Legislature(2005 - 2006)SENATE FINANCE 532
08/03/2006 09:00 AM Senate SPECIAL COMMITTEE ON NATURAL GAS DEV
| Audio | Topic |
|---|---|
| Start | |
| SB3002 | |
| Amendment 5a | |
| Amendment 8 | |
| Amendment 7 | |
| Amendment 1 to Amendment 7 | |
| Amendment 6 | |
| Alaska Gasline Port Authority Presentation | |
| Jim Whitaker, Alaska Gasline Port Authority | |
| Bill Walker, Alaska Gasline Port Authority | |
| Radoslav Shipkoff, Greengate Llc | |
| Governor Walter Hickel | |
| SB3002 | |
| David Van Tuyl, Bp | |
| Mark Nelson, Exxonmobil | |
| Wendy King, Conocophillips | |
| Jim Clark and Joseph Donohue | |
| Amendment 9 | |
| Amendment 10 | |
| Dan Dickinson | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB3002 | TELECONFERENCED | |
SB 3002-STRANDED GAS AMENDMENTS
9:35:38 AM
CHAIR SEEKINS announced SB 3002 to be up for consideration. He
said that he would like to correct Amendment 5, which was
adopted 08/01/2006, and asked if the members had other
amendments to offer.
9:36:22 AM
SENATOR BEN STEVENS said that he had a new amendment and a
revised Amendment 2.
The committee took an at-ease from 9:36:46 AM to 9:40:48 AM to
copy and distribute the amendments.
CHAIR SEEKINS reminded the committee that Amendment 5 was
amended to add two subparagraphs, one referenced traversing land
beneath navigable waters, and the other entering Canada at any
point north of 64 degrees.
He moved to rescind the committee's action of 8/1/06 in adopting
Amendment 5 as amended. There being no objection, it was so
ordered.
CHAIR SEEKINS offered Amendment 5A, which read:
^AMENDMENT 5A
Sec. 43.82.100. Qualified project.
Based on information available to the commissioner,
the commissioner may determine that a proposal for new
investment is a qualified project under this chapter
if the project
(1) principally involves
(A) the transportation of natural gas by pipeline to
one or more markets, together with any associated
processing or treatment;
(B) the export of liquefied natural gas from the state
to one or more other states or countries; or
(C) any other technology that commercializes the
shipment of natural gas within the state or from the
state to one or more other states or countries;
(2) would produce at least 500,000,000,000 cubic feet
of stranded gas within 20 years from the commencement
of commercial operations; [AND]
(3) is capable, subject to applicable commercial
regulation and technical and economic considerations,
of making gas available to meet the reasonably
foreseeable demand in this state for gas within the
economic proximity of the project; and
(4) no project may be considered a qualified project
under this chapter if the pipeline to transport
natural gas from land within the Prudhoe Bay oil and
gas lease area follows a route that:
(1) traverses land beneath navigable waters (as
defined in section 2 of the Submerged Lands Act
(43 U.S.C. 1301)) beneath, or adjacent shoreline
of, the Beaufort Sea; or
(2) enters Canada at any point north of 64
degrees north latitude; and
There being no objection to adopting Amendment 5A, it was so
ordered.
The committee took an at-ease from 9:42:51 AM to 9:49:35 AM.
CHAIR SEEKINS announced that Senators Donny Olson, Lyda Green
and Albert Kookesh had joined the meeting.
9:50:58 AM
SENATOR BEN STEVENS offered Amendment 8 and objected for
discussion purposes:
^AMENDMENT 8
Delete "30"
Insert "60"
In the following section:
Sec. 43.82.430. Final findings, determination,
and proposed amendments; execution of the contract.
(a) within [30] 60 days after the close of the public
comment period under AS 43.82.410(4), the commissioner
of Revenue shall
He explained that it is an extension of the amount of time in
the Alaska Stranded Gas Development Act (ASGDA) from 30 to 60
days for the commissioner to assemble the final fiscal interest
finding and determination.
SENATOR BEN STEVENS removed his objection and moved to adopt
Amendment number 8.
9:52:37 AM
SENATOR WAGONER said he has no objection to the amendment, but
is not ready to vote on the Stranded Gas Act as amended. He
wondered if it might behoove the committee to handle this matter
differently.
SENATOR DYSON asked whether Senator Wagoner was suggesting that
Amendment 8 become a separate bill.
SENATOR WAGONER pointed out that would ensure that the
commissioner is allowed the additional 30 days.
9:53:51 AM
CHAIR SEEKINS said that might be a point for further discussion;
but he wanted to vote on Amendment 8 to SB 3002 at this time.
9:54:39 AM
CHAIR SEEKINS asked if there were any objections to the motion
to adopt Amendment 8 to SB 3002. There being no objection, the
motion carried.
9:54:50 AM
SENATOR BEN STEVENS moved to adopt Amendment 7, and objected for
discussion purposes:
^AMENDMENT 7
Page 7, lines 3-12
Delete all material and insert the following new
material in its place:
Sec. 12. AS 43.82.270 is amended to read:
Sec. 43.82.270. Project plans and work
commitments. A contract under AS 43.82.020 must
include provisions for implementation of the qualified
project plan approved under AS 43.82.140, as may be
modified as a result of the development of a contract
under this chapter, and provisions for updating the
plan at reasonable intervals until the commencement of
commercial operations of the approved qualified
project. The commissioner of revenue, in consultation
with the commissioner of natural resources, may, as a
term in a contract under AS 43.82.020, include work
commitments or other obligations in the contract to be
accomplished before the commencement of commercial
operations of the approved qualified project. A
minimum project expenditure commitment shall be
included in a contract under AS 43.82.020 that meets
the requirements set out in (b)-(d) of this section.
Sec. 13. AS 43.82.270 is amended by adding new
subsections to read:
(b) The sponsors of the Alaska Highway Natural Gas
Pipeline Project shall incur a minimum of
$1,500,000,000 in project expenditures beginning with
the date the contract is fully executed by the parties
and continuing until December 31, 2010. The project
expenditures required by this subsection must be
necessary to finance the planning and permitting phase
of the project leading up to the decision on full
project funding. The sponsors shall allocate and incur
expenditures regularly throughout the period covered
by the minimum expenditure commitment. If the
commissioner of natural resources determines that a
sponsor breached minimum expenditure commitment
imposed by the contract, the unexpended balance of the
expenditure obligation attributed to that sponsor
shall be paid to the state treasury.
(c) The sponsors shall establish an escrow account,
letter of credit, or other form of financial security
satisfactory to the commissioner of revenue to cover
the minimum project expenditure commitments imposed in
(b) of this section.
(d) The sponsors shall provide the commissioner of
natural resources with an expenditure report at the
end of each month containing enough information to
permit an audit of compliance with the expenditure
commitments imposed in (b) of this section.
Renumber remaining sections.
He explained that the intent of this amendment is embodied in
Section 13, subsection (b), which requires that, upon execution
of a contract between the sponsor group and the state, a $1.5
billion account shall be funded to cover all preliminary front-
end engineering design work and permitting costs. That account
shall stay in existence for approximately 40 months from time of
execution, until 12/31/2010. At that time, if the project has
not moved to full project funding and the commissioner
determines that there is a breach in the process to that point,
the balance of the account shall revert to the state treasury.
9:57:44 AM
SENATOR DYSON said he wanted to hear from the producers and/or
the state's consultants on the issue before voting on it. He
also wanted to set forth some performance deadlines such as
dates for filing the Environmental Impact Statement (EIS) and
for an open season.
9:58:52 AM
SENATOR ELTON asked Senator Stevens if the sponsors would apply
to the commissioner for reimbursement of expenses from the
escrow account that Amendment 7 creates.
SENATOR BEN STEVENS said that is correct. All front-end
engineering and design work would be credited to that account.
The commissioner and the parties to the contract would have to
approve those expenditures to ensure that they fall under the
contract before funds would be disbursed.
He added that the State has already set aside $300 million for
that purpose in the Alaska Housing Finance Corporation (AHFC)
account.
CHAIR SEEKINS likened it to an earnest money account that is
drawn down for project expenditures.
SENATOR BEN STEVENS agreed.
^Amendment 1 to Amendment 7
10:00:31 AM
SENATOR WILKEN offered Amendment 1 to Amendment 7. He proposed
that language be inserted in Section 13, line 9, after the word
"resources", so that line would read "commissioner of natural
resources, with the concurrence of the commissioner of revenue".
He objected for discussion purposes, and explained that these
would be weighty decisions that should be shared across
agencies.
SENATOR BEN STEVENS said he had no objection to that.
CHAIR SEEKINS asked for further objections to Amendment 1 to
Amendment 7.
10:01:40 AM
SENATOR GREEN inquired about any impacts that the committee may
not have considered.
CHAIR SEEKINS said he would ask.
10:02:38 AM
SENATOR STEDMAN asked if it is correct to infer from Section 13,
subsection (c) that the account does not have to be funded; it
is sufficient that the full faith and credit of the corporation
be behind expenditures up to $1.5 billion.
SENATOR BEN STEVENS answered that he is correct; a cash deposit
is not required. Each party would have to put up a letter of
credit equal to its participation, and those letters of credit
would be drawn upon as expenses are incurred. If a sponsor were
found in breach of its duty to execute, the unexpended balance
of the obligation attributed to that sponsor would be called to
the state treasury.
CHAIR SEEKINS noted that it is not a drawdown account.
SENATOR BEN STEVENS agreed.
SENATOR STEDMAN asked for confirmation that there would be no
initial cash call of $1.5 billion on the participants.
SENATOR BEN STEVENS answered that one could view it as "upon
execution" the parties agree to spend $1.5 billion by the end of
2010.
CHAIR SEEKINS asked what happens if the money is not spent by
December 31, 2010.
SENATOR BEN STEVENS replied that the remaining balance would be
paid to the state.
SENATOR STEDMAN prefaced his question by saying that a
considerable amount of money has already been spent. He asked
how the "look back" would be dealt with.
10:05:11 AM
SENATOR BEN STEVENS referred to the first sentence of subsection
(b), which reads, "The sponsors of the Alaska Highway Natural
Gas Pipeline Project shall incur a minimum of $1.5 billion in
project expenditures beginning with the date the contract is
fully executed by the parties and continuing until December 31,
2010."
10:05:24 AM
SENATOR DYSON recommended that the committee delay a vote on
this amendment for a couple of hours, until the producers and
the administration's consultants have had some time to look at
it.
SENATOR BEN STEVENS said he knows the producers' response will
be "no"; every substantive amendment the committee has put
forward to the stranded gas act has been met with a resounding
"no". He said that there should be a commitment to perform. If
the sponsors want to drag their feet, there is $1.5 billion on
the line.
CHAIR SEEKINS clarified that, if the state has a $300 million
commitment, the three sponsors have $1.2 billion on the line
between them.
SENATOR BEN STEVENS said that's right.
SENATOR DYSON said that he was impressed by some of the
producers' testimony yesterday and still wants to hear from them
before voting.
CHAIR SEEKINS assured him that the committee would hear from
them.
10:08:10 AM
SENATOR ELTON said he would also like to hear from Mr. Joseph
Donohue whether, if there were an issue about payments under
this amendment, it would go to the contractual dispute
resolution process.
SENATOR STEDMAN pointed out that the state has already put up
its portion of $300 million.
10:09:44 AM
CHAIR SEEKINS welcomed former Governor Hickel.
10:10:12 AM
CHAIR SEEKINS moved to table Amendment 7.
SENATOR BEN STEVENS objected.
CHAIR SEEKINS announced Amendment 7 would be set aside.
10:10:33 AM
SENATOR BEN STEVENS moved to withdraw Amendment 2 and re-offer
it in a new form as Amendment 6. There being no objection, it
was so ordered.
10:10:53 AM
SENATOR BEN STEVENS moved to adopt Amendment 6 and objected for
discussion purposes.
^AMENDMENT 6
Page 1, line 3, following "terms;":
Insert "providing for an advisory vote,treatment of
certain laws, and approval and ratification regarding
a stranded gas fiscal contract;"
Page 8, following line 8:
Insert new bill sections to read:
"*Sec. 14. AS 43.82.430(b) is amended to read:
(b)After considering the material described in
(a) of this section and securing the agreement of
the other parties to the proposed contract regarding
any proposed amendments prepared under (a) of this
section, if the commissioner determines that the
contract is in the long-term fiscal interests of the
state, the commissioner may execute [SHALL SUBMIT]
the contract [TO THE GOVERNOR].
Sec. 15. AS 43.82.430(c) is amended to read:
(c) The commissioner's final findings and
determination under (a) of this section and decision
regarding whether to execute the contract under (b)
of this section are final agency decisions under
this chapter.
Sec. 16. AS 43.82.440 is amended to read:
Sec. 43.82.330. Judicial review. An [A PERSON MAY
NOT BRING AN] action challenging the constitutionality
of a law authorizing a contract developed under this
chapter [ENACTED UNDER AS 43.82.435] or the
enforceability of a contract executed under a process
authorized by [A] law may not be brought [AUTHORIZING
A CONTRACT ENACTED UNDER AS 43.82.435] unless the
action is commenced within 120 days after the date
that the contract was executed by the state and the
other parties to the contract."
Renumber the following bill sections accordingly.
Page 11, line 30:
Delete all material and insert the following:
"*Sec.23. (a) AS 43.82.435 is repealed.
(b) AS 43.82.445 is repealed. "
Page 11, following line 30:
Insert new bill sections to read:
"*Sec. 24. The uncodified law of the State of
Alaska is amended by adding a new section to
read:
APPROVAL AND RATIFICATION. Notwithstanding
AS 43.82.435, repealed by sec.23(a) of this Act,
the provisions of the Alaska Stranded Gas Fiscal
Contract between the State of Alaska and BP
Exploration (Alaska) Incorporated, ConocoPhillips
Alaska, Incorporated, and ExxonMobil Alaska
Production, Incorporated, as amended to conform
to the provisions of the Act, are approved, and
the process and procedures followed in
formulating that contract are ratified.
*Sec. 25. The uncodified law of the State of
Alaska is amended by adding a new section to
read:
SUSPENSION OF OTHER LAW. The provisions of
the Alaska Stranded Gas Fiscal Contract between
the State of Alaska and BP Exploration (Alaska)
Incorporated, ConocoPhillips Alaska,
Incorporated, and ExxonMobil Alaska Production,
Incorporated, as amended to conform with the
provisions of the Act, are effective
notwithstanding the provisions of any other law,
including AS 43.82.200-43.82.270. Any
inconsistency between the Alaska Stranded Gas
Development Act (AS 43.82) and the fiscal
contract executed under AS 43.82 are cured and
authorized by this section.
*Sec. 26. The uncodified law of the State of
Alaska is amended by adding a new section to
read:
ADVISORY VOTE. At the 2006 general election
to be held on November 7, 2006, in substantial
compliance with the election laws of the state,
the lieutenant governor shall place before the
qualified voters of the state a question advisory
to the governor and the commissioner of revenue.
Notwithstanding other laws relating to
preparation of the ballot proposition, the
question shall appear on the ballot in the
following form:
QUESTION
Shall the commissioner of revenue sign and make
binding upon the State of Alaska the Alaska
Stranded Gas Fiscal Contract between the State of
Alaska and BP Exploration(Alaska) Incorporated,
ConocoPhillips Alaska, Incorporated, and
ExxonMobil Alaska Production, Incorporated?
Yes [ ] No [ ]"
Renumber the following bill sections accordingly.
Page 12, line 7:
Delete "Sections 2-14 and 17-20"
Insert "Sections 2-13, 17, 20-22, and 23(b)"
Page 12, following line 9:
Insert new bill sections to read:
"*Sec. 29. CONDITIONAL EFFECT. Sections 14-16,
23(a), and 24 of this Act take effect only if a
majority of the votes cast in the 2006 general
election on the ballot proposition in sec. 26 of
the Act favor execution by the commissioner of
revenue and binding effect on the State of Alaska
of the Stranded Gas Fiscal Contract between the
State of Alaska and BP Exploration (Alaska)
Incorporated, ConocoPhillips Alaska,
Incorporated, and ExxonMobil Alaska Production,
Incorporated.
*Sec. 30. If secs. 14-16, 23(a), and 24 of this
Act take effect under sec. 29 of this Act, they
take effect on the date that the director of
elections certifies the results of the 2006
general election."
Page 12, line 10:
Delete "This"
Insert "Except as provided in sec. 30 of the
Act, this"
10:13:41 AM
SENATOR BEN STEVENS explained that Amendment 2 had some
complexities that were based upon the original bill, regarding
when certain sections would become effective. When the CS came
out, there were inconsistencies between the amendment and the CS
that caused errors. The memo circulated by Senators Olson and
French is based upon one of those major errors, which is when
section 24 would be enacted.
He said that Amendment 6 corrects those inconsistencies. Page 1
of Amendment 6 includes the purpose of the amendment in the
title. Section 14 changes the process for submitting the
contract to say that, "the commissioner may execute the
contract." Section 15 has to do with making that execution the
final agency finding. Section 16 re-states that the contract is
developed under this chapter.
SENATOR BEN STEVENS continued to page 2 of the amendment. Line 7
inserts a new provision 23 (a) that repeals the requirement for
legislative authorization and is tied to the effective date
under Section 29. That is, if a vote of the people is ratified
to favor execution of the fiscal contract, the requirement for
legislative authorization is repealed.
He said that Section 24 has raised concern, and stressed that
approval and ratification of the provisions of the contract is
not intended to authorize execution. Section 24 is not effective
until the conditional effect of the requirement for the general
vote. Section 25 is the enabling legislation that says any
inconsistencies between the SGDA and the fiscal contract are
cured by this section, under the assumption that the contract is
accepted by a majority of the general public and becomes
executable by the commissioner. Section 26 establishes a vote of
the general public to execute.
10:16:08 AM
SENATOR BEN STEVENS pointed out that Section 29 is the most
important because it provides the conditional effect that,
"Sections 14-16, 23 (a) and 24 of this Act take effect only if a
majority of the votes cast in the 2006 general election on the
ballot proposition in Section 26 of this Act favor execution by
the commissioner of revenue".
He re-emphasized that, if the vote is taken to the people and
the people ratify it, legislative authorization is not
necessary.
10:17:13 AM
SENATOR BEN STEVENS announced that he wished to set Amendment 6
aside and bring it up later. There being no objection, it was
so ordered.
CHAIR SEEKINS suspended the hearing on SB 3002 until after the
Alaska Gasline Port Authority presentation.
SB 3002-STRANDED GAS AMENDMENTS
7:15:49 PM
CHAIR SEEKINS returned attention to SB 3002. He informed members
that drafting was proofreading a new proposed committee
substitute (CS).
7:16:13 PM
CHAIR SEEKINS said he would open with Amendment 7 (already moved
and set aside), having to do with the $1.5 billion good-faith
account.
7:17:22 PM
^David Van Tuyl, BP
DAVID VAN TUYL, Commercial Manager, Alaska Gas Group, BP, said
that BP does not support this amendment. It believes it may have
unintended consequences that will be bad for the project,
including higher costs. He estimates the total cost to project
sanction would approach $1 billion, but fears that this
amendment wipes out any incentive to work efficiently. Even if
the producers perform well and deliver, they could still have to
write a check to the state. It increases costs at the front end
of the project when it especially hurts project economics. BP
fears it will result in schedule-driven behaviors that
historically result in cost overruns and failed projects.
7:20:04 PM
He also thinks the amendment raises a number of awkward
questions and concerns regarding the project. Specifically, the
state might be conflicted out of voting in project management
decisions. It raises the question, "What is a sponsor?" The term
is not defined in the act, nor does it say whether the state is
considered one. In addition, it creates difficulties for project
economics. The language does not provide a specific amount,
saying only that the commissioner can set it at a minimum of
$1.5 billion. There is no detail of what is included in project
expenditures or how they will be audited.
BP is committed to diligently advance this project, and the
contract currently drafted does that. It is evaluating public
comments in an effort to constructively address valid concerns;
but the producers negotiated a balanced contract and, if the
costs and risks increase, the contract will have to be re-
balanced in order to go forward.
7:22:20 PM
SENATOR DYSON asked for clarification of the term "full project
funding" from Sec. 13(b) that reads: "Project expenditures
required by this subsection must be necessary to finance the
planning or permitting phase of the project leading up to the
decision on full project funding."
MR. VAN TUYL replied that is a good question, and said he is not
sure the term is defined in the act. He thinks it means project
sanction, which is when the companies commit the funds necessary
to fund the project; but he isn't sure.
SENATOR DYSON said he thinks that is what the sponsor intended,
and asked what the producers have to accomplish in order to get
to that point in the process.
MR. VAN TUYL answered that they have to complete all of the
preliminary engineering and the environmental fieldwork
necessary to prepare a FERC application; hold a successful open
season; and submit the project application to FERC and the
National Energy Board (NEB) in Canada. Those regulatory
processes have to run their course and the producers would have
to receive a "Record of Decision" from the FERC and a "Leave to
Construct" from the NEB, either conditional or unconditional.
Once those are received, the companies will decide whether they
are acceptable, then they would commit funds.
SENATOR DYSON asked if all of those things could be accomplished
in four years.
MR. VAN TUYL answered yes, but reminded Senator Dyson that there
are processes in that time frame over which the producers have
no control.
7:25:45 PM
SENATOR DYSON asked if the timeframe is realistic. He said that
he does not believe the sponsor of the bill intended the
producers to spend more money; the intention was that money
spent during this phase would be provided for by this account.
He also pointed out that the account doesn't have to be funded;
they only have to provide a letter of credit. So, although this
is a hassle, it does not take any money out of the producers'
pockets. He asked if $1.5 billion is an unreasonable number for
all that has to be done to get to project sanction.
MR. VAN TUYL replied that BP estimated that costs to get to
sanction might approach $1 billion, but it hopes to beat that.
He said his concern is the language that says if the
commissioner determines that a sponsor has breached the minimum
expenditure commitment, the unexpended balance would be paid to
the state treasury. That seems to mean that the producers have
to spend at least that much by December 31, 2010, whether the
work could be completed for less or not.
7:27:40 PM
SENATOR ELTON asked Mr. Van Tuyl if, relative to a definition of
"sponsor", it would be clearer to say the "mainline LLC" rather
than "the sponsors of the Alaska highway natural gas project".
MR. VAN TUYL answered that he supposed it would address the
question of who has the obligation for the expenditure. The
specific expenditure amount in the amendment is still a concern.
SENATOR ELTON asked if disputes would be handled by the
commissioner of DNR with the concurrence of the commissioner of
DOR, or would go through an arbitration panel.
MR. VAN TUYL said that is not clear.
7:30:07 PM
CHAIR SEEKINS asked Mr. Van Tuyl to restate his concern
regarding the use of the word "sponsor" in this amendment.
MR. VAN TUYL replied that he isn't aware that "sponsor" is
specifically defined in the act, although "sponsor group" and
"member of a qualified sponsor group" are used generally to
refer to the producers.
CHAIR SEEKINS said that the meaning of "sponsor" or "sponsor
group" is assumed, and asked if Mr. Van Tuyl was sure it is not
defined in the act.
MR. VAN TUYL said he does not see it in the definitions section
in the act.
7:31:36 PM
CHAIR SEEKINS said it is not in definitions, but there is a
whole section on what it takes to be a qualified sponsor or
qualified sponsor group.
MR. VAN TUYL agreed, and pointed out that it would seem to
exclude the state. If that were the case, then the state's share
would be excluded.
CHAIR SEEKINS said he would ask the drafter; but he thinks the
intent was that, since the state is a 20 percent owner, it would
have to put up 20 percent of the amount.
7:32:07 PM
SENATOR BEN STEVENS said he would like to clarify his intent.
The first sentence of Section 13(b) reads: "The sponsors of the
Alaska Highway Gas Pipeline Project shall incur" [A Minimum Of
$1,500,000,000] "in project expenditures beginning with the date
the contract is fully executed". So, once contract is fully
executed, all parties to the contract become the sponsors.
7:33:32 PM
CHAIR SEEKINS said that he couldn't find any definition. He
asked Senator Stevens what he proposes if the costs are less
than $1.5 billion.
SENATOR BEN STEVENS responded that, if the total expenditures to
full project funding were less, then the sponsors would not be
liable for the balance of the $1.5 billion. The only time funds
would revert to the state treasury is if there was a breach.
7:36:16 PM
MR. VAN TUYL said he wanted to emphasize his concern about the
deadline. If all of the activities are not completed by January
1, 2011 as required by the contract, and the total cost is only
$800 million, the commissioner could say that the producers are
in breach and require them to pay the full amount, which is a
minimum of $1.5 billion. That could cause participants to cut
corners or operate in a way that is different from the norm, in
order to make the deadline.
7:37:17 PM
^Mark Nelson, ExxonMobil
MARK NELSON, ExxonMobil, said that ExxonMobil is also opposed to
Amendment 7 due to the hard completion date and minimum spending
requirements. Just as the producers have a responsibility to
shareholders, the state has a responsibility to Alaskans to
pursue the project in a disciplined manner using best practices.
Project management experts and individual project analysis have
concluded that, "When the calendar rather than the data drives
the project, the project usually fails." Rushing to meet imposed
deadlines serves to increase costs, compromise safety, and
increase the risk of project failure. As with other amendments
presented by this committee, this amendment may prevent the
project from being commercially viable. An economic project does
not need guaranteed start-up dates and mandated spending rates,
because the parties already have a substantial incentive to
advance it. In conclusion, being schedule-driven won't deliver
the best project to the state of Alaska and participating
companies.
7:40:40 PM
^Wendy King, ConocoPhillips
WENDY KING, ConocoPhillips, said she appreciates that, from the
public comment perspective and the comments that she has heard
in committee over the past couple of months, work commitments
are a significant issue to the legislature. For the producers,
it is a heart-of-the-deal issue. The producers have emphasized
that it is not advisable to tie work activities and dollars to
dates. Schedule-driven projects are set up for failure.
She stressed that ConocoPhillips wants to move this project
forward and is committed to spend the money necessary to get to
project sanction, but cautioned that, until project sanction,
all of those funds are likely to be equity funds, not financed
funds. Also the federal loan guarantees won't provide backup
financing until the project gets to the completion tests, so the
sponsors are "on the hook" for those dollars.
Ms. King said that Conoco Phillips is trying to work with all
parties to find a solution to work commitments. This could
include committing some money to project development in the
contract itself. She said that Conoco Phillips is not opposed to
spending commitments, but it sees challenges with this
particular amendment. The $1.5 billion monetary requirement is
more than ConocoPhillips expects to have to spend, and the focus
should be on keeping costs down. Another issue is the timeline.
The contract hasn't even been approved and the producers do not
know when the project will begin, but there is already pressure
to get to sanction by 2010. Schedule-driven behavior is a
concern.
7:44:14 PM
She continued to say there should be some mechanism whereby, if
there is a spending commitment, but all parties agree it should
be spent at a later date, it could be deferred. She is also
concerned that putting up $1.5 billion in the beginning could
create some time-value of money issues. To conclude,
ConocoPhillips has not had time to fully assess this amendment
internally. It is willing to entertain some of the concepts in
the amendment, but it needs to advance that in the context of
discussions on work commitments.
7:45:28 PM
SENATOR STEDMAN said that, in the second line from bottom of
Amendment 7, it talks about providing the commissioner with a
monthly expenditure report; so that should alleviate some of the
concern about a big expenditure coming in only one day into the
project. The intent is not to get remuneration to the state, it
is to keep the project moving forward and deal with other
concerns.
MR. NELSON said that ExxonMobil's concern is that it does not
have control over a lot of things that can happen prior to
project sanction, such as a judicial challenge. It would be
putting money at risk, or could be forced to continue spending
money during a challenge of the contract.
7:47:26 PM
SENATOR BUNDE commented that Mr. Van Tuyl mentioned fairness,
and one of the consistent tenets he has heard from the producers
is certainty. He thinks fairness would dictate some certainty
for the state as well. The producers are putting money at risk;
the state is putting its economy and the well being of its
citizens at risk. He said he was heartened to hear that the
producers have thought about how to bring more certainty to the
state, and is wondering when the committee might hear more about
that.
MS. KING replied that the public comment period closed July 24,
and ConocoPhillips is just beginning discussions with the
administration and its partners to find a balance that works for
all parties. She said she is unable to provide a firm timeline
for a decision at this point.
7:49:46 PM
SENATOR BUNDE asked if it is possible that a decision might be
available before next Thursday.
MS. KING said that is very optimistic.
7:50:08 PM
SENATOR WILKEN said that is the best testimony Ms. King has
given, and it is clear that she understands the state's
position; so, he addressed his comments to the representatives
of the other two producers. He said he will vote for this
amendment, but does so with some concern, because he does not
like deadlines either. This contract won't leave the legislature
as a "trust me" contract. He does not want to get to the end of
the four years estimated to project sanction and hear that the
producers aren't ready yet. He said he does not know what the
benchmarks are, but there have to be some specific goals the
state can use to measure whether the producers are expending the
effort necessary to move this project ahead.
7:53:36 PM
MR. VAN TUYL said he appreciates Senator Wilken's concern, and
BP is committed to advance the project and monetize the resource
for the benefit of BP and the state. The challenge is how to
structure the contract to ensure that outcome. The work
commitments in the contract are the product of a lot of
consideration, and he thinks the formula provides as much
certainty as it is reasonably possible to provide. Deadlines and
spending rates may not result in the desired outcome.
7:56:12 PM
SENATOR WILKEN said he believes what Mr. Van Tuyl said, but he
does not want Mr. Van Tuyl's replacement talking to his
replacement about these same issues. He wants some type of a
yardstick.
MR. NELSON echoed Mr. Van Tuyl's remarks, saying that ExxonMobil
is committed to this project and will continue to work hard; but
it does not want to put inefficient measures in place that will
cost extra money.
7:57:19 PM
SENATOR BEN STEVENS said he wanted to make a clarifying point.
In Section 13 when it says, "the contract is fully executed by
the parties", the term parties is defined as "the state and all
participants" and participant means "BP, ConocoPhillips, and
ExxonMobil". The sponsor is the one that takes it to the federal
government.
7:58:21 PM
CHAIR SEEKINS pointed out that this is $1.5 billion, and $300
million has already been set aside by the state.
SENATOR BEN STEVENS clarified that the state is putting risk
money up front as well, and once the contract is executed, the
state will agree to pay 20 percent of the expenses incurred. He
said he does not agree that all of the $300 million will come
back to the state if a breach has occurred.
SENATOR ELTON asked Senator Stevens if it was his intent to kick
any disputes under Section 13(b) or (d) into the arbitration
dispute resolution process, or for them to be settled by the
commissioners.
SENATOR BEN STEVENS said he cannot answer the question, but his
intent was for the minimum project expenditure to be agreed upon
in the contract. As part of the contract, it would be subject to
dispute resolution; but the statute does not become part of
dispute resolution.
8:03:36 PM
CHAIR SEEKINS asked if the unexpended balance attributed to that
sponsor would be subject to forfeiture.
SENATOR BEN STEVENS answered yes; it doesn't say whole project
would come to a stop.
8:04:59 PM
SENATOR ELTON said he is struggling with language that would
make it clear that disputes under Section 13(b), (c) or (d)
would be settled by the commissioners of revenue and natural
resources outside the dispute resolution process established in
the contract, and is thinking of a possible conceptual amendment
to clarify that.
8:05:41 PM
SENATOR BEN STEVENS said he does not think that language is
necessary, because the contract cannot dictate what statute
says. He said he does not want to put anything in statute that
can be dictated by contractual terms.
8:08:32 PM
SENATOR DYSON said he agrees with Senator B. Stevens, but he
worries about the curative language the committee saw earlier,
which he is told is standard in a contract. If the contract is
ratified and it later proves to be in conflict with any existing
law, the curative language says the contract trumps the legal
statute; so he feels that the point Senator Elton raises is a
valid one. He also feels that the producer's concern about the
deadline is valid. If the contract is not ratified quickly, it
would be better to specify a number of days or years instead of
naming a firm end date. He thinks accommodation should also be
made for events beyond the producers' control.
8:09:45 PM
SENATOR HOFFMAN asked Chair Seekins to refresh his memory
regarding the amendment before the committee.
CHAIR SEEKINS said that the amendment to Amendment 7, to include
"with the concurrence of the commissioner of the Department of
Revenue" is before the committee.
SENATOR HOFFMAN asked Senator Stevens how he arrived at $1.5
billion in light of the fact that all three sponsors have said
they think they can get to project sanction for less than $1
billion.
8:10:42 PM
SENATOR BEN STEVENS said the legislature voted on a $300 million
set-aside, and the state is a 20 percent partner, so he
calculated the total based on that.
8:11:59 PM
SENATOR STEDMAN commented that the state had some concerns about
its ability to come up with the funds to build this, and the
$300 million set aside is a good start toward the full 20
percent it will have to come up with.
The committee took an at-ease from 8:12:54 PM to 8:17:20 PM.
CHAIR SEEKINS called the meeting back to order. Not all of the
members were present, so he went off the record until they
arrived.
SENATOR KOOKESH arrived.
The committee took an at-ease from 8:18:06 PM to 8:19:08 PM.
CHAIR SEEKINS called for discussion among the members.
SENATOR ELTON said he will vote yes, but still has concerns
about the dispute resolution process and plans to discuss it
with Legislative Legal Services before the bill gets to the
floor.
8:19:45 PM
CHAIR SEEKINS interrupted to clarify that the matter before the
committee is whether there is any objection to adopting
Amendment 1 to Amendment 7 (proposed earlier by Senator Wilken)
to insert "with the concurrence of the commissioner of revenue"
in Section 13. There being no objection, it was so ordered.
8:20:12 PM
CHAIR SEEKINS said that the committee is now discussing
Amendment 7, as amended.
SENATOR ELTON said he appreciates the effort to create some work
commitments and monetary incentives, and does not think it is
too burdensome for the producers. He does not put aside their
concerns however, and thinks that they should have time to come
up with a way to tweak this approach if they feel it is
necessary.
8:21:59 PM
SENATOR BUNDE asked Senator Stevens whether, if there is a delay
and the reason for it is disputed, the dispute would go to
arbitration.
SENATOR BEN STEVENS replied that is not his intent. It is
intended to provide leverage to the commissioners. The intent
was to create financial commitments, while giving the producers
latitude to be efficient within that framework. How a dispute
would be handled relates to whether a determination is made that
there has been a breach in the spending commitment imposed by
the contract.
8:24:38 PM
SENATOR BEN STEVENS removed his objection.
SENATOR DYSON objected.
8:25:12 PM
The roll was called:
Yea: Senator Olson, Senator Wilken, Senator Hoffman,
Senator Kookesh, Senator Ben Stevens, Senator Stedman,
Senator Bunde, Senator Green, Senator Wagoner, Senator
Elton, Senator Seekins
Nay: Senator Dyson
Amendment 7 was adopted as amended by a vote of 11
yeas, 1 nay.
8:26:34 PM
CHAIR SEEKINS introduced a new draft CS, Version F.
8:26:46 PM
SENATOR GREEN moved to adopt Version F as the working document.
There being no objection, it was so ordered.
8:27:23 PM
^Jim Clark and Joseph Donohue
JIM CLARK, Chief Negotiator, Office of the Governor, introduced
himself.
CHAIR SEEKINS asked Joe Donohue if he would explain the intent
behind Section 1 of the CS.
8:27:44 PM
JOSEPH DONOHUE, Preston, Gates & Ellis, said the intent of
Section 1 of the bill (Version F) is to provide authority for
the state to agree to the Federal Arbitration Act. So, this is
an exception to the revised Alaska Uniform Arbitration Act. The
contract provides that the Federal Arbitration Act will control
the arbitration procedures, and this exception is designed to
clarify that.
8:28:36 PM
SENATOR DYSON asked if he is correct that the Federal
Arbitration Act will apply except where this contract has
exceptions.
MR. DONOHUE answered that the concern was that state law might
conflict with the contents of the proposed contract. This allows
the state to negotiate in the context of a Stranded Gas
Development Act contract, to stipulate to arbitration procedures
outside of title 9 of the state law.
SENATOR DYSON asked if the contract doesn't conform to state
law, this paragraph puts it under federal arbitration law.
MR. DONOHUE said this allows the state to stipulate as a
contractual term in a fiscal contract under 43.82 that the
Federal Arbitration Act will control arbitration proceedings.
8:30:02 PM
CHAIR SEEKINS asked if there were objections or proposed
amendments to Section 1. Hearing none, he asked Mr. Donohue to
address paragraph 1 of Section 2.
MR. DONOHUE explained that paragraph 1 of Section 2 was intended
to clarify that the contract developed under 43.82 could include
fiscal certainty terms relating to oil and to the business
activities of the qualified sponsors generally, not just those
related to new investment, or the gas pipeline project.
CHAIR SEEKINS asked for questions or amendments.
8:31:10 PM
SENATOR ELTON asked Mr. Donohue to speak to a suggestion he made
earlier, when explaining Version G to the committee, that this
section be moved to another part of the bill.
MR. DONOHUE replied that his comment was related to lines 6-7,
the language "including gas pipeline expansion pricing that
encourages further gas exploration." At one point, the
administration considered proposing language to 43.82.200 that
would deal with this issue and take it out of the purpose
clause.
SENATOR ELTON asked if the administration decided against that.
MR. DONOHUE answered yes.
CHAIR SEEKINS commented that the committee added "or a related
party" to that paragraph and the next, as well as a definition
of related party in a later section. He explained that Section 3
was the committee's amendment to the earlier CS (Version G).
8:32:41 PM
CHAIR SEEKINS reminded the committee that Section 4 is an
amendment that was offered by Senator Stedman and has been
included in the new CS. He asked Mr. Donohue to explain the
deletion on page 3 of Section 5.
MR. DONOHUE explained that Section 5 inserts the concept of
"related party" to make it clear that fiscal certainty terms can
relate to owners of the GTP, the mainline LLC, and other
entities. Also, the deletion on page 3 is designed clarify that
fiscal terms do not necessarily have to relate directly to this
new investment.
CHAIR SEEKINS asked for questions on Section 6.
8:34:09 PM
SENATOR ELTON commented that, under Version G, there was an
amendment to 43.82.020, which was negotiation of contract terms
and deals with the related party issue, and that section seems
to be missing in this version.
CHAIR SEEKINS said he would come back to the sections that were
removed for convenience, to discuss whether any should be
reinserted.
8:35:00 PM
MR. DONOHUE explained that Section 6 deletes the reference to
royalties. AS 43.82.220 currently deals only with royalty-in-
kind and royalty-in-value issues, and the intent was to broaden
the application of 43.82.220 to deal more generally with oil and
gas lease and unit agreements.
He went on to Section 7, which states that compliance with
43.82.220(a) is sufficient to satisfy all statutory requirements
under AS 38. That is primarily intended to make clear that those
are the sole criteria that apply to decisions to enter into
shipping commitments under the stranded gas act, and that the
royalty advisory board has no role in those decisions.
8:36:45 PM
CHAIR SEEKINS explained that Section 8 on pages 3-4, is the
amendment adopted regarding Project Labor Agreements (PLA's),
which has been incorporated into the new CS. He asked Mr.
Donohue to go on to Section 9.
MR. DONOHUE said Section 9 deletes language that would limit the
term of the contract to the period necessary to develop the
stranded gas, in order to avoid legal issues relating to how
long that period might be. It also contains the committee
amendments passed earlier in the week, changing the term from
commencement of operations from 35 years to 25 years, and
maximum contract period from 45 years to 35 years.
8:38:08 PM
SENATOR BEN STEVENS offered Amendment 9 (the first amendment to
Version F) and objected for discussion purposes. He said this
amendment came before the committee during the last special
session and has not changed.
^AMENDMENT 9
AS 43.82 is amended by adding a new section to read:
Sec. 43.82.255. Term of contract provisions
related to oil. (a) The
provisions of this section apply to a contract
developed under AS 43.82.020 that
provides for periodic payment in lieu of taxes on oil
under AS 43.55.
(b) For the part of the contract term beginning
immediately after the date
of full project funding or the date of issuance of a
certificate of public convenience
whichever date is later, and ending 14 years after
that date, the commissioner may
develop a term for the contract that provides for
payments in lieu of the taxes on oil
set out in AS 43.55. For the part of the contract term
established with as much
certainty as the Constitution of the State of Alaska
allows.
(c) For the part of the contract term beginning
immediately after the period
described in (b) of this section, and ending on a date
not later than 25 years after the
effective date of the contract, the amount of the
payment in lieu of tax on oil under AS 43.55 must be
equal to the amount of the tax levied by the law.
However, the
commissioner may develop a contract term that, in the
event of a material change in
the taxes enacted after the effective date of the
contract, establishes a procedure for
restoring the parties to substantially the same
economic position they had as of the
end of the period described in (b) of this section
immediately before the change.
(d) Implementation of a contract provision
authorized in this section may'be made subject to the
dispute resolution procedures of the contract.
CHAIR SEEKINS said he assumed that Senator Stevens wanted to
make some modifications, and that is why it was not incorporated
into the CS. He asked if there were questions regarding
Amendment 9.
SENATOR WILKEN referred to line 18, the word "commissioner", and
reminded the committee that the administration was going to
prepare language to clarify that this refers to the commissioner
at the time of the fiscal certainty. He asked if the
administration has had the opportunity to work on that.
MR. DONOHUE apologized and said he does not have it ready.
8:40:09 PM
CHAIR SEEKINS asked Senator Stevens if he would like to hold the
amendment to look at the new language.
SENATOR BEN STEVENS replied that it is up to the discretion of
the chair.
CHAIR SEEKINS asked if Senator Stevens' intent is that it be
automatic and negotiated now, or that it be negotiated in the
future, if the legislature raises taxes making an economic
balancing agreement necessary.
SENATOR BEN STEVENS answered that it would be negotiated as the
result of a material change at a future date.
CHAIR SEEKINS asked if it would satisfy his intent to say:
"However, in the event of a material change in the taxes enacted
after the effective date of the contract and after the period of
time specified in paragraph (b), the commissioner of revenue may
develop a contract term that establishes a procedure for
restoring the parties to substantially the same economic
position they had..."
8:41:59 PM
SENATOR BEN STEVENS asked Chair Seekins to repeat his proposed
language.
CHAIR SEEKINS did so.
SENATOR BEN STEVENS replied that, if that helps to clarify it,
he has no problem with it; but he feels it is already prescribed
on line 14.
8:42:52 PM
MR. DONOHUE interjected that, given the context of 43.82
generally no clarification is needed.
CHAIR SEEKINS said that, as he understands the statute, the
commissioner referred to is the commissioner of revenue, and the
economic balancing procedure would not take effect automatically
unless the economic rents changed after the prescribed period of
time. He asked Senator Wilken if he was satisfied with that
determination.
SENATOR WILKEN answered that he is not. He said he does not
understand why the committee feels it should deal with this at
all. The sitting commissioner can maintain the fiscal
equilibrium during that 14-year period.
8:45:04 PM
CHAIR SEEKINS replied that this section takes place after the 14
years.
SENATOR WILKEN responded that it is at the tail of 25 years.
MR. DONOHUE explained that, under this provision, the current
commissioners might offer a contract term that would lock in the
tax that is in effect by law at project sanction. The producers
may or may not agree to that, since they don't know what is
being locked in; so there is uncertainty related to the second
phase as to whether the producers would even be willing to
consider this. As to the third phase, it seems as if the
commissioner could negotiate provisions now that help refine the
concept of material change and how it would work when there is
fiscal stability.
8:46:24 PM
MR. CLARK suggested that the administration meet with producers
to craft language that fulfills the committee's direction, and
bring it back for review before the legislature ratifies the
contract.
8:47:31 PM
CHAIR SEEKINS said he understands it would be the sitting
commissioner that would make the decision to do it.
SENATOR GREEN pointed out that this is language that the
committee already adopted two or three times.
SENATOR BEN STEVENS said he did not think there were any
proposed changes.
SENATOR WILKEN said that, when the committee talked about this
amendment previously, there were three sections: four years to
sanction, five years to build, 9 years for capital cost
recovery. Then there was a piece of time at the end and, if
there were changes that would require the state to change oil,
it would seek balance through gas, or vice versa. This amendment
proposes to address something that, best guess, starts 14 or
more years from now. He did not understand why one would suppose
this legislature can do a better job of it today than the
commissioner and the administration could in 14 years, given all
the circumstances that could arise.
8:50:54 PM
MR. CLARK said that the language for fiscal balancing agreements
exists in many types of contracts. It is usually included on the
front end so all parties know what the rules will be in the
future. It may be that, at end of the 14-year period, it needs
to be changed; but that could happen to other sections of the
contract as well.
8:52:38 PM
SENATOR DYSON asked what is before the committee now.
CHAIR SEEKINS replied that it is Amendment 9 (the first
amendment to Version F).
SENATOR DYSON said that it looks as if disputes under this
section are subject to the contractual arbitration process, and
asked Senator Stevens to comment on the last two lines of the
amendment.
SENATOR BEN STEVENS answered that terms of a contract are
subject to dispute resolution. Disputes concerning the timing
would be settled in arbitration.
8:55:18 PM
CHAIR SEEKINS confirmed that it is when it is implemented.
SENATOR DYSON said that confirmed what he thought was true. He
said he appreciates what Senator Stevens has done, but is not
convinced of the efficacy of that dispute resolution process.
8:56:14 PM
SENATOR STEDMAN asked Chair Seekins if he could provide a brief
timeline to the people listening from home.
CHAIR SEEKINS summarized that there is a period of approximately
four years until project sanction, prior to which there is no
fiscal certainty. For a period of approximately five years after
sanction and nine years of construction, during capital cost
recovery, the state has established what taxes on oil will be.
That is a total of 14 years after project sanction. The
remaining 25 years, minus the pre-build years and the capital
cost recovery years, is a period of economic balancing during
which, if taxes are raised resulting in a substantive change in
the distribution of rents, the commissioner can enter into the
process to restore economic balance. (This was illustrated using
the chart Senator Wilken created for SB 2004.)
8:58:06 PM
CHAIR SEEKINS asked if he had summarized it correctly.
SENATOR BEN STEVENS replied yes.
SENATOR STEDMAN paraphrased that, under this amendment, the oil
tax structure would not be locked in until after sanction. The
state would stabilize the taxation on oil through the
construction.
CHAIR SEEKINS interrupted that it may be unconstitutional to do
so.
8:58:52 PM
SENATOR WILKEN said he would vote for the amendment because it
addresses one of the issues the committee has with the contract,
but told Mr. Clark that he expects to have further discussions
with him on this subject.
SENATOR ELTON said he would vote for the amendment because it is
marginally better than what is in the contract that he supposes
will be presented to the legislature. He does not think it does
anything to alleviate the constitutional questions, and he does
not think the state should lock itself into a tax rate for any
period of time.
9:00:01 PM
SENATOR DYSON removed his objection.
CHAIR SEEKINS asked whether there was further objection to
adopting Amendment 9. There being no objection, it was so
ordered.
9:00:25 PM
CHAIR SEEKINS explained that Sections 10 and 11 are the same as
Amendment 7 to Version G, which was adopted by the committee. He
asked Mr. Donohue to address Section 12.
MR. DONOHUE explained that Section 12, beginning on page 6,
extends the minimum public comment period from 30 to 60 days.
CHAIR SEEKINS asked if this is an amendment that was passed
earlier today.
9:01:34 PM
SENATOR BEN STEVENS said yes; it was a curative amendment,
because the 60 days expired on the 24th of July.
SENATOR WILKEN said he thought the amendment was on line 23.
CHAIR SEEKINS answered yes. This was a curative amendment to the
60 days of public comment that ended in July.
MR. DONOHUE agreed.
SENATOR WILKEN repeated that he thought the change was on line
23.
CHAIR SEEKINS replied that it would be.
SENATOR BEN STEVENS said he believes the governor announced that
he was going to have 75 days of public comment, from May 10 to
July 24.
MR. CLARK confirmed that it was 75 days.
^Amendment 10
9:03:07 PM
SENATOR BEN STEVENS moved to adopt Amendment 10, which amends
line 19 on page 6 to read "75" in lieu of "60". There being no
objection, it was so ordered. (This is the second amendment to
Version F.)
CHAIR SEEKINS said that Section 13 is the one that was amended
earlier today.
9:03:47 PM
MR. DONOHUE said that the amendments to Section 14 clarify that
the fiscal terms can relate to the qualified sponsor, members of
the qualified sponsor group, or related parties. The amendments
on lines 11-13 specify that payments are due to the state, but
can be made payable to the revenue affected municipalities.
He continued to Section 15, saying that the amendments to
43.82.505 provide that all of the impact payments due under the
fiscal contract would be paid to economically affected
municipalities under the principals outlined in 43.82.520.
SENATOR WILKEN apologized to the committee for digressing, but
said he has been working on the PILT issue and needed to correct
an error. Section 16 of Version G was deleted in Version F but
contained some really good work and should be retained.
CHAIR SEEKINS said he would put it back in and asked where
Senator Wilken would like it to be inserted.
SENATOR SEEKINS said it should go right after economically
impacted municipalities and would become a new Section 16.
Section 15 would revert to its language in G, because it refers
to Section 16.
9:06:08 PM
SENATOR WILKEN moved to adopt the foregoing as conceptual
Amendment 11, the third amendment to Version F. He noted it
would take Sections 15 and 16 of Version G and insert them after
the current Section 15 in Version F.
SENATOR ELTON interjected that, unless he has misunderstood
Senator Wilken's intent, they should be inserted after Section
14, beginning on line 14, because Section 15 in Version F would
be replaced.
CHAIR SEEKINS asked for confirmation.
SENATOR WILKEN agreed and restated his motion.
The committee took an at-ease from 9:10:01 PM to 9:10:51 PM and
from 9:12:22 PM to 9:14:30 PM to discuss technical aspects of
the amendment.
9:16:31 PM
CHAIR SEEKINS re-stated Senator Wilken's motion to adopt
conceptual amendment 11 to Version F: Remove Section 15 of
Version F, replace it with Sections 15 and 16 of Version G, and
renumber the other sections accordingly. There being no
objection, the motion carried.
9:17:22 PM
SENATOR WILKEN moved to adopt Amendment 12 (fourth amendment to
Version F). He objected for discussion purposes.
He said that, under the stranded gas amendment, AS 43.82.210
speaks to payment in lieu of taxes for municipalities, and the
amendment intends that the legislature will decide how the PILT
monies are distributed. The state gets money from the oil
companies in four major ways: a corporate income tax; royalties;
severance tax, and an ad valorum tax. The ad valorem tax calls
for 2 percent of the total value to be divided between
municipalities that have oil and gas properties within their
boundaries, with the balance remaining in the general fund. That
tax is being replaced by PILT, which will generate approximately
$12.67 billion over the next 35 years.
9:20:41 PM
SENATOR WILKEN said he researched how the PILT money was
distributed and found that one area is benefiting
disproportionately to others, and he isn't sure that is in line
with the spirit of Section 8.1 of Alaska's constitution. He
distributed a chart showing the distribution and pointed out
that the North Slope Borough will get 70 percent of the money.
Fairbanks North Star Borough will get 4 percent; Valdez will get
3 percent; the state of Alaska will get the 21 percent that
remains. If that were distributed on a per capita basis, that
would be $1.3 million each for residents of the North Slope
Borough; $96,000 for those in Valdez; $5,800 for residents of
Fairbanks North Star Borough; and $4,400 for each of the
626,000 citizens of Alaska.
He said that Amendment 12 provides that the money will go to the
state and the legislature will decide how to distribute it to
the people of Alaska.
9:23:28 PM
CHAIR SEEKINS asked Senator Wilken if Version F, page 3, between
lines 18-19 would be a good place to insert the amendment.
MR. CLARK interrupted to suggest that it might be helpful for
Mr. Dickinson, author of this section, to explain the
administration's rationale.
9:24:34 PM
^Dan Dickinson
DAN DICKINSON, CPA, said that Section 20.1 of the contract
states that payments are due to the state. It can direct that
some of those are paid to political subdivisions, and rules for
that are found in Exhibit G. It also states that political
subdivisions have no rights under the contract and cannot go
directly to the producers for satisfaction on issues.
CHAIR SEEKINS asked if there is a problem with the distribution
being directed by law.
MR. DICKINSON answered that Exhibit G, the methodology that
determines how it is divided up, provides that no money goes to
a political subdivision unless there is a ratio in front of it.
That ratio is the political subdivision's mil rate over 20 mils.
Under law, the legislature establishes the rules for the mil
rate, so he believes that the amendment is superfluous. Having
said that, maybe mil rates aren't the best way to determine how
certain municipalities get money. Other rules could be made.
9:28:47 PM
SENATOR WILKEN said that, although everything Mr. Dickinson said
is correct, he is not sure how germane it is to what he is
trying to do. He referred to Exhibit G, which reads in part:
"participant may make a portion of its payments due to the state
under articles 15, 16, and 17, payable to a political
subdivision." Then it says to go to Exhibit F for calculations,
and number 15 under F shows hypothetical examples that really do
not illustrate how the money will be distributed. How that money
is divided up should be dealt with through deliberative
legislative process, not through the contract.
9:31:42 PM
MR. DICKINSON observed that Section 43.82.210 of the Stranded
Gas Act instructs the commissioner that PILT payments to
municipalities will be a function of the contract. He also
pointed out that there is an assumption as to what mil rates
are; but those mil rates can be changed. He urged caution to
ensure that the mil rate is always a critical part of the
calculation.
9:33:10 PM
SENATOR HOFFMAN explained that the vast majority of the money is
going to the North Slope because that is where the resource is,
and the borough should be incentivized to encourage development.
9:34:26 PM
SENATOR OLSON pointed out that the pie chart shows North Slope
Borough getting 2/3 of the money, twice as much as the rest of
the state.
He asked Mr. Dickinson how accurate the percentages are, since
nobody knows what the mil rate will be 35 years from now.
9:35:49 PM
MR. DICKINSON answered that there are a number of assumptions
that reflect the situation today. The more distant the
projection, the harder it is to predict how those assumptions
will hold up. If the tax base increases, all other things being
equal, one would expect the mil rate on the North Slope to
lower. For example, if the tax base grows by $3 to $3.5 billion
to a tax base that is currently $12 billion, that is an increase
of almost 30 percent, so the mil rate should decrease by 30
percent and the state's portion should pick up.
SENATOR OLSON asked if Mr. Dickinson is saying that the numbers
could be off by 30 percent.
MR. DICKINSON responded that, over 30 years, that would be a
generous estimate.
9:37:35 PM
SENATOR OLSON opined that the administration is not in favor of
amendment.
MR. DICKINSON answered that is correct. The administration
worked hard to ensure that the legislature retained the ability
to control these issues.
9:38:17 PM
SENATOR STEDMAN asked if the mil rate would have to change
statewide to do the property tax adjustment to bring that number
down.
MR. DICKINSON replied that is correct. Under the current
system, any taxation up to 20 mils by a locality goes to that
locality; the difference between its tax rate and 20 mils goes
to the state. Under current statute, a municipality can go up to
30 mils for operations. If it is receiving payments to pay back
bonded indebtedness, there is no mil rate limit. So, one of the
things that happens in the contract is that municipalities'
current ability to tax is limited. Even though 20 mils has
effectively been the ceiling, the actual cap is at 30. This
legislation would reduce it to 20 for operations; there is no
cap for debt.
9:40:33 PM
SENATOR WILKEN agreed with Mr. Dickinson, but noted that a
provision in current law allows the North Slope Borough to
choose how it establishes its per capita mil rate. Because its
expenses exceed the 30 mils, it is allowed to use a formula that
takes the average per capita of the state, multiplies it by 225,
and divides it by municipal population. That lowers the
effective mil rate to keep it below 30 mils. Today it is at 29.7
mils for its operating budget and 40.22 mils for debt, which
comes to 69.97. They get to make that choice. Today, the North
Slope Borough has approximately 6,894 people. Through the
optional calculation for North Slope Borough, the municipal
population is counted as 13,047.
9:42:45 PM
MR. DICKINSON answered yes. Those options are defined in law,
and the issue went as far as the Supreme Court about five years
ago, which affirmed it. Because it is in law, it remains in the
purview of the legislature.
SENATOR BUNDE said one might refer to this amendment as a belt
and suspenders. When dealing with $5 to $10 billion, that might
be a good investment. The numbers may be speculative, but
wherever underground resources are found, they belong to all of
the people of the state, not to a particular geographic region.
When hyperinflation hits, which will happen when the pipeline
goes through, all communities will suffer economic impacts.
9:44:21 PM
SENATOR OLSON said that he is not sure what the previous
speaker's point was, but he would like to go back to the point
that Senator Wilken made and ask whether the option that North
Slope Borough has chosen differs from what other boroughs have
available to them.
SENATOR WILKEN responded that the provision was included because
of the boroughs extraordinary wealth. Any borough has the
option, but only one has the wealth to use it.
9:45:23 PM
CHAIR SEEKINS asked if there is a continuing objection to the
motion to adopt Amendment 12.
SENATOR OLSON objected.
The roll was called:
Yea: Senator Bunde, Senator Dyson, Senator Wilken,
Senator Green, Senator Wagoner, Senator Seekins
Nay: Senator Kookesh, Senator Stevens, Senator
Stedman, Senator Olson, Senator Elton, Senator Hoffman
Amendment 12 failed to be adopted by a vote of 6 yeas,
6 nays
9:46:12 PM
CHAIR SEEKINS moved on. There were no questions or proposed
amendments to Sections 18-22.
9:47:37 PM
CHAIR SEEKINS asked if there were any other sections that
members would like added back into Version F.
SENATOR BEN STEVENS reminded Chair Seekins that Amendment 6 (to
Version G) is still on the table. In the interest of time, he
asked to reserve the right to offer it on the floor if there is
no other debate.
CHAIR SEEKINS agreed.
SENATOR ELTON asked what sections of G have been dropped.
9:48:39 PM
SENATOR WILKEN answered that the sections deleted from Version G
were Sections 3, 4 and 7; Sections 11 and 16 were deleted but
put back into Version F.
MR. DONOHUE explained that Section 3 made it clear that fiscal
terms can relate to "related parties," including the mainline
LLCs and other LLCs. The deleted language in sub-paragraph (1)
clarified that fiscal terms are not restricted to activities,
income, and property related to the specific approved, qualified
project. Sub-paragraph (2) related to broad amendments that
would allow the fiscal contract to negotiate terms that varied
from the oil and gas lease agreements and unit agreements. Sub-
paragraph (3) provided authority for the state to negotiate for
the receipt of production taxes in kind rather than in value.
9:52:14 PM
MR. DONOHUE explained that Section 4 of Version G relates to
amendments to the contract development provisions. Sub-paragraph
(1) clarifies that fiscal certainty can attach to oil and that
credits can be provided for investments in the project,
specifically in the fiscal contract and not related to
provisions of excess profits tax (EPT) and related tax. Sub-
paragraph (2), lines 11-12, relates to provisions that would
expand the scope of 43.82.220 beyond the authority to vary
royalty-in-kind notice and timing provisions, and royalty-in-
value valuation methodologies to include variations from oil and
gas lease agreements and unit agreements. On lines 23-24, the
language authorizes the administration to negotiate
administrative determination contractual provisions and is
associated with a repealer of 43.82.445. Sub-paragraph (7) would
broaden the authority of Section 7 to authorize all the terms of
the contract that are not specifically mentioned in 43.82.200.
9:54:23 PM
MR. DONOHUE went on to explain that some of the preceding
deletions relate to Section 7, 43.82.220(a), which would broaden
the authority of the state to negotiate provisions that would
vary from leases and unit agreements within the context of the
fiscal contract. Specifically sub-paragraph (1) clarifies the
state's right to enter into shipping commitments for the life of
the agreement, and to specify by the deletion of the current
sub-paragraph (3) that the state's commitment to take its
royalty share in value is not limited to initial purchase and
sale agreements. Sub-paragraph (2), lines 21-23 are intended to
authorize certain provisions of the fiscal contract that vary
from lease terms and, in some cases, the terms of title 38.
9:55:56 PM
CHAIR SEEKINS said that the deletions did not necessarily
reflect a lack of intent to consider these provisions; but
members felt they did not have enough information to act on them
at this time.
MR. CLARK stressed that these are provisions that will have to
be discussed at a later time, as they will be needed to make a
contract work.
9:57:06 PM
SENATOR GREEN moved to report CSSB 3002 Version F, as amended,
from committee.
SENATOR WILKEN, SENATOR BUNDE and SENATOR ELTON objected.
SENATOR WILKEN explained he would like to see what the
administration does to address public comments before giving it
further authority. He also wants to see the LLC agreement and do
more work on how the PILT will be distributed.
9:59:08 PM
SENATOR ELTON explained that, in addition to Senator Wilken's
concerns, he is not comfortable with the piecemeal fashion in
which these amendments are being handled.
SENATOR BUNDE said he shares Senator Wilken's concerns.
CHAIR SEEKINS said he intended to vote for the bill because,
even though more work is needed, it provides some sideboards
that might help in further negotiations.
10:02:48 PM
SENATOR HOFFMAN agreed with Chair Seekins that this is just a
step toward moving the project forward.
10:03:50 PM
CHAIR SEEKINS asked for further comment. There was none.
The roll was called:
Yea: Senator Hoffman, Senator Ben Stevens, Senator
Stedman, Senator Green, Senator Seekins
Nay: Senator Elton, Senator Kookesh, Senator Bunde,
Senator Olson, Senator Dyson, Senator Wilken, Senator
Wagoner
CSSB 3002(NGD), Version F, as amended, failed to move
from committee by a vote of 5 yeas and 7 nays.
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