Legislature(2023 - 2024)BARNES 124
04/03/2024 01:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| HB394 | |
| HB393 | |
| HB388 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 393 | TELECONFERENCED | |
| *+ | HB 394 | TELECONFERENCED | |
| += | HB 388 | TELECONFERENCED | |
| += | HB 359 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 393-COOK INLET/MIDDLE EARTH GAS ROYALTIES
1:57:17 PM
CHAIR MCKAY announced that the next order of business would be
HOUSE BILL NO. 393, "An Act relating to oil and gas leases and
royalty shares; and providing for an effective date."
CHAIR MCKAY, on behalf of the sponsor, the House Resources
Standing Committee, of which he serves as chair, presented the
sponsor statement for HB 393 [copy included in the committee
packet] which read as follows [original punctuation provided]:
In the coming years, Southcentral Alaska faces a
critical challenge: a projected shortage and ever-
increasing decline in Cook Inlet gas production. This
looming shortage poses a significant threat to the
energy security of our state, with the potential to
lead to drastic increases in energy prices for the
residents and businesses of Southcentral Alaska. The
prospect of diminishing in-state gas supplies and a
reliance on liquefied natural gas (LNG) imports not
only threatens our economic stability but also our way
of life.
Due to the nature of this issue, bold and decisive
action is required. HB 393 makes a significant change
to the Cook Inlet royalty structure based on the idea
that the Inlet is not attracting enough investment
dollars and activity for development and exploration
drilling. At this critical juncture, royalties on Cook
Inlet gas which decrease drilling activity, increase
the cost of gas, or lead to costly LNG imports
represent a tax on southcentral ratepayers in addition
to jeopardizing the energy security of our state.
This legislation seeks to address the anticipated gas
production shortfall by decreasing royalty rates on
new wells for gas used by Alaskans to 0%, with the
goal of fostering an environment which will lead to
increased drilling and exploration activities in the
Cook Inlet region. This bill also reduces the base
royalty on wells currently producing to 5%, which will
extend the life of those wells leading to more gas
production. HB 393 extends incentives to "middle
earth" and allows drilling and development costs to be
deducted against royalty burdens. The rationale behind
HB 393 is straightforward: by enhancing project
economics, we can attract more investment into natural
gas exploration and production. This increased
investment will not only mitigate the risk of a gas
shortage but also has the potential to stabilize
energy prices for Southcentral Alaskans.
HB 393 is an acknowledgment of the critical role that
affordable and reliable energy plays in our lives and
a recognition of the need for immediate action to
secure our energy future. I urge my colleagues in the
33rd Alaska State Legislature to join me in supporting
HB 393.
2:01:12 PM
TREVOR JEPSEN, Staff, Representative Tom McKay, Alaska State
Legislature, on behalf of the sponsor, the House Resources
Standing Committee, of which Representative McKay serves as
chair, introduced HB 393 with a PowerPoint presentation, titled
"HB 393 - Cook Inlet/Middle Earth Gas Royalties" [hard copy
included in the committee packet]. He pointed out that the
graph on slide 2 shows the projected decline of gas production
in Cook Inlet in the coming decades. He noted that when this
low-cost gas supply disappears, the cost would be felt across
the entire state, not just Southcentral Alaska. He added that
this would take over 15 to 20 years to happen but could cause
such effects as the loss of population and higher government
costs. He expressed the opinion that royalty modifications
would be the most impactful tool, so it is crucial for the
legislature to pass the proposed legislation this session.
MR. JEPSEN moved to slide 3 and pointed out the results of
polls, which show there is a high level of Southcentral support
for the state to utilize incentives to private companies and
utilities for the purpose of identifying and pursuing projects,
as this would ensure energy deliverability. He added that this
would be gas produced in Alaska for Alaskans. He pointed out
that there is also support for creating incentives for oil and
gas companies to find and produce more Cook Inlet gas, and there
is a high percentage of the population opposed to importing
natural gas.
MR. JEPSEN moved to slide 4, which provided background on Cook
Inlet gas reserves. He pointed out that the slide shows a
hypothetical to help understand gas volume and production prices
going forward. He stated that the graph shows that easily
accessible gas reserves are the least expensive, with cost
rising incrementally on the graph to undiscovered gas. He noted
that the cost of undiscovered gas would be comparable to the
cost of LNG imports. He argued that the proposed royalty
changes would lower the cost to the producers, which would in
turn lower consumer costs.
2:06:36 PM
MR. JEPSEN moved to slide 5 and stated that in evaluating energy
policy, the state should consider three factors. The first
factor is whether the policy should be short term or long term.
The second factor is the level of risk the state would take, as
importing LNG would be a higher cost with a lower risk. He
noted that forgoing royalties on new gas wells, as in the
proposed legislation, would be a higher risk option. He added
that this would be aimed at lower energy costs for residents.
The final consideration would be how policies interact and
complement each other. He expressed the opinion that HB 393
would work in conjunction with other committee bills to further
increase project economics, making investment in Cook Inlet more
attractive.
MR. JEPSEN moved to slide 6, which reviewed the potential fiscal
impacts of the proposed legislation to Alaskans. He pointed out
that the chart compares the cost resulting from the decrease of
Cook Inlet royalties with the cost increase to ratepayers from
LNG imports. He noted that even if there is no change to
royalty relief, there is a projected decrease in Cook Inlet
royalties over the next few decades. He noted that the
Southcentral utility revenues represent ratepayers' costs. He
argued that if LNG is imported, there would be a large increase
to the ratepayers.
2:10:15 PM
MR. JEPSEN moved to slide 7 and discussed the royalty structure
modifications. Based on the current lack of interest in the
Cook Inlet sedimentary basin, he suggested that the market is
sending a message that the current tax and royalty structure is
not ideal. He stated that the rate of return on gas is much
lower than oil. He maintained that if royalties are reduced,
rates of return and the economics of projects would be boosted,
making projects more viable. He continued to address the
effects of reducing royalties in new and producing wells. He
stated that HB 393 would also not allow the assessment of
royalties until payout, which is the recuperation of costs for
oil and gas development in Cook Inlet in middle earth. He
suggested that this would allow costs to be recouped quicker,
and he acknowledged the time value of money.
MR. JEPSEN moved to slide 8 and provided an overview of HB 393.
The slide read as follows [original punctuation provided]:
•Changes royalty structure for Cook Inlet:
• 0% for gas produced from new wells drilled
starting in FY25
• 5% for oil produced from new wells drilled
starting FY25
• 5% on oil and gas produced from wells drilled
prior to FY25
•Capital expenditures associated with development of
oil or gas can be deducted from royalty burden;
Excludes North Slope
•Requires commissioner to enter into lease
negotiations to comply with these terms
2:13:32 PM
MR. JEPSEN moved to slide 9 and provided the sectional analysis
for HB 393, which read as follows [original punctuation
provided]:
Sec. 1 Amends AS 38.05.180(f) to allow an exception
for the new subsection (mm). Changes royalty structure
for Cook Inlet leases to 0% on gas and 5% on oil for
wells drilled after July 1st, 2024, and 5% on oil and
gas for wells drilled prior to July 1st, 2024.
2:13:42 PM
REPRESENTATIVE SADDLER questioned what the exception would be in
Section 1.
MR. JEPSEN responded that this has to do with the terms of the
oil and gas leases. It would require the commissioner to issue
oil and gas leases according to the subsection which changes the
lease terms.
REPRESENTATIVE SADDLER reiterated the question.
CHAIR MCKAY deferred the question until after the sectional
analysis.
2:15:11 PM
MR. JEPSEN continued with the sectional analysis, which read as
follows [original punctuation provided]:
Sec. 2 Adds a new subsection (mm) to AS 38.05.180,
stating that for leases issued for property in the
state excluding land north of 68 degrees North
latitude, the royalty share reserved to the state may
not exceed zero if the lessee is recovering costs
associated with development of oil or gas produced
from a well drilled on or after July 1, 2024.
Sec. 3 Adds uncodified law regarding transition to
comply with the changes in royalty rates which
requires the commissioner of natural resources to
enter into lease negotiations with a lessee holding a
lease issued before the effective date of this Act in
the Cook Inlet sedimentary basin to modify the lease
to meet the royalty rates required by AS
38.05.180(f)(7) and (mm).
Sec. 4 Provides for an effective date of July 1, 2024.
2:16:21 PM
DEREK NOTTINGHAM, Director, Division of Oil and Gas, Department
of Natural Resources (DNR), responded to Representative
Saddler's question. He expressed the belief that the exception
would be for new leases, as they would be exempted from the
minimum royalty of 12.5 percent.
2:17:04 PM
REPRESENTATIVE MEARS expressed the belief that HB 393 would be a
giveaway by the state, with no accountability or no promises of
new gas. She argued that there needs to be a justification on
how this would save consumers in utility rates, as this has not
been discussed.
CHAIR MCKAY expressed disagreement, stating, "I would not say
that we could ever promise anything." He continued that
legislation is often put forward to incentivize the private
sector, but what the private sector will do is not guaranteed.
He asked Mr. Jepsen to discuss what could possibly happen if
energy rates were to double or triple at the raw material end of
the supply chain.
2:18:54 PM
MR. JEPSEN stated that the example on [slide 6] is a rough
calculation using the information on royalty revenues to the
state and revenues to Southcentral utilities. He suggested that
if there is a doubling in price for utility gas heat and
electricity, this would be a straight pass to the consumer
rates, which would then likely double. He expressed agreement
that there would be no guarantees and there would be risks. He
stated that currently there is little interest in [developing
gas] in Cook Inlet and changing the royalty would be an effort
to bring in new gas producers. He maintained that this is an
idea and a tool the state has, but there would be no guarantees.
2:20:22 PM
REPRESENTATIVE SADDLER referenced past legislation that had "no
promises" for Cook Inlet, but it had worked. He discussed how
lowering the royalty share would make investment in Cook Inlet
more advantageous. He stated that this would be a policy call
"to see if we think the give is worth the get."
2:21:04 PM
CHAIR MCKAY expressed the opinion that Representative Mears's
question was "excellent." He stated that the conversation is
important because the free market has not been responding. He
pointed out that low-cost energy is essential for Alaska. He
discussed how there has been no interest in developing oil and
gas in Cook Inlet. He opined that the free market in Alaska is
unlike the Lower 48, as it is isolated. He stated that the oil
and gas field in Cook Inlet is very mature and "barely hanging
on." He reminded the committee of the projection that Alaska
would not be importing LNG for six more years. He reiterated
that the state is isolated and not connected to a real market.
He discussed the issue of the limited market for gas in the
Railbelt and urged the committee that the state should not wait
for the free market to take care of the situation, as the state
has very few levers, and addressing royalties is one of these
levers.
2:25:14 PM
The committee took an at-ease from 2:25 p.m. to 2:26 p.m.
2:26:42 PM
REPRESENTATIVE SADDLER pointed out that the fiscal note is
indeterminate, and he questioned whether there would be
additional [staff needed] for analysis and accounting functions.
2:27:34 PM
MR. NOTTINGHAM expressed the belief that DNR already has the
staff to do the accounting functions. He added that these
functions would be similar to other duties that staff already
performs. He stated that the indeterminate fiscal note has
nothing to do with staff; rather, it is more to do with the
uncertain outcomes of the proposed legislation.
2:28:42 PM
REPRESENTATIVE MEARS, referencing her previous question, stated
that there are many unanswered questions on the potential
impacts to utility companies. She argued that a rough estimate
[on the effects of cutting royalties] is insufficient when
discussing the potential impacts to consumers.
CHAIR MCKAY countered that there would be a significant impact
if energy prices increased dramatically.
REPRESENTATIVE MCCABE opined that the free market is not present
in the state because of taxes and the government. He suggested
that taking away the taxes could possibly increase the
availability of gas. He said, "Gas is going away, that's a
fact." He suggested that the proposed legislation's impact
would be the availability of gas, even if there is an increase
in price, but this would be up to economics and gas as a finite
resource. He argued that HB 393 would incentivize the gas
industry to come to Alaska, so consumers would not be effected,
as the consumers will be effected [with higher rates] soon.
2:30:52 PM
CHAIR MCKAY opened public testimony on HB 393. After
ascertaining there was no one who wished to testify, he closed
public testimony.
2:31:16 PM
MR. JEPSEN, following on Representative Mear's concern on "give
aways," argued that with the projections, there would be no Cook
Inlet royalty money within 10 to 15 years.
2:31:42 PM
REPRESENTATIVE SADDLER questioned whether there had been any
research on how production is effected by a change in royalties.
MR. NOTTINGHAM expressed uncertainty on any studies. He stated
that there is literature that suggests royalty reduction would
incentive new activity and new oil and gas production. He
stated that he would follow up on this with the committee.
2:33:22 PM
CHAIR MCKAY announced that HB 393 was held over.
HB 388-COOK INLET RESERVE-BASED LENDING
[Contains discussion of HB 393.]
2:33:27 PM
CHAIR MCKAY announced that the final order of business would be
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." [Before the committee, adopted on 3/22/24 as a working
document, was the proposed committee substitute (CS) for HB 388,
Version 33-LS1237\U, Nauman, 3/15/24 ("Version U)".]
2:33:42 PM
The committee took a brief at-ease at 2:33 p.m.
2:34:26 PM
REPRESENTATIVE RAUSCHER made a motion and corrected the motion
following the upcoming at-ease.
2:35:03 PM
The committee took a brief at-ease at 2:35 p.m.
2:35:57 PM
REPRESENTATIVE RAUSCHER moved to adopt the proposed CS for HB
388, Version 33-LS1237\R, Nauman, 3/30/24, as a working
document. There being no objection, Version R was before the
committee.
2:36:41 PM
TREVOR JEPSEN, Staff, Representative Tom McKay, Alaska State
Legislature, on behalf of the sponsor, the House Resources
Standing Committee, on which Representative McKay serves as
chair, presented the summary of changes for Version R of HB 388
[copy included in the committee packet], which read as follows
[original punctuation provided]:
Sec. 1 New section which conforms the Cook Inlet
reserve-based lending fund to current AIDEA dividend
policy.
Sec. 2 New section which allows the creation of
subsidiaries under AIDEA to handle reserve-based
lending projects.
Sec. 3 Amends section 1 of 33-LS1237\U to remove the
projected rate of return and AIDEA recommendation on
whether to pursue projects from the reporting
requirements associated with reserve-based lending
projects identified by AIDEA. Adds a reporting
requirement on the amount necessary to be appropriated
by the legislature for projects.
Sec. 4 Amends section 2 of 33-LS1237\U to conform
44.88.850(a) with other AIDEA investment funds,
allowing flexibility regarding the transfer of funds
into and out of the account instead of designating the
fund consist solely of appropriations made by the
legislature. Adds an additional subsection (c) which
requires the authority to set the interest rate for
reserve-based loans and allows them to be less than
the cost of funds to the authority. Provides for a
definition of "cost of funds".
Sec. 5 Same as section 3 in 33-LS1237\U
Sec. 6 Same as section 4 in 33-LS1237\U
2:39:38 PM
CHAIR MCKAY stated that the proposed legislation would set up a
fund within the Alaska Industrial Development and Export
Authority (AIDEA) to invest in oil and gas development projects,
of which the legislature could incentivize.
MR. JEPSEN, in response to Chair McKay, stated that the intent
of HB 388, Version R, would be to set up a designated fund for
Cook Inlet reserve-based lending. He stated that the loans
would be based on the gas reserves in Cook Inlet, with the value
of a specific loan based on the size of the reservoir. He
explained this in more detail, stating that the high costs
associated with big development projects, along with the fact
the gas cannot be sold as needed, has hampered projects
economically. He stated that the proposed legislation was
designed to set up the fund under AIDEA to allow it to invest in
Cook Inlet gas projects. He further discussed the economics of
the proposed legislation.
CHAIR MCKAY added that Version R would not direct the state to
appropriate money; it would only set up the regulatory framework
for this to happen if the legislature decides to proceed with
projects. He stated that AIDEA would then be allowed to manage
the investment.
MR. JEPSEN concurred. He added that there is a reporting
requirement proposed under the bill, so AIDEA would report back
to the legislature on prospective projects.
2:42:58 PM
RANDY RUARO, Executive Director, Alaska Industrial Development
and Export Authority, in response to a question from
Representative McCabe, estimated that there are 200 billion
cubic feet (Bcf) of crude reserves in [the Cosmopolitan Oil and
Gas Field].
REPRESENTATIVE MCCABE questioned the amount of proven reserves
in Cook Inlet.
MR. JEPSEN responded that, per the Department of Natural
Resources (DNR), there are 800 Bcf of proven reserves in Cook
Inlet, which equals approximately a 10-year supply.
REPRESENTATIVE MCCABE suggested that HB 388, Version R, and [HB
393] would create tools to go forward. He stated that [HB 393]
would provide an incentive for investors, while HB 388, Version
R, would create a loan program. He suggested that these pieces
of legislation would incentivize the free market to find more
gas for the energy needs in Southcentral.
MR. JEPSEN concurred that these House Resources Standing
Committee Bills would work together to provide an alternate
pathway and improve project economics.
CHAIR MCKAY interjected that HB 388 would not create a tax
credit, but companies would pay back AIDEA. He requested that
Mr. Ruaro comment on this.
2:46:33 PM
MR. RUARO explained that AIDEA has broad authority. He
explained that previous legislation has been passed giving AIDEA
specific authority to provide investments and loans. He stated
that AIDEA supports Version R, as it would provide a tool to do
this.
REPRESENTATIVE SADDLER questioned the contradiction in funding
between the Alaska Energy Authority (AEA) and AIDEA in the two
fiscal notes.
MR. RUARO answered that the fund would be established in AIDEA.
REPRESENTATIVE SADDLER suggested that the fiscal note provided
by AEA be changed.
MR. JEPSEN interjected that this fiscal note would be removed
once Version R passed from committee.
2:48:35 PM
REPRESENTATIVE SADDLER expressed the understanding that Version
R would first create a reserve-based lending fund in AIDEA, and
then the legislature would capitalize this with an
appropriation. He continued that AIDEA would then lend the
money to finance production. He questioned whether oil and gas
reserves would be the collateral for the loans.
MR. RUARO answered that this would be a form of credit AIDEA
could take; however, Version R would not limit AIDEA to only
this collateral. In response to a follow-up question, he stated
that 25 percent of the fund would pay the AIDEA dividend. He
explained that this would conform with other AIDEA programs. He
clarified that this would be from the net income of the fund,
not the net value of the fund.
2:50:59 PM
REPRESENTATIVE SADDLER requested an explanation on the
collateral and loan process.
2:51:08 PM
MARK DAVIS, Special Counsel, Alaska Industrial Development and
Export Authority, explained that this reserve-based lending
would be based on the reserve value of the well, which can be
monetized. In response to a follow-up question, he stated that
there would be other collateral taken, such as equipment a
company may own. He added that there would need to be assurance
that AIDEA would be paid back.
2:52:26 PM
REPRESENTATIVE MEARS pointed out that these loans may be
significantly larger than other loans AIDEA has provided, adding
that these loans would be less expensive. She questioned how
this would affect AIDEA's other projects in the state.
MR. RUARO expressed the understanding that Version R would not
require a below market interest rate; rather, this would be at
the discretion of AIDEA. He continued that individual decisions
on each application would be made.
2:53:32 PM
MR. DAVIS explained Interior Natural Gas Utility (IGU) loans, as
defined in the uncodified section of House Bill 105 [passed
during the Twenty-Ninth Alaska State Legislature]. In this
instance, the legislature directed AIDEA to make the loan lower
than the market rate, with some conditions; however, Version R
would not do this. He stated that the proposed legislation
would allow AIDEA to see the reserves as collateral rather than
only using the cash flow. He noted that in startup situations
often the cash flow is less than the value of the company, so
the proposed legislation would allow the reserves to hold the
value to secure the loan.
2:54:42 PM
REPRESENTATIVE MCCABE questioned whether AIDEA had paid back $11
million to the state general fund last year.
MR. RUARO responded in the affirmative.
2:54:59 PM
REPRESENTATIVE SADDLER questioned the size and scope of the
proposed loans.
MR. RUARO expressed uncertainty whether there would be a minimum
or maximum amount of the loans, as there are large and small
producers in Cook Inlet. In response to a follow-up question
concerning the largest investment AIDEA has made, he gave the
example of a $90 million loan and a $40 million loan.
2:56:16 PM
MR. DAVIS stated that another way of looking at this would be
the cost of drilling a well in Cook Inlet, and the last time
AIDEA provided a loan was for the Endeavor rig, which cost an
estimated $20 million.
2:56:52 PM
MR. JEPSEN provided the example that a new platform in Cook
Inlet would be $500 million. He expressed the opinion that
AIDEA would not be the sole funder of this.
MR. RUARO added that AIDEA is often not the only financing
entity involved.
MR. DAVIS interjected that a few years ago the Endeavor had cost
$144 million, with AIDEA's investment being $23 million, so
there were other partners.
2:57:44 PM
REPRESENTATIVE MCCABE referenced the $11 million that AIDEA paid
to the general fund and suggested that AIDEA is like a "state
bank," and the state is earning money from this.
MR. RUARO responded in the affirmative. He stated that AIDEA
has provided dividends to the state of around $500 million. He
noted that this is just a part of the net income.
2:58:44 PM
CHAIR MCKAY commented that, other than making a state-run oil
company, all avenues are being looked at to help Cook Inlet. He
pointed out that using the private sector is a benefit because
it "knows how to do this work."
2:59:29 PM
REPRESENTATIVE MEARS questioned whether the uniqueness of the
proposed program prohibits these types of loans to be issued
through existing programs in AIDEA.
MR. RUARO answered that AIDEA has a very broad discretion, but
the details and specificity helps "sharpen the tool in the
toolbox." He stated that it is not uncommon for the legislature
to provide specific tools. He expressed the opinion that AIDEA
could do this without the proposed legislation; however, having
specific definitions and details would be helpful.
3:00:44 PM
CHAIR MCKAY announced that HB 388 was held over.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB0394A.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 394 |
| HB 394 Sponsor Statement ver. A.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 394 |
| HB 394 Sectional Analysis ver. A.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 394 |
| HB 394 Presentation ver. A.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 394 |
| HB 394 Fiscal Note DCCED-RCA.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 394 |
| HB 394 RCA Presentation to HRES 4.3.24.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 394 |
| HB0393A.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 393 |
| HB 393 Sponsor Statement Version A.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 393 |
| HB 393 Sectional Analysis Version A.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 393 |
| HB 393 Presentation Version A.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 393 |
| HB 393 Fiscal Note #1 DNR-DOG.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 393 |
| HB 393 Fiscal Note #2 DOR-TAX.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 393 |
| CSHB 388(RES) LS-1237R Summary of Changes.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 388 |
| CSHB 388(RES) LS-1237R.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 388 |