Legislature(2023 - 2024)ADAMS 519
04/19/2024 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB74 | |
| HB388 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 74 | TELECONFERENCED | |
| + | HB 388 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 388
"An Act relating to state loans for oil and gas
projects in the Cook Inlet sedimentary basin; relating
to the Alaska Energy Authority; relating to the Alaska
Industrial Development and Export Authority; and
providing for an effective date."
2:48:09 PM
REPRESENTATIVE TOM MCKAY, SPONSOR, explained that the bill
was one of a "portfolio" of bills designed to stimulate
increased gas production in Cook Inlet. He reminded the
committee that Cook Inlet served a closed market and was
limited to 70 Billion Cubic Feet (bcf) production per year.
He indicated that importing LNG was not possible until
2030. The legislation was intended to close the gap. He
summarized that HB 388 provided a mechanism through Alaska
Industrial Development and Export Authority (AIDEA), to
loan money to operators in Cook Inlet who lacked the
resources to drill new wells in existing and proven new gas
fields. The bill offered a framework but did not commit any
funding. He read the sponsor statement (copy on file):
Based on the projected shortage of Cook Inlet gas
production in both the near-future and years to come,
Southcentral Alaska risks becoming reliant on imported
liquefied natural gas (LNG). This dependency not only
threatens to destabilize our energy prices but also to
erode the economic foundations of our state, impacting
every Alaskan. HB 388 is a potential solution to this
problem and is designed to bolster our state's energy
independence and economic stability by leveraging gas
that is in the ground but not currently being
developed.
Reserve-Based Lending is an asset-based financing
mechanism in the oil and gas industry in which loans
are made based on either undeveloped or developed and
producing oil and gas assets. The amount of the loan
is based on the value of the borrower's oil and gas
reserves. This bill proposes the establishment of a
Cook Inlet Reserve-Based Lending Fund to support
increased oil and gas production in Cook Inlet,
ensuring that we continue to prioritize local
production over expected costly LNG imports.
Recognizing the challenges of attracting private
capital to Cook Inlet gas plays, HB 388 proposes a
solution to finance projects essential for enhancing
affordable gas production for Alaskan's.
This innovative funding mechanism will not only help
avoid the potential economic impacts associated with
importing liquefied natural gas, but also ensure a
more secure and self-reliant energy future for
Alaskans. By making prudent, interest-aligned loans
against oil and gas reserves, the state can catalyze
critical infrastructure developments, thereby
safeguarding and expanding Cook Inlet's contribution
to our energy supply.
I urge my colleagues of the 33rd Legislature and the
people of Alaska to support HB 388 as a step towards
energy development, economic resilience, and the long-
term prosperity of our great state.
2:52:22 PM
TREVOR JEPSEN, STAFF, REPRESENTATIVE TOM MCKAY, introduced
the PowerPoint presentation "HB 388 Cook Inlet Reserve-
Based Lending" dated April 19, 2024 (copy on file). He
began on Slide 2 titled "Cook Inlet Gas Shortage
South Central will face an increasing gas production
shortage in the coming years
? Fallback solution to Cook Inlet gas is LNG
imports
? LNG imports estimated to be significantly more
expensive, however exact increase is currently
speculative
Mr. Jepsen recounted that a projected Cook Inlet gas
shortage threatened the energy security of Southcentral
Alaska. A potential shortfall was expected as early as 2027
increasing through 2040. He cited the Ditman Research
opinion poll from July 2023 that showed Southcentral
residents held a "high level of opposition" to imported LNG
and a "high level of support" for implementing financial
incentives to increase Cook Inlet gas production. Many
experts believed that gas imports would be significantly
more expensive than locally produced gas. He believed that
the legislature owed a solution to Alaska residents through
increased exploration and production. He pointed to the
graph on slide 2 that portrayed fuel price forecasts for
the next 16 years from the Alaska Energy Authority. He
remarked that by simply hoping the price for imported LNG
would cost the same as Cook Inlet gas and not taking any
action was not in the best interest of Alaskans. He
believed that HB 388 represented a proactive approach to
development of Cook Inlet gas reserves. He added that
private sector capital had not been secured due to project
economics in a highly competitive global market.
Mr. Jepsen continued to slide 3 titled "Cook Inlet Gas:
Private Capital Attraction Issues
Expensive, risky, or low rate of return projects have
difficulty in the private market
? Oil and gas projects are highly capital-intensive
investments competing for limited capital in a world
of (relatively) unlimited projects
? Nature of Cook Inlet as a stranded gas market
further complicates funding issues for private
investment
Mr. Jepsen voiced that the petroleum industry faced a
"complex global environment" engaging in exploration and
development amidst fluctuating prices and other factors.
Financial institutions were confronted with limitations
related to capital necessitating collaboration with
entities that helped mitigate some risk such as, local
governments that were stake holders in oil and gas
development. He identified that the primary issue in Cook
Inlet gas development was attracting private capital for
"proven and highly probable reserves." If only so much gas
a year could be sold, the potential rate of return on
investment could decrease due to the time value of money,
making a project uneconomical.
Mr. Jepsen continued on slide 4 titled "Reserve-Based
Lending (RBL)
o Financing structure for independent oil and gas
companies
o "Borrowing-base" type of loan based on the
projected Net Present Value (NPV) of cash flows
generated by the underlying hydrocarbon assets
o Began in onshore Texas in the 1970's; use
accelerated for UK North Sea plays in the 1970's
and 1980's
o A state-funded RBL program would balance lower
project rates of return against the avoidance of
the impact of higher and unstable energy prices
on Alaskans
Mr. Jepsen explained that repayment of a RBL loan happened
through the sale of oil and gas from the assets. The value
of RBL was periodically adjusted to reflect shifts in
underlying assumptions like production volume, market
prices, evaluation of reserves, taxation, etc. He
delineated that RBL was an established financing tool with
origins in the United States. The market was segmented into
two primary regions, the U.S. and International markets.
Due to the Alaska Constitution, Alaskan RBL lending
structures would mimic the international market structure
because the mineral rights belonged to the state. He added
that state funded RBL financing would not necessarily be
for the full amount of the project and in many cases would
be one of many financing mechanisms.
Mr. Jepsen continued on slide 5 titled "Reserve
Classifications
o Not all "reserves" are equal:
3 classifications: Proven (P1), Probable
(P2), and Possible (P3)
Mr. Jepsen elaborated that the deterministic method of
calculating reserves was based on known geology,
technology, and economic conditions. The method employed a
single set of values that represented a best estimate for
each parameter in order to estimate reserves and was the
most common estimation technique. He delineated that the
probabilistic method estimated reserves by incorporating
the uncertainty in key parameters of the calculation, which
resulted in a range of estimated reserves at different
levels of probability. The method provided a more
comprehensive view of risk and enabled decision makers to
better grasp the range of outcomes. He determined that the
best way to approach reserve classification was to use a
combination of both methods. According to the chart on the
slide, he reported that Proved (P1) correlated to P90
reserves, Probable (P2) reserves correlated to P50, and
Possible related to P10 reserves. He noted that a state
funded program would focus on proven reserves and the bill
made the distinction.
3:00:34 PM
continued on slide 6 titled "HB 388 Cook Inlet Reserve-
Based Lending
o Establishes Cook Inlet Reserve Based Lending fund
under AIDEA outside of their revolving fund;
conforms fund to current AIDEA dividend policy
and defines funding sources. Also allows for the
creation of AIDEA subsidiaries to issue loans.
o Does not specify an appropriation, simply creates
the fund allowing legislature flexibility to fund
directed projects
o Introduces reporting requirement for AIDEA to
deliver to the legislature at the beginning of
each new session regarding potential Cook Inlet
RBL projects
o Funds may be used for reserve-based loans deemed
necessary to increase oil and gas production from
the Cook Inlet Sedimentary Basin
Mr. Jepsen concluded that HB 388 allowed AIDEA to issue
loans to the private sector with lower rates of return than
typically allowed.
3:01:44 PM
Representative Stapp ascertained that the state would
capitalize an account and let companies' loan on a state
owned asset; the oil and gas reserve, and when the gas was
produced, they would sell it back to "us." He asked if his
assessment was fair. Mr. Jepsen answered that they would
receive the loan based on the value of the produced asset.
The revenue and profit were associated with extracting the
asset, which was how the loan value would be calculated.
Representative Stapp inquired as to who owned the asset. He
proposed that the state did. Mr. Jepsen responded in the
affirmative, which was why the lending structure was
fashioned after the international market loan structure.
Representative Stapp hypothesized the scenario of asking
the North Rim Bank for a loan using its Anchorage asset as
collateralization for the loan and paying back via its
business model. He wondered if he should expect to get the
loan by using the banks asset as collateral. Mr. Jepsen
replied that the comparison was "apples to oranges" and
that the two were not comparable. He voiced that there was
significant value to gas extraction, which was what the
loan was based upon. The state could not extract the
reserves itself, therefore the scenario brought
"significant value" to the state. He remarked that it was
necessary for a third party to conduct the activity to
bring the revenues to the state. Representative Stapp asked
what happened to the state's funding if the state "gives
them the money to develop our gas and they go bankrupt."
Mr. Jepsen responded that there was a level of risk as with
all loans and AIDEA had the discretion to perform the
financial due diligence.
Representative McKay interjected that the bill did not
authorize lending money to anyone, but it set up the
framework that could be enacted under another bill in the
future. He replied that if a company went bankrupt, the
assets were still in existence and the likely outcome was
that another operator would take over and assume the loan.
The loan payments were from the sale of the produced gas.
He emphasized that there was no risk to the state with HB
388 and pointed to bullet point 4 on slide 6. He offered
that the bill required AIDEA to assess the Cook Inlet
situation and recommend projects. He recommended that the
committee take a hard look at the bill. He characterized
the legislation as an evaluation program to find out what
was available in Cook Inlet as a basis for a decision on
how to proceed.
3:06:36 PM
Representative Stapp asked whether AIDEA currently had any
debt or bonds issued to Blue Crest or Furie.
3:06:58 PM
BRANDON BREFCZYNSKI, DEPUTY DIRECTOR, ALASKA INDUSTRIAL
DEVELOPMENT AND EXPORT AUTHORITY, ANCHORAGE (via
teleconference), responded that AIDEA had a loan with Blue
Crest with a balance of $13 million. Representative Stapp
asked what the purpose was of the loan. Mr. Brefczynski
answered that the purpose was to finance the rig and the
man camp.
Representative McKay interjected that the rig drilled
several oil wells at the Cosmopolitan field and were
currently producing. He voiced that the investment was
providing a return to the state. Representative Stapp
responded that the point to his inquiry was the state was
already providing investment money. He wondered if there
was anything that prevented AIDEA from issuing more loans
to the producers. Mr. Brefczynski responded in the
negative. He expounded that AIDEA currently has the ability
and had issued loans to finance Cook Inlet efforts. The
authority provided a loan to HEX for $7.5 million, which
was repaid. He deduced that clarity in the statutes was
"better" even though AIDEA could finance projects in Cook
Inlet and had the ability to structure the size of its debt
using a reserve based model. He appreciated the clarity the
bill offered.
Representative McKay added that there were two different
fields at Cosmopolitan: an oil field and a gas field. The
rig that AIDEA provided money for was an onshore oil rig.
The legislation was focused on gas extraction and was a
completely different project.
Representative Stapp inquired what type of asset evaluation
was performed when companies were awarded loans to ensure
the loan would be repaid. He wondered if potential
production was factored in or the company's balance sheet
was reviewed. Mr. Brefczynski replied that it included all
of the above. He related that the "extensive due diligence
process" included hiring a contractor to review assets,
review the company's fiscal model, and vetting through
AIDEA's investment committee and board.
3:11:11 PM
Representative Hannan asked about slide 6 and referred to
the second bullet specifically the language, "allowing
legislature flexibility to fund directed projects" related
to the dividend created. She asked if the bill would offer
more legislative authority to give direction internal to
AIDEA's decision making regarding eligible projects.
Mr. Jepsen responded that one of the most important aspects
of the bill was the reporting mandate that required AIDEA
to review Cook Inlet Reserve Based Lending projects. He
indicated that the provision was not in current statute.
The projects were evaluated by such measures as project
cost estimate, potential recoverable gas, and the amount
necessary to be appropriated to the fund. The bullet point
addressed the created fund that offered the legislature
flexibility to fund the projects analyzed by AIDEA.
Representative Hannan relayed that she consistently was
asked why the legislature did not direct projects within
AIDEA. She understood the legislature could not make the
decisions regarding AIDEA's loans. She ascertained that the
bill created the flexibility for the legislature to decide
which Cook Inlet RBL projects should be funded. Mr. Jepsen
responded in the affirmative. Representative Hannan asked
if it would limit the projects to only those included in
AIDEA's report. Mr. Jepsen answered that the legislation
did not replace AIDEA's current RBL lending ability. He
furthered that for most of the projects AIDEA was not
making RBL type loans because they did not meet the
fiduciary responsibility due to lower rates of return. The
legislature could choose to capitalize these types of
projects via the authority in the bill.
3:14:58 PM
Representative Josephson reported that historically,
AIDEA's returns had only been in the 3 percent range
anyway. He pointed to the first bullet point on slide 6
focusing on the language "Establishes Cook Inlet Reserve
Based Lending fund under AIDEA outside of their revolving
fund;" He asked if the revolving fund was the typical loan
fund with funds lending out and loan payments repaying the
fund. Mr. Brefczynski responded in the affirmative.
Representative Josephson asked if AIDEA had "hundreds of
millions of dollars" of unencumbered funds. Mr. Brefczynski
replied that AIDEA had a "cash position" but also had a
project pipeline in the range of $400 to $500 million of
potential projects. He reported that the money was
accounted for. Representative Josephson asked if a portion
of the unencumbered funding would be incumbered for the RBL
program in the bill. Mr. Brefczynski asked for
clarification. Representative Josephson assumed that some
of AIDEA's unencumbered loan funds would shrink to some
degree for the purposes of Cook Inlet RBL. Mr. Brefczynski
responded that it would only be if the board decided to
move its own receipts into the RBL fund for an active loan
application. He furthered that if the legislature were to
appropriate general fund (GF) money to the fund the amount
would be designated only for RBL. Representative Josephson
asked that if the legislature approved a recommended RBL
the funding would be AIDEA dollars and not GF. Mr.
Brefczynski answered that the funding could be either or
AIDEA funding or GF. He voiced that for the likelihood of
AIDEA to approve a loan below market interest rates it
would likely need GF funding. The authority was subject to
the prudent investor rule and other policies and was
limited in supporting loans below interest rates. However,
in the past, the legislature had appropriated money to
AIDEA for the Interior Gas Utility (IGU) project in
Fairbanks at a lower market rate.
3:20:15 PM
Representative Stapp summarized that a private company
would collateralize the state's asset, lend state money to
the company by net present cash value repaying the loan in
sales to the state. He wondered what mechanism was
available to limit the company's profit margin from the
system he described.
Representative McKay responded that the company would not
sell the product to the state. He communicated that the gas
would be sold to utilities and the company would repay the
loan from the sales revenue. The utilities price was
regulated by the Regulatory Commission of Alaska (RCA), and
he doubted that a windfall profit situation could result
from the provisions in the bill. He reminded the committee
that the Regulatory Commission of Alaska regulated the
price of gas produced in Cook Inlet and sold to utilities.
Representative Stapp referred to the price controls. He
deemed that the problem with the demand was at the end user
point of sale. He wondered if there was a higher profit
margin via the utilities paying more money for gas whether
it would make the economics of the project more valuable to
the producers. Representative McKay could not predict
future gas prices in Cook Inlet. He believed that gas
produced in Cook Inlet would be cheaper than importing LNG.
He commented on other legislation put forward to mitigate
the situation that included royalty relief. He viewed HB
388 as another way to incentivize more gas production
activity in Cook Inlet if the royalty relief bills failed
to increase production. He warned that if the private
sector lost interest and left Cook Inlet the state would
have to operate an Alaska oil and gas company. He was
attempting to design bills that left the work in the hands
of the private sector while the state assisted via the
financial aspect. He maintained that the bill did not
currently commit any funds. The bill facilitated determing
how much more gas could be produced in Cook Inlet and
whether it was worth investing in the private sector.
3:24:48 PM
Representative Stapp wondered why the state did not just
purchase a jackup rig. He asked if the state had purchased
a rig in the past. Mr. Jepsen answered in the affirmative
and added that the Endeavor rig was roughly $140 million,
and the state's portion was $20 million.
3:25:24 PM
MARK DAVIS, ATTORNEY, ALASKA INDUSTRIAL DEVELOPMENT AND
EXPORT AUTHORITY, ANCHORAGE (via teleconference), confirmed
that the rig cost $140 million and AIDEA contributed $23
million and made a return on the investment. Representative
Stapp asked what happened to the rig. Mr. Davis responded
that it was moved to South Africa by one of the state's
partners that purchased the state's portion. He furthered
that while in operation, the state drilled several
abatement holes and determined that some of the areas did
not contain oil and gas reserves. He voiced that RBL
created a borrowing base rather than resource based
lending. Representative Stapp asked if the state could
bring back the rig. Mr. Davis answered that if would need
to be purchased. He noted that there was another jackup rig
in Cook Inlet.
Representative McKay did not think it was advisable to buy
large marine drilling equipment which had significant
liability.
3:27:05 PM
HB 388 was HEARD and HELD in committee for further
consideration.
Co-Chair Foster reviewed the agenda for the following
meeting.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB388 Presentation ver. D 4.12.24.pdf |
HFIN 4/19/2024 1:30:00 PM |
HB 388 |
| HB388 Sponsor Statement ver. D 4.12.24.pdf |
HFIN 4/19/2024 1:30:00 PM |
HB 388 |
| HB388 Sectional Analysis ver. D 4.12.24.pdf |
HFIN 4/19/2024 1:30:00 PM |
HB 388 |
| HB388 Summary of Changes (S to D) 4.12.24.pdf |
HFIN 4/19/2024 1:30:00 PM |
HB 388 |
| HB 74 Public Testimony Rec'd by 042524.pdf |
HFIN 4/19/2024 1:30:00 PM |
HB 74 |