSEPHSON referenced Mr. Therriault talking about
ORRI, collateralization through infrastructure itself, and
proven reserves, and asked whether AIDEA is allowed in the event
of default to take "X percentage" of a private landholder's
royalty share.
MR. THERRIAULT responded that he believes the collateral AIDEA
took in the Mustang project is what is called an overriding
royalty interest (ORRI) whereby a percentage of whatever is
produced out of that field; when it is produced that value is
pledged as collateral. He advised that the state must be
careful to avoid actually taking ownership and putting itself in
the position of an active participant that is being obligated
for capital calls. By taking an ORRI position, the state
creates one degree of separation from those active owners and
thereby protects itself from capital calls. It also protects
the state from becoming part of the stream that has ultimate
dismantling, removal, and restoration (DR&R) responsibilities.
REPRESENTATIVE SEATON reiterated his request that AIDEA follow
up with the Department of Revenue regarding gross value at point
of production less than zero and how that would go into the
calculations on eventual loaning on those deals. He reiterated
the state needs to ensure it is protecting itself in any loans.
10:42:40 AM
CO-CHAIR NAGEAK expressed his concern that HB 246 would create
another bureaucracy within a certain place that requires more
staff, more space, and more everything.
MR. PARADY answered that AIDEA takes very seriously its
responsibility to be efficient; for example, between AIDEA and
the Alaska Energy Authority (AEA) there are currently 22
unfilled positions. He said AIDEA loans in this sector of the
economy out of its revolving loan fund. Essentially HB 246
would set up a fourth fund to which AIDEA could access whatever
funds it is capitalized with and continue to loan in this area
because AIDEA is [currently] over-weighted. It is envisioned
that the loan activity would be absorbed within AIDEA's existing
staff. The bill would be switching the potential source of
funding from the revolving loan fund to this proposed oil and
gas infrastructure development fund. He said AIDEA's mission is
supporting development of the Alaskan economy and helping create
jobs, and it does project financing and refinancing. Examples
of AIDEA successfully helping to grow the Alaska economy include
the ship yard, ore terminal in Skagway, and the Ambler road.
People come to AIDEA seeking its assistance in this area and in
this downturn it would seem that trying to keep small- and mid-
sized projects is worthwhile irrespective of the tax credit
issue. It is within the umbrella of AIDEA's mission to keep
working and it is not an intent to grow a bureaucracy; AIDEA
pays for it operations out of its earnings.
REPRESENTATIVE TARR surmised the bill's zero fiscal note is a
reflection of AIDEA's ability to do this proposed new fund with
existing staff.
MR. PARADY replied yes. He noted that the cost associated with
AIDEA's use of a consultant to evaluate a collateral is charged
against that loan activity; the cost is not supported by the
general fund, it comes out of a specific project.
10:45:30 AM
CO-CHAIR NAGEAK closed public testimony on HB 246 after
ascertaining that no one else wished to testify.
[HB 246 was held over.]
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