Legislature(2009 - 2010)BUTROVICH 205
02/08/2010 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB195 | |
| SB208 | |
| SB228 | |
| SB203 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 208 | TELECONFERENCED | |
| *+ | SB 203 | TELECONFERENCED | |
| *+ | SB 228 | TELECONFERENCED | |
| += | SB 195 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 208-DNR STUDY ON NATURAL GAS
3:36:40 PM
CO-CHAIR WIELECHOWSKI announced SB 208 to be up for
consideration.
MICHELLE SYDEMAN, staff to Senator Wielechowski, sponsor of SB
208, explained that many share a growing concern over the
dwindling reserves of natural gas in Cook Inlet. Last year the
committee heard testimony on this topic from Kevin Banks,
Director, Division of Oil and Gas, and Bob Swenson, Director,
Division of Geological and Geophysical Survey, both with the
DNR. They were all shown a chart that is in their packets today
that is known as "The Waterfall Chart," which depicts declining
production from Cook Inlet wells. Unless there is additional
exploration and identification of new reserves by 2012 the
possibility exists of homes and businesses in Southcentral
Alaska not having sufficient gas.
She said that earlier this year the DNR completed a new
assessment of known possible and probable reserves in Cook
Inlet. The review concluded that if sufficient investing in the
Inlet were made, supplies could last a great deal longer,
certainly into the next decade. This would be especially good
for the local economy since gas produced locally would not be
subject to expensive tariffs or other transportation costs.
MS. SYDEMAN said the challenge still remains of deciding what
actions the state should take if any at all to encourage more
natural gas exploration and production in the Inlet.
3:37:34 PM
SENATOR HUGGINS joined the committee.
3:37:43 PM
MS. SYDEMAN remembered the June 4 meeting in Anchorage when
producers from Cook Inlet were asked what could be done to help
them feel more comfortable investing there. So, she said, this
bill examines which incentives are most likely to work and which
would simply transfer precious state dollars from the state
treasury to companies that otherwise might have sufficient
incentive to invest in the Inlet if proper market conditions
exist. It asks if the state can take steps other than lowering
tax rates or increasing credits that might have a greater effect
on private sector behavior. This question is particularly
compelling in light of the very modest tax rates and generous
tax credits the producers in the Inlet already enjoy, and the
fact that the Legislature has gone to lengths to encourage more
gas production in the Inlet. It asks to what extent those
incentives are working, because that is not exactly known now.
Before the state leaps to offer additional incentives, Ms.
Sydeman stated, this bill seeks to answer questions like what
other jurisdictions are doing to promote more investment. If the
small size of the market in Alaska is an impediment to new
exploration and production, which they all heard last June, are
can the state take steps to enhance the market to ensure that
producers see a return on their investment in a reasonable time
frame? Could it commit to buying proven reserves upfront so
investors don't have to wait years to realize their investment,
for instance?
MS. SYDEMAN said last week they heard testimony that the state
already reimburses companies for roughly 45-65 percent of their
exploration costs. Given this fact, how can the state partner
more effectively with industry to ensure that the needs of
Alaskans for a long-term, affordable and reliable source of gas
are met? Would it be worthwhile to consider establishment of a
state entity like ANGDA to partner with the private sector to
explore in areas where a critical need for gas exists? She said
this bill calls for a speedy analysis of these questions before
new incentives are enacted. It asks Department of Natural
Resources (DNR) and the Department of Revenue (DOR)to assess the
effectiveness of existing incentives, propose new incentives
they believe will be useful and then look more broadly at what
other strategies the state might employ to make sure Alaskans
don't tumble down the cliff depicted in the waterfall chart.
Most importantly, it calls for this work to be done
expeditiously - by November 1 of this year, so the legislature
can act swiftly next year once the foundation for more informed
decisions has been laid.
3:41:39 PM
KEVIN BANKS, Director, Division of Oil and Gas, Department of
Natural Resources (DNR), said he was available to answer
questions on SB 208.
SENATOR WAGONER said he wanted Mr. Banks to talk about how
important the market is versus the incentive to explore. He
thought they had already incentivized gas exploration in Cook
Inlet as much as possible some years ago.
3:42:45 PM
MR. BANKS responded that was a good point and that the waterfall
chart is as much a function of decline in demand in the
marketplace as it is a decline in production. The real challenge
in the Cook Inlet market is that it has essentially three large
sellers of gas and three or so consumers of gas in the form of
the electric utilities and the local distribution company,
EnStar. As a consequence, the marketplace has few players. So he
likes to say, "The market is free, but it's not necessarily
competitive."
3:44:10 PM
Furthermore, he remarked, it's challenged because the
contracting arrangements among all of the parties don't always
come due at the same time. So, one contract will expire and it
may be the only time that buyers and sellers are interacting in
the marketplace until another contract is negotiated. There are
very few indicators of what the market price is or should be,
and it's difficult to know what market incentives exist to
encourage new production in the kind of "surplus production"
that the Inlet has enjoyed for so long - the lack of which is
creating some anxiety about future supplies.
3:44:59 PM
SENATOR STEDMAN asked if he has seen any changes since the PPT
was passed and if they need to review that work.
MR. BANKS answered that at the moment, the tax rate that applies
to gas in the Cook Inlet is only about $17.07/mcf, and as prices
for gas change in time, that number will remain the same under
the current tax regime. Tax credits can be used in Cook Inlet,
but he didn't know how the credits and tax rate interact with
each other; DNR might better respond to that. It was his
impression that the tax and royalty provisions that apply in the
Cook Inlet exert kind of a light touch on production there.
Several fields have only a 5-percent royalty as result of
legislation that was done 10 years ago. He mentioned that
Armstrong is developing the North Fork Unit - one of those 5-
percent royalty fields. So in a sense, a lot of the stimulus in
terms of tax and royalty incentives is already in place. Then to
follow on from Senator Wagoner's point, it would behoove
legislators to try to get a better understanding of how the
market interacts, so they might considering doing something to
expand it.
CO-CHAIR WIELECHOWSKI said this is one of the first things he
looked into when elected over three years ago and they still
don't have an answer. Some of the lowest tax and royalty rates
in the nation are in Cook Inlet; so that looks like the
incentives that are in place are not working and his thought is
to step back and get some experts to evaluate how exploration
can be spurred.
3:48:40 PM
SENATOR WAGONER said no one will explore and drill for gas
without a market or a place to put it. Right now there is no
place to put it; the only outlet is the LNG plant. Has any
producer other than ConocoPhillips or Marathon put any gas into
the LNG plant?
MR. BANKS said he didn't know.
3:49:48 PM
JOHN IVERSON, Director, Tax Division, Department of Revenue
(DOR), said that exploration in Cook Inlet is very heavily
incentivized from a tax credit perspective.
SENATOR HUGGINS stated that it appears that this area is a
victim of a lack of effort and the subject gets just probed
whenever it comes up. He has listened to the department talk
about all the gas there and he has seen the charts and all we
have to do is go get it. The two jack-up rigs the Murkowski
administration talked about "just went away." Right now the
state has an in-state gas coordinator that is supposed to be
working on things like this. Enstar and ANGDA have been working
on it, the Railbelt consolidation is going on, and then there's
the RCA that no matter what solution they come up with, they
tend to be able "to just screw it up" because long term
contracts can't be used. He asked Mr. Banks if he was "Mr. Cook
Inlet," programmatically, what three things would he do in Cook
Inlet?
3:53:19 PM
MR. BANKS answered that he looks at the problem from different
perspectives. Number one, the size of the market is pretty
small; number two, the Cook Inlet region has enjoyed relatively
low gas prices because it had a surplus of productive capability
- people looking for oil found large gas fields. It was actually
cheaper to just drill another producing well than to do anything
else. If we want to go back to the time where we had this kind
of surplus productive capacity, then that tends to mean there
are different kinds of problems to solve. First of all, the
market must be bigger. It has to have some kind of support
either in exports or some other kind of demand. The issue, then,
is if gas can be found for prices that are attractive for those
kinds of projects.
3:55:21 PM
MR. BANKS said he is convinced that Cook Inlet has a fair amount
of gas in the ground, and the trigger to get it to market is not
just a matter of price, although that is important. A place to
put it is also needed; and this requires increasing costly
investments.
He said the he would look for ways to expand the market, ways to
export, and create situations within the market today that will
solve some of the more critical problems. For instance, the
supply on an annual basis as indicated in the supply studies is
part of the problem, but gas supply is also needed in the winter
when it's cold and consumption rates are high. Storage will be
needed for that. They also need to make sure that the
infrastructure for supplying gas to homes will not break down -
so reliability is another factor. Also some kind of mechanism
should be considered so that a lessee or a producer doesn't have
to strand his supply of gas in order to give the state peace of
mind knowing that it has a sufficient supply of gas - whatever
that means.
3:56:46 PM
SENATOR HUGGINS said effort are going on right now to work LNG
imports and he characterizes that as - okay we can't solve our
problems, so we'll buy somebody else's product and invest in
their jobs. He hangs his head when he thinks about it. He asked
Mr. Banks if he was aware of those efforts.
MR. BANKS answered no.
SENATOR HUGGINS remarked, "Call the Railbelt Consolidation guys,
because they're doing it."
MR. BANKS asked if he was referring to the integrated resource
development plan.
SENATOR HUGGINS said that is part of it.
CO-CHAIR WIELECHOWSKI agreed with him and said that all these
groups have been studying these problems for years, but no
comprehensive plan has been developed for it.
3:58:22 PM
SENATOR STEDMAN asked Mr. Banks to clarify what he means by
expanding and "unstranding" the Cook Inlet area.
MR. BANKS replied that he means if the goal is to be where we
used to be with excess gas supply, the only way to have that is
to have a larger market. But the industrial LNG market was
created to take up excess supply. When consumers needed the gas,
there was an opportunity to direct production into the local
market. To the extent that the reserves on the graph are
"stranded" it means that people are not drilling for these kinds
of supplies of gas because they know that unless they can enter
into some kind of agreement with a local utility, there is no
point in drilling today. So, a producer will wait until it has a
supply contract with certain supply requirements that must be
met and then make the drilling commitments to satisfy those
requirements. It seemed to him that a broader market with more
players would create conditions for more production.
4:00:27 PM
SENATOR STEDMAN asked what part the long term pricing contracts
play into this and how do they incentivize producers to drill if
they aren't able to get a long term contract to make it worth
their while to go drill.
MR. BANKS replied that he was hitting on all the issues that
surround the problems with getting more production out of the
Cook Inlet, and he didn't disagree with anything he said. Even
the possibility of LNG exports from Cook Inlet in the future, a
new industrial use, or the reestablishment of Agrium's plant
will truly depend on the price of gas. How the marketplace with
so few players gets to that price is a real challenge. He said
he shares everyone's frustration that he has heard here today
about how the market itself doesn't seem to be taking care of
what residents' expectations are for that region - that new
supplies will be produced there. So, something else needs to be
examined as a possibility. A structure like ANGDA should be
explored and that is what that kind of study is doing.
4:02:49 PM
SENATOR WAGONER suggested the he discuss the Armstrong re-
drilling on the North Fork of the Anchor River and talk about
the history of that gas field where oil was explored in the
early '70s, but gas was found. The wells were capped, because
there was no market or transportation for it.
MR. BANKS explained that North Fork and several other fields
that are now under way in the last several years are an example
of fields that had been discovered very early on in the search
for oil, but because of the lack of transportation and the
technology that existed in those days the gas wasn't produced.
Now Armstrong is bringing in different technologies that weren't
even available when the gas was discovered and they have a
commitment to sell 10 bcf to Enstar. Presumably the price will
be satisfactory to Armstrong to encourage their development, and
those are a bit higher than what the weighted average cost of
gas is today in the Cook Inlet.
4:05:25 PM
SENATOR HUGGINS recalled that the state has one lease for gas
storage.
MR. BANKS answered that three gas storage facilities exist now
in the Cook Inlet - one is on federal land at Swanson River and
two are on state land.
SENATOR HUGGINS said one is proposed by ANR, a subsidiary of
TransCanada, and it appears that it has been put in limbo by the
Regulatory Commission of Alaska (RCA) and their connotation that
there potentially has to be legislation before it will go
forward.
MR. BANKS said he wouldn't say that judging by the level of
activities his division is entering into and that the department
is involved with in terms of permitting the project and
developing the storage lease. It is correct that the RCA ruled
that it regarded its jurisdiction as muddled over the question
of whether or not they would regulate storage there, but he
wasn't sure to what extent that is going to hold up a project
that still has an 18-month timeframe before production goes into
it.
4:07:31 PM
SENATOR HUGGINS said if modifications have to happen
legislatively, would he be correct in assuming the
administration would bring forward some legislation. Does there
have to be a fix?
MR. BANKS replied that he didn't know what the administration is
planning on doing on that issue, but he knew some discussions
were going on in the other body with the chairman of the RCA
now.
SENATOR HUGGINS said he is supportive of his efforts to get some
things done. Lawmakers need some answers, because they can't
just "dilly dally on the sidelines" while people end up without
any gas.
CO-CHAIR MCGUIRE asked what kind of outreach his division does
or how it interfaces with potential commercial consumers in the
Cook Inlet. For instance, she said, Alberta has an active
portion of its department looking for those industrial anchors
that will be a part of developing these basins and trying to
match them up with potential explorers.
4:09:05 PM
MR. BANKS replied that the department doesn't have a specific
outreach to that kind of consumer, but it does spend a lot time
with the potential producers and potential new producers. It was
an attempt of theirs in licensing the LNG plant where exports
are now occurring to encourage the operators of the plant to
offer the services of the LNG plant to other suppliers as part
of an RFP that they were to publish just prior to the export
license period to begin. They did that without much success.
When the opportunity arises the department steps up, but it
doesn't do that kind of advertising and promoting that she is
thinking about.
4:11:04 PM
CO-CHAIR MCGUIRE asked who is leading the charge in developing
Cook Inlet, and said perhaps the administration is the better
branch of government to do this. She remembered last year that
no one was interested in gas storage in the Interim and then she
started hearing rumors that TransCanada had been in
conversations with the department and is on the fast track to a
storage facility. How is the department participating in those
negotiations?
4:12:54 PM
MR. BANKS thanked her for the encouragement to develop new
markets for the state's gas. He said that he went to China in
December and met with petrochemical companies along with Harold
Heinze and some legislators as part of his "ongoing duties as
assigned" in trying to find potential gas markets in general.
With respect to the TransCanada project, they are thought of as
the applicant for the AGIA pipeline, but their subsidiary, ANR,
has a lot of storage capacity in facilities in the Midwest,
particularly in Michigan. So becoming a potential sponsor of a
storage facility whose role it is only to provide the
warehousing of the gas and pumping it out when it is needed
hasn't been done yet in the state of Alaska. ANR came to the
department about six months ago and they are working through a
process to gain the appropriate permits and the land they will
need for the surface operations, and the DNR is helping them
prepare the lease agreements that will make it possible for them
to operate a storage facility on the state's mineral estate.
That company and the current lessee have agreements; some of
those discussions are ongoing and confidential so he couldn't
say too much. He related that the department has had other
sporadic conversations with other sponsors in the Cook Inlet
region; he has gotten the sense that the sponsors have gone back
to do some more homework and he full expects them back as time
goes on. He said, "There are more than just the TransCanada ANR
proposal that may come to fore here in the next couple of
years."
CO-CHAIR MCGUIRE said a second example occurred to her - the
first one being AGIA - of when the government decides to really
fast track and put together a series of permits, advice,
authority, and bring suppliers together. She would like to see
Alaskan companies coming forward and maybe the department could
come up with a process to get more information out to them about
the opportunities.
SENATOR STEDMAN went to page 3, line 1, that said, "identify,
evaluate and recommend additional incentives that may be enacted
by the legislature for increasing exploration and development of
gas" and suggested softening it to "that may be enacted by the
legislature" because they are really trying to come up with a
solution.
He went to a similar item on line 4 says, "determine the cost,
feasibility, and a proposed organizational structure for a new
state entity". He said some are a little gun shy about
continually creating new state entities; Cook Inlet already has
too many entities running around. This issue has been going on
for several years and it seemed more like a long-term price
issue to him.
4:19:08 PM
MR. BANKS said on that last point, their supply study had an
observation that bringing in the new resources will cost more
than in the past and that the right kind of price signal will
have to be available to producers to do it. He agreed that an
"organizational structure" might be a "long reach" and that they
should look at all possibilities. However, he thought this bill
intended to look for a more active role by the state to achieve
some new supply.
SENATOR STEDMAN said he still thought that until the long-term
price issue is solved, they can do everything including paying
an explorer directly to explore and even that wouldn't solve the
problem. He said lowering the tax rate in Cook Inlet three years
ago didn't produce the results they were hoping for then and he
did not want to create another state bureaucracy that would not
lead to a solution.
CO-CHAIR WIELECHOWSKI said Cook Inlet has some of the lowest
taxes in the country and very low royalty rates, but it's not
getting exploration. If the producers who have the leases are
not willing to develop the leases they have, he said, let's do
it ourselves.
4:22:55 PM
SENATOR WAGONER said if they really want the "free market" to
work, they should have a five year sunset and keep RCA from
having oversight on gas contracts. Basically that gas has one
major user, Enstar, and with the RCA controlling the market,
they won't see much exploration in Cook Inlet other than what
can be put under contract. Taking RCA out of the picture would
stimulate some exploration and production.
CO-CHAIR MCGUIRE said she and Senator Wielechowski diverged
philosophically on this particular method of solving the
problem, but they don't diverge on the need for it. That sense
of frustration is pretty unanimous, but the need in Cook Inlet
is "dire." She thought in a state that depends so much on this
resource someone should be tasked with bringing people to the
table to chat with other folks - like the tourism and fisheries
industries do.
SENATOR STEDMAN said he supported the concept of the bill, but
they need to look back at what incentives they have already done
in Cook Inlet over the last decade - reducing taxes, increasing
credits, and ring-fencing Cook Inlet - that were supposed to
address this issue.
CO-CHAIR WIELECHOWSKI said that is a good point and he also
thought they should look at what has been done in the past and
not repeat themselves on something that isn't working.
4:29:31 PM
JERRY MCCUTCHEON, representing himself, Anchorage, Alaska, said
this is a Kevin Banks problem. They don't need to encourage
further Cook Inlet gas production with tax breaks or whatever;
they need to enforce the leases in Alaska's constitution.
4:31:12 PM
CO-CHAIR WIELECHOWSKI announced a recess.
4:31:17 PM
CO-CHAIR WIELECHOWSKI called the meeting back to order at 4:31.
He closed public testimony and announced that SB 208 would be
set aside for further work.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 203 Bill Packet - Part 1.pdf |
SRES 2/8/2010 3:30:00 PM |
SB 203 |
| SB 203 Bill Packet - Part 2.pdf |
SRES 2/8/2010 3:30:00 PM |
SB 203 |
| SB 228 Bill Packet - Part 1.pdf |
SRES 2/8/2010 3:30:00 PM |
SB 228 |
| SB 228 Bill Packet - Part 2.pdf |
SRES 2/8/2010 3:30:00 PM |
SB 228 |
| SB 195 - Bill Packet - Part 1.pdf |
SRES 2/8/2010 3:30:00 PM |
SB 195 |
| SB 195 - Bill Packet - Part 2.pdf |
SRES 2/8/2010 3:30:00 PM |
SB 195 |