Legislature(2005 - 2006)CAPITOL 124

03/07/2006 05:30 PM House OIL & GAS

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06:26:49 PM Start
06:26:59 PM HB223
07:35:52 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to a Call of the Chair --
-- Rescheduled from 03/02/06 --
Scheduled But Not Heard
Scheduled But Not Heard
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
HB 223-NATURAL GAS PIPELINE INCENTIVE/ GAS TAX                                                                                
6:26:59 PM                                                                                                                    
CHAIR KOHRING  announced that the  first order of  business would                                                               
be HOUSE  BILL NO. 223,  "An Act levying  a tax on  certain known                                                               
resources  of natural  gas, conditionally  repealing the  levy of                                                               
that  tax, and  authorizing a  credit  for payments  of that  tax                                                               
against amounts due  under the oil and  gas properties production                                                               
(severance)  tax  if  requirements   relating  to  the  sale  and                                                               
delivery  of  the natural  gas  are  met;  and providing  for  an                                                               
effective date."                                                                                                                
CHAIR KOHRING  announced that  it is  not his  intent to  move HB
6:28:20 PM                                                                                                                    
REPRESENTATIVE  HARRY  CRAWFORD,  Alaska State  Legislature,  co-                                                               
sponsor of HB 223, began by relating  that HB 223 was born out of                                                               
frustration and the  prospects of huge deficits  [for the state].                                                               
He highlighted  that North America's  largest gas  field, Prudhoe                                                               
Bay,  sits untapped  over the  past 30  years.   Although Prudhoe                                                               
Bay's gas  may not have  made sense to  go to market  earlier, he                                                               
didn't believe  that to be  the case over  the last six  to seven                                                               
years.   Alaska's gas  is in competition  with gas  fields around                                                               
the world.   He  suggested that  the committee  imagine countries                                                               
such  as Indonesia  or Venezuela  taking a  back seat  to another                                                               
country because it  doesn't fit in with the  oil companies' plans                                                               
and because  other countries are  telling the oil  companies that                                                               
they either use the resource or lose it.                                                                                        
6:30:38 PM                                                                                                                    
REPRESENTATIVE CRAWFORD acknowledged that  for the last 30 years,                                                               
different  administrations  and  legislatures have  tried  really                                                               
hard  to find  the right  mix of  incentives to  get this  gas to                                                               
market.   However, incentives alone  haven't worked.   Therefore,                                                               
HB 223  attempts to  provide a positive  incentive and  provide a                                                               
penalty if  the [oil companies]  don't move forward  with getting                                                               
this  resource to  market.   For every  year the  companies delay                                                               
putting  Alaska's  gas to  market,  there  would be  a  financial                                                               
penalty  imposed   on  the  companies.   Representative  Crawford                                                               
related his  belief that this  legislation is the right  thing to                                                               
do in order to get this gas  out of the ground and into America's                                                               
6:32:46 PM                                                                                                                    
CHAIR KOHRING inquired as to  whether the approach embodied in HB
223 has been used anywhere else in the world.                                                                                   
REPRESENTATIVE   CRAWFORD  answered   that  variations   on  this                                                               
approach  have been  utilized.   In fact,  Alaska actually  had a                                                               
reserves tax on oil from 1974-1977.   When the oil flowed through                                                               
the pipeline, the reserves tax was eliminated.                                                                                  
6:34:01 PM                                                                                                                    
KEN  ALPER,  Staff to  Representative  Eric  Croft, Alaska  State                                                               
Legislature, speaking on  behalf of the prime sponsor  of HB 223,                                                               
related that other jurisdictions in  the U.S. tax reserves within                                                               
the property  tax structure.   However,  within Alaska's  oil and                                                               
gas property tax, the reserves are exempt.                                                                                      
CHAIR  KOHRING   expressed  concern  with  using   the  force  of                                                               
government to force  the hand of the private  sector and industry                                                               
to accomplish this objective.                                                                                                   
6:35:17 PM                                                                                                                    
REPRESENTATIVE CRAWFORD opined that  without the government doing                                                               
its part, Alaskans are placed  at a disadvantage.  It's incumbent                                                               
upon the legislature to do everything  it can to stand up for the                                                               
people of Alaska and obtain the most of its resources, he said.                                                                 
REPRESENTATIVE  GUTTENBERG thanked  the sponsors  for introducing                                                               
this legislation.  He recalled  the late 1970s, when the pipeline                                                               
was completed  and people thought another  oil or a gas  line was                                                               
coming.   However, 30  years later, the  state is  still waiting.                                                               
This legislation offers a healthy  approach to explore options to                                                               
get Alaska's gas to market.                                                                                                     
6:38:16 PM                                                                                                                    
JIM  WHITAKER,  Mayor,  Fairbanks  North Star  Borough,  said  he                                                               
didn't  believe  HB  223  should  be  viewed  as  even  a  little                                                               
controversial.   Furthermore, this legislation doesn't  address a                                                               
philosophical debate or  issue.  This legislation  is, however, a                                                               
question about  a business decision.   He informed  the committee                                                               
that  legislation similar  to HB  223 was  considered in  the mid                                                               
1980s and again in 2000.  Therefore,  it's not a new idea in this                                                               
state or  other places  in the  world either.   Drawing  upon his                                                               
experience  living in  oil provinces  in the  Middle East,  Mayor                                                               
Whitaker said  that the notion  is very  simple:  "Produce  it or                                                               
we'll take it  back."  He indicated that was  also the message he                                                               
heard when  he was the  chair of  the House Special  Committee on                                                               
Oil and  Gas when he  called the various oil  provinces regarding                                                               
Alaska's situation.                                                                                                             
MAYOR WHITAKER reiterated that the  idea embodied in HB 223 isn't                                                               
a new  idea and  is a  practice that's  fairly common  around the                                                               
world.    In  fact,  this idea  incentivizes  the  production  of                                                               
natural gas,  which is a  normal and ordinary  business practice.                                                               
He characterized the legislation as  an investment incentive.  He                                                               
mentioned that an  internal rate of return  analysis is generally                                                               
the  industry  standard  utilized  when  determining  whether  to                                                               
sanction a project  or not.  Given that an  Alaska gas project is                                                               
not sanctioned,  additional costs  will be  incurred and  a lower                                                               
overall rate  of return will result.   However, if an  Alaska gas                                                               
project is  sanctioned, a  rate of return  will be  maintained or                                                               
significantly increased.   This is simply a  business decision on                                                               
the part  of the  producer's board of  directors that  relates to                                                               
the  set of  circumstances as  should be  the same  case for  the                                                               
legislature.    Government,   particularly  the  legislature,  is                                                               
implored to run  [the construction of a gas line]  as a business.                                                               
If  that were  the  case, this  [legislation proposes]  precisely                                                               
what the [government] would do.                                                                                                 
6:42:43 PM                                                                                                                    
MAYOR WHITAKER opined that HB  223 accomplishes the same goals as                                                               
the legislature is considering as  a replacement for the economic                                                               
limit  factor (ELF).   The  proposal  in HB  223 incentivizes  to                                                               
produce   and  increases   the  state's   revenues  either   way.                                                               
Therefore, if  the legislature  is going to  consider and  pass a                                                               
replacement for ELF  utilizing that logic, the  same logic should                                                               
be applied to HB 223 and thus  it should be passed.  He concluded                                                               
by  saying,  "It is  an  incentive  to  produce  and one  way  or                                                               
another, it does increase the state's  revenue.  And so, I simply                                                               
ask that the legislature consider  itself to be the state's board                                                               
of directors and make a good business decision."                                                                                
6:44:26 PM                                                                                                                    
KEN KONRAD, Senior Vice President - Gas, BP Alaska, paraphrased                                                                 
from the following written testimony [original punctuation                                                                      
     We believe  this is bad  policy - bad for  industry and                                                                    
     bad   for  Alaska.     Furthermore,   it  de-stabilizes                                                                    
     Alaska's  fiscal regime  at the  very moment  Alaska is                                                                    
     trying  to attract  massive  oil  and gas  investments.                                                                    
     Staggering  levels of  investment are  needed from  the                                                                    
     major and also  to some extent independent  oil and gas                                                                    
     companies to help  secure a 50 year oil  and gas future                                                                    
     on the North Slope.                                                                                                        
     That  future is  anchored by  the gas  pipeline but  it                                                                    
     also requires significant  additional ANS [Alaska North                                                                    
     Slope] investment  to stem the disturbing  ongoing rate                                                                    
     of  oil  decline to  keep  oil  production at  economic                                                                    
     levels.  That future  requires a stable and competitive                                                                    
     fiscal regime.                                                                                                             
     All our  time and energy  over the past six  months has                                                                    
     been  dedicated towards  finalizing  a Fiscal  Contract                                                                    
     with  Alaska.   We strongly  believe that  is the  best                                                                    
     means to advance a project.                                                                                                
     Simply  stated,  a gas  reserves  tax  really makes  no                                                                    
     sense - you don't tax projects into existence.                                                                             
     It seems  the gas  reserves tax and  many of  the other                                                                    
     "gas  now" ideas  that have  cycled through  Alaska for                                                                    
     many,  many   years  are   born  out   of  frustration.                                                                    
     Frustration driven by the  incorrect perception by some                                                                    
     that companies have been "warehousing" the gas.                                                                            
     As we  sit here today  poised to secure a  gas pipeline                                                                    
     deal  supported by  all three  major  producers, it  is                                                                    
     worth  revisiting what  has  really  occurred with  ANS                                                                    
     gas, how it has been conserved  and put to good use and                                                                    
     how Alaska  has benefited by allowing  market forces to                                                                    
     guide ANS gas development.                                                                                                 
6:46:50 PM                                                                                                                    
MR. KONRAD  continued:                                                                                                          
     From the outset, I'll remind  you that BP's business is                                                                    
     producing  and selling  oil  and gas.    We don't  make                                                                    
     money by  not producing  and not  selling oil  and gas.                                                                
     The so called  "warehousing" of gas makes  no sense for                                                                    
     BP  or  its  shareholders.   In  BP,  if  projects  are                                                                    
     commercially viable  and if the risk/reward  balance is                                                                    
     right, those  projects get  funded.   If they  are not,                                                                    
     they don't.                                                                                                                
     The initial  plan for Prudhoe  Bay gas was to  build an                                                                    
     overland pipeline to U.S. markets  in the early 1980's.                                                                    
     BP with  other industry participants  invested hundreds                                                                    
     of millions  of dollars  towards a project  that didn't                                                                    
     work.  That  project would have transported  ANS gas at                                                                    
     a cost  of $4-$5/mcf [thousand  cubic feet] to  be sold                                                                    
     into a market averaging  $2/mcf that would have yielded                                                                    
     a  negative netback  for both  the resource  owners and                                                                    
     the  State.   It made  no  economic sense  and was  not                                                                    
     Through  the  1990's,  various LNG  [liquefied  natural                                                                    
     gas] ideas  were studied by  all three  major producers                                                                    
     as well  as others.   Millions were  spent.   These LNG                                                                    
     projects  would  have  yielded   a  netback  price  for                                                                    
     resource owners  and the  State near  zero or  at best,                                                                    
     slightly  positive.    None of  these  LNG  ideas  made                                                                    
     economic sense and they did not advance.                                                                                   
     But let's not just talk  about what hasn't happened and                                                                    
     what won't happen.  Let's  talk about what has happened                                                                    
     and what will happen with ANS gas.                                                                                         
     A  series of  very large  gas related  investments have                                                                    
     occurred  at  Prudhoe  Bay  over  many  years.    Those                                                                    
     investments,   costing   billions    of   dollars   and                                                                    
     generating  thousands   of  jobs,  increased   the  oil                                                                    
     recovery from  Prudhoe by more  than 3  billion barrels                                                                    
     (energy  equivalence  of  more than  18  TCF  [trillion                                                                    
     cubic  feet]  of  gas)   generating  many  billions  of                                                                    
     dollars to State revenue.                                                                                                  
6:49:03 PM                                                                                                                    
MR. KONRAD continued:                                                                                                           
     Other  North  Slope  fields  have  made  many  similar,                                                                    
     albeit  smaller gas  related  investments with  similar                                                                    
     benefits  - more  jobs, higher  oil  recovery and  more                                                                    
     State revenue.                                                                                                             
MR.  KONRAD then  turned the  committee's attention  to the  last                                                               
page of his written testimony,  which is a chart entitled "Alaska                                                               
Gas  Timeline."   As mentioned  earlier, in  the early  1980s the                                                               
decision  was  made   not  to  advance  a  project   that  had  a                                                               
"hopelessly  negative netback."   However,  a series  of projects                                                               
was  started.     In  1984  the  seawater   injection  plant  was                                                               
constructed for water  flooding as well as  to maintain reservoir                                                               
pressure high enough at Prudhoe  Bay to support an admissible gas                                                               
enhanced  oil recovery  (EOR) project.    In 1986  a central  gas                                                               
facility,  a facility  that strips  gas  of some  of its  heavier                                                               
components in  order to manufacture  EOR solvents that  can strip                                                               
more oil out of  the rock.  In 1990 the  Gas Handling Expansion I                                                               
(GHX-1) project  was completed and  increased field  gas handling                                                               
capacity to cycle  more gas and recover more oil.   In 1995 GHX-2                                                               
was completed and increased gas  handling capacity to 7.5 billion                                                               
cubic  feet  (bcf)  a  day.    In  1999  the  Miscible  Injection                                                               
Expansion (MIX)  project was  completed.   During that  time, gas                                                               
prices  increased  and the  Prudhoe  Bay  owners realigned  their                                                               
economic interest.   In 2001 the  Joint Study Team formed  by the                                                               
three producers to study the overland gas pipeline.                                                                             
6:51:11 PM                                                                                                                    
MR. KONRAD highlighted that in  2003 the Stranded Gas Development                                                               
Act was  reauthorized and 2004  passed key  enabling legislation.                                                               
A couple of  months later, the major companies  placed before the                                                               
state  a comprehensive  proposal  that would've  allowed the  gas                                                               
project to advance.   The details surrounding  that proposal have                                                               
been  under negotiation  ever since,  he said.   Mr.  Konrad then                                                               
continued to paraphrase from the following written testimony:                                                                   
     The   combination  of   technological  innovation   and                                                                    
     allowing  natural market  forces  to  work has  enabled                                                                    
     wealth  creation  and  benefits  for  both  Alaska  and                                                                    
     industry.  At the same  time, populist gas schemes that                                                                    
     would have effectively given  Alaska's gas away without                                                                    
     value were avoided.                                                                                                        
     Today,   a  modern,   high  pressure,   large  diameter                                                                    
     pipeline  as proposed  by BP  and the  other major  ANS                                                                    
     resource  owners, in  partnership with  the State,  can                                                                    
     bring another round of benefits from Alaska's gas.                                                                         
     It would yield a reasonable  netback price for the gas,                                                                    
     create  thousands  upon  thousands  of  jobs,  generate                                                                    
     billions of dollars in State  revenues and create a new                                                                    
     industry  in Alaska.   An  industry exploring  for, and                                                                    
     developing, both  oil and gas.   An industry  that with                                                                    
     significant additional  investment, can  create another                                                                    
     50 years of oil and gas activity on the North Slope.                                                                       
     The  stars are  aligned.   The  State and  all 3  major                                                                    
     producers are  aligned behind a  single ANS  gas export                                                                    
     project  -  both  as  resource  owners  and  as  equity                                                                    
     partners.   The opportunity to advance  an economically                                                                    
     efficient gas pipeline is at our doorstep.                                                                                 
     This  Legislature  will  soon have  an  opportunity  to                                                                    
     review,  and I  hope  support, a  Fiscal Contract  that                                                                    
     will advance a gas pipeline.                                                                                               
     Thank  you for  the  opportunity to  testify.   I'd  be                                                                    
     happy to answer any questions.                                                                                             
6:53:28 PM                                                                                                                    
REPRESENTATIVE GARDNER inquired as to  the position BP would hold                                                               
in  regard  to development  of  the  gas  fields  if any  of  the                                                               
following  occurred:    HB  488  or  similar  legislation  that's                                                               
acceptable to  the major producers isn't  passed; the legislature                                                               
doesn't  amend   the  Stranded  Gas   Development  Act;   or  the                                                               
legislature doesn't approve the governor's contract.                                                                            
MR.  KONRAD  opined  that  those  outcomes  would  make  it  very                                                               
difficult.   He related that he  is very confident that  once the                                                               
contract is out  for a full and open debate,  people will see the                                                               
benefits and be supportive.                                                                                                     
REPRESENTATIVE GUTTENBERG  related that many  legislators believe                                                               
that the negotiations  will result in a contract to  build [a gas                                                               
pipeline].  However,  the testimony indicates that  it's going to                                                               
be a fiscal regime rather than  a contract to build.  He inquired                                                               
as to  the difference  between a fiscal  contract with  the state                                                               
and building a gas line.                                                                                                        
6:55:35 PM                                                                                                                    
MR. KONRAD  answered that  the aforementioned  will be  easier to                                                               
explain once  the fiscal contract  is available.  He  pointed out                                                               
that BP alone doesn't control the construction decision as it                                                                   
requires a rigorous regulatory process.                                                                                         
6:56:33 PM                                                                                                                    
JACK  GRIFFIN, Vice  President, External  Affairs, ConocoPhillips                                                               
Alaska,  Inc.  ("ConocoPhillips"),  reminded the  committee  that                                                               
ConocoPhillips  has presented  testimony  last  year and  earlier                                                               
this year  in opposition to HB  223, which he said  remains.  Mr.                                                               
Griffin then said:                                                                                                              
     And to clarify, if I  can, some confusion regarding the                                                                    
     affect  this  bill  would  have  on  ConocoPhillips,  a                                                                    
     company that  not only possesses all  of the incentives                                                                    
     necessary to move forward on  a North Slope gas project                                                                    
     but, in  fact, has  taken every reasonable  step within                                                                    
     its  power to  do so.   Mr.  Chairman, as  you and  the                                                                    
     other   members   of    this   committee   well   know,                                                                    
     ConocoPhillips  has  reached   an  agreement  with  the                                                                    
     administration  on the  base, fiscal,  and other  terms                                                                    
     that  we need  to move  forward  on a  North Slope  gas                                                                    
     project.   We  reached an  agreement in  principle with                                                                    
     the  state on  October  21st of  last  year and  worked                                                                    
     diligently   over  the   following  weeks   to  resolve                                                                    
     outstanding    technical     and    drafting    issues.                                                                    
     ConocoPhillips now  has a deal  with the state  that it                                                                    
     is willing  to use as  a basis  for moving to  the next                                                                    
     phase of  project development.  Our  agreement with the                                                                    
     state  is  the  culmination  of  a  multi-year  effort.                                                                    
     Following a  $125 million cost study  conducted jointly                                                                    
     with the other major North  Slope producers to move the                                                                    
     North  Slope   gas  project  to   the  next   phase  of                                                                    
     development.  ConocoPhillips took  a leadership role in                                                                    
     seeking from you a reauthorization  of the Stranded Gas                                                                    
     Development  Act,   which  has  led  directly   to  our                                                                    
     contract  with  the  state.     ConocoPhillips  took  a                                                                    
     leadership  role in  obtaining several  critical pieces                                                                    
     of federal  legislation that will  help   bring greater                                                                    
     predictability   and   efficiency    to   the   federal                                                                    
     permitting process as well as,  we hope, lower the cost                                                                    
     of  the  debt  for  the   project.    We  also  took  a                                                                    
     leadership  role in  advancing  an  application to  the                                                                    
     state  under the  Stranded Gas  Development Act.   And,                                                                    
     obviously,  we are  taking a  leading role  in crafting                                                                    
     and finalizing  an appropriate fiscal contract  for the                                                                    
     project.  We  believe the time has come to  move to the                                                                    
     next  phase of  North Slope  gas development.   We  are                                                                    
     ready and willing to take that step.                                                                                       
     HB  223,   however,  undermines  our   gas  development                                                                    
     efforts  by  penalizing  ConocoPhillips and  the  other                                                                    
     major North  Slope producers for taking  the very steps                                                                    
     that  the  administration  and  this  legislature  have                                                                    
     urged  us  to  take  to advance  the  North  Slope  gas                                                                    
     project.   Specifically, and  in contrast  to testimony                                                                    
     that has  previously been provided on  this bill, there                                                                    
     is  nothing that  ConocoPhillips  itself  can do  under                                                                    
     this  bill,  as  it  is  currently  written,  to  avoid                                                                    
     imposition of  this new tax  short of  surrendering the                                                                    
     billions  of dollars  we have  already invested  in our                                                                    
     lease hold  interests at  Prudhoe Bay.   At  a previous                                                                    
     hearing on  this bill  and in  testimony today,  it was                                                                    
     suggested that ConocoPhillips could  avoid this new tax                                                                    
     by  selling its  gas  or  by committing  its  gas to  a                                                                    
     project under  an open  season.  In  fact, that  is not                                                                    
     the case.   This tax is automatic and  unavoidable.  If                                                                    
     we started  welding steel and laying  pipe tomorrow, we                                                                    
     could not avoid  this new tax.  Now  supporters of this                                                                    
     new  tax have  claimed  that our  tax  payment will  be                                                                    
     refunded  if the  North  Slope  producers move  forward                                                                    
     with  the gas  project.   We  don't  believe that  this                                                                    
     claim  is  accurate.   The  amount  of  ConocoPhillips'                                                                    
     obligation under  this bill is  likely to exceed,  by a                                                                    
     substantial  amount, $200  million  per  year over  the                                                                    
     next 10  years.  Under the  proposed legislation, these                                                                    
     tax dollars  would not be refunded  until perhaps 10-25                                                                    
     years  in the  future,  without any  allowance for  the                                                                    
     time value of money.   That coupled with limitations on                                                                    
     the amount that  can be refunded each month  as well as                                                                    
     a final cutoff  date for refunds guarantee  that only a                                                                    
     fraction  of the  tax that  is paid  would actually  be                                                                    
7:01:04 PM                                                                                                                    
MR. GRIFFIN continued:                                                                                                          
     Indeed,  ConocoPhillips'  obligation  to  pay  the  tax                                                                    
     continues even if a gas  project is delayed for reasons                                                                    
     beyond its control, such as  state or federal inaction.                                                                    
     More  specifically,  the  project cannot  move  forward                                                                    
     without  appropriate  state  and federal  permits,  but                                                                    
     there is no guaranteed date  by which this permits will                                                                    
     be  issued.   In fact,  if this  bill becomes  law, the                                                                    
     state  will actually  have an  incentive  to delay  the                                                                    
     project,  simply to  force North  Slope producers  like                                                                    
     ConocoPhillips to  continue to  pay this  punitive tax.                                                                    
     It  is  difficult to  imagine  a  more destructive  tax                                                                    
     policy for the state to  date, particularly now when we                                                                    
     are  on the  verge of  moving the  project to  its next                                                                    
     stage  of development.   Consequently,  we urge  you to                                                                    
     reject this  bill.  In  closing, I would like  to voice                                                                    
     our belief that the  bill raises additional significant                                                                    
     legal and  policy issues,  including issues  under both                                                                    
     the  state and  federal constitutions.   Obviously,  we                                                                    
     have not  tried to  address all of  those issues  in my                                                                    
     comments  today.   Again, Mr.  Chairman and  members of                                                                    
     the committee, thank you for considering our views.                                                                        
REPRESENTATIVE  GARDNER commented  that the  legislature is  at a                                                               
disadvantage because  members haven't seen the  contract that has                                                               
been  negotiated with  the governor.    She then  inquired as  to                                                               
ConocoPhillips' timeline,  such as when construction  would occur                                                               
and gas  would flow, should  everything proposed by  the governor                                                               
proceed like clock work.                                                                                                        
MR. GRIFFIN informed the committee  that of the $125 million that                                                               
ConocoPhillips,  BP,  and ExxonMobil  Corporation  ("ExxonMobil")                                                               
spent  to  study  this  project,   a  success-case  timeline  was                                                               
developed.  The aforementioned specifies  that it will take about                                                               
9-10 years from  the time the producers re-form  the project team                                                               
until  first gas  starts flowing  to market.   He  specified that                                                               
there  is  an  upfront  period   to  allow  preparation  for  the                                                               
permitting process as well as an extensive permitting process.                                                                  
7:04:39 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  recalled Mr. Griffin's  testimony that                                                               
HB 223 provides  the state an incentive to delay.   Although that                                                               
is [a possibility], he pointed  out that there are many scenarios                                                               
that can be played out.  However,  in the end the sponsors of the                                                               
legislation and others simply want the gas to reach the market.                                                                 
MR. GRIFFIN said that he  believes the legislature and the public                                                               
want to  move the gas project  forward.  However, the  reality of                                                               
HB 223  is that the  state will collect  revenues as long  as the                                                               
project doesn't move forward.   Therefore, it becomes a financial                                                               
incentive for  the state to  delay issuing permits.   Whether the                                                               
desire  to  move  forward  on   the  project  will  overcome  the                                                               
financial incentive  to delay  is hard to  predict, as  are other                                                               
components.  Mr. Griffin opined, "It's not hard to imagine a                                                                    
scenario where the state would actually be collecting more under                                                                
this tax than it would as a participant in the gas project."                                                                    
7:07:03 PM                                                                                                                    
JUDY BRADY,  Executive Director,  Alaska Oil and  Gas Association                                                               
(AOGA), began  by relating that  all of  the members of  AOGA are                                                               
very interested  in having the  gas pipeline  be a success.   She                                                               
then paraphrased  from the following written  testimony [original                                                               
punctuation provided]:                                                                                                          
     AOGA is strongly  opposed to the concept of  oil or gas                                                                    
     reserve  taxes and  therefore opposes  House Bill  223,                                                                    
     which would  impose a  gas reserve  tax on  North Slope                                                                    
     HB 223 would  create, in terms of  monetary impact, one                                                                    
     of the  most massive  new taxes  in the  United States,                                                                    
     and  reflects  a  basic misunderstanding  of  how  mega                                                                    
     projects  are developed,  financed and  approved.   The                                                                    
     $20 plus billion gas pipeline  project is unique in its                                                                    
     size, complexity and risk.                                                                                                 
     HB  223, which  is  touted  as a  way  of spurring  the                                                                    
     development  of a  natural gas  pipeline, only  adds to                                                                    
     the economic risk of this  project and the potential of                                                                    
     putting the  project at risk.   The fact is  no project                                                                    
     can be  taxed into existence.   A project can  be taxed                                                                    
     out of existence.                                                                                                          
     We  have  been  asked  if  AOGA  has  reconsidered  our                                                                    
     opposition to  the concept of reserve  tax legislation,                                                                    
     in light of the fact that  an initiative to enact a gas                                                                    
     reserves tax  has been certified  for the  2006 General                                                                    
     Election ballot.                                                                                                           
     The answer to  that question is NO.   AOGA continues to                                                                    
     strongly  oppose   the  concept  of  gas   reserve  tax                                                                    
     legislation for  the reasons outlined in  our submitted                                                                    
     testimony.    Any  legislation that  would  remove  the                                                                    
     initiative from  the ballot would suffer  from the same                                                                    
     flaws that lead us to oppose HB 223.                                                                                       
     The many  difficult and  complicated actions  that must                                                                    
     take place  to build this mega-project  simply will not                                                                    
     be  influenced  or  hurried  because  of  a  threat  of                                                                    
     retaliation in  the form  of a huge  punitive tax.   In                                                                    
     fact, as we have said,  a punitive tax is both counter-                                                                    
     productive and unnecessary.                                                                                                
     Positive  progress continues  to be  made according  to                                                                    
     all public  reports.  Governor Murkowski  has announced                                                                    
     that  a contract  establishing fiscal  terms for  a gas                                                                    
     pipeline  will  be  available  for  public  review  and                                                                    
     legislative  action  in  the   near  future.    He  has                                                                    
     announced  his  plans for  a  special  session to  take                                                                    
     action on the gas contract.                                                                                                
     We believe  that as Alaskans  see positive  progress in                                                                    
     the many complicated and difficult  policy issues to be                                                                    
     addressed, they will also agree  that a gas reserve tax                                                                    
     is unnecessary and counter-productive.                                                                                     
     The common goal is to build  a gas pipeline.  AOGA will                                                                    
     continue  to support  each positive  step that  ensures                                                                    
     that goal is  accomplished.  A gas reserves  tax is not                                                                    
     a positive step.                                                                                                           
     Thank you, Mr.  Chairman, for allowing us  to make this                                                                    
     testimony on behalf of AOGA and its members.                                                                               
7:11:39 PM                                                                                                                    
DEBRA VOGT  informed the  committee she retired  in 1999  after a                                                               
20-year career with the state.   She related that for most of her                                                               
career  she was  involved  with  oil and  gas  taxes.   Ms.  Vogt                                                               
provided the following testimony:                                                                                               
     This  bill would  institute a  reserves tax  on certain                                                                    
     natural gas in  place.  The tax would  be repealed when                                                                    
     a gas line  is built and the gas is  traveling down it.                                                                    
     At  that time,  the taxpayer  can take  the taxes  paid                                                                    
     under  the  bill as  a  credit  against the  taxpayer's                                                                    
     severance tax liability.   The credit provisions expire                                                                    
     in 2030.  If the taxpayer  doesn't want to pay the tax,                                                                    
     it can  abandon its leases  and the gas will  revert to                                                                    
     the state.   These  provisions will clearly  provide an                                                                    
     incentive  to get  these natural  resources to  market.                                                                    
     The state had  a reserves tax on oil in  the years just                                                                    
     before   the  pipeline   ...  and   other  states   and                                                                    
     municipalities  tax hydrocarbon  reserves just  as they                                                                    
     tax other  property.  In my  view, this is a  much more                                                                    
     direct  and  effective  way   to  encourage  the  lease                                                                    
     holders  to  get  that  gas   to  market  than  is  the                                                                    
     undisclosed plan that  the governor says he  has up his                                                                    
     sleeve.  This  legislature is being asked to  buy a pig                                                                    
     in a poke as far as  the governor's plan is concerned -                                                                    
     -  you don't  get to  see the  other side  of the  deal                                                                    
     until you've put  all your cards on the table.   At the                                                                    
     minimum,  you  should  have  all  the  details  of  the                                                                    
     rumored plan on  the table before you  accept or reject                                                                    
     an  alternative like  this.   If  you want  to see  the                                                                    
     benefit  of our  natural gas  resources, this  approach                                                                    
     has merit.  I urge  your serious consideration.  Thanks                                                                    
     for letting me testify.                                                                                                    
MS.  VOGT, in  response to  Representative Guttenberg,  said that                                                               
she  didn't find  the opposition  to HB  223 unusual.   Ms.  Vogt                                                               
opined that  she doesn't know  what HB  223 puts at  risk because                                                               
there is  no knowledge  of an alternative  plan.   Therefore, she                                                               
reiterated the need for all plans to be available for review.                                                                   
7:14:58 PM                                                                                                                    
MERRICK  PEIRCE opined  that HB  223  is outstanding  legislation                                                               
that's long overdue.  One of  the reasons this approach is a good                                                               
way to  get Alaska's gas into  the market is because  the retired                                                               
president of  ARCO Alaska testified before  the legislature years                                                               
ago saying that legislation such as  HB 223 would be necessary to                                                               
get an Alaska  gas pipeline built.  Mr.  Peirce acknowledged that                                                               
the oil companies have said that  HB 488, as proposed by Governor                                                               
Murkowski, has  to be passed  or they will  walk away from  a gas                                                               
pipeline deal.   To that, Mr.  Peirce said there may  be a better                                                               
way to obtain a gas pipeline,  which he said would be through the                                                               
Port Authority's proposal.  Mr.  Peirce pointed out that there is                                                               
no  doubt that  the initiative  that was  just certified  will be                                                               
passed, and  therefore the only  question is why  the legislature                                                               
doesn't tweak this legislation, if necessary, and pass it.                                                                      
MR. PEIRCE posed a scenario in which  HB 223 is passed and no gas                                                               
pipeline  is  built.   The  aforementioned  would result  in  the                                                               
Fairbanks community receiving just shy  of $1 billion annually in                                                               
revenue,  additional  revenue  beyond what  the  state  currently                                                               
receives.  That money would make  it very likely there would be a                                                               
dramatic increase  in state and municipal  revenue assistance for                                                               
the Fairbanks  North Star  Borough, which  has among  the highest                                                               
property  taxes in  the state.    On the  other hand,  if HB  223                                                               
induces  the construction  of the  gas pipeline,  there are  many                                                               
benefits  that  he  said  he  wouldn't go  into.    However,  for                                                               
Fairbanks in  particular it's essential because  the community is                                                               
bearing a massive  burden to keep homes and businesses  warm.  In                                                               
Fairbanks  there isn't  much  of an  alternative  to oil  heating                                                               
fuel, he  opined.   Mr. Peirce  opined, "It's  a real  shame that                                                               
legislation like  HB 223 wasn't  passed over  10 years ago  as we                                                               
would already  be enjoying  the benefits  that I  just described.                                                               
All we  can do now is  to try and make  up for lost time  and get                                                               
this passed  as quickly  as possible."   Mr. Peirce  concluded by                                                               
noting  that  he  often   philosophically  agrees  with  Chairman                                                               
Kohring  as  he,  too,  isn't  a  fan  of  intrusive  government.                                                               
However,  on this  particular issue  of determining  how to  best                                                               
develop  the natural  resources  of the  state, the  constitution                                                               
requires  that the  return on  the state's  natural resources  be                                                               
maximized.   This legislation, he  opined, is an  appropriate way                                                               
to do so.                                                                                                                       
7:20:16 PM                                                                                                                    
DAVID  GOTTSTEIN,   Backbone  2,  began  by   characterizing  the                                                               
relationship between  the state  and the  oil industry  such that                                                               
the oil industry  on the North Slope represents  tenants with the                                                               
right  of first  refusal.   The oil  industry's obligation  is to                                                               
produce  the  resource  to  the maximum  benefit  to  the  state,                                                               
although it  may not be  to the industry's  benefit.  One  of the                                                               
issues continuously  being raised is that  perhaps these projects                                                               
doesn't rise  to the top  of the capital  deployment requirements                                                               
of the  oil companies.   However, that's not the  requirement, he                                                               
opined.   He emphasized, "We  won't actually  know if the  gas is                                                               
stranded  unless we  make  the  gas available  in  an open,  free                                                               
competitive bid  process."  Therefore,  if no one shows  up, then                                                               
it's stranded.   If someone does  show up and is  willing to take                                                               
the gas in  an economic form and build a  pipeline, then it isn't                                                               
stranded and proves it's economic.   Mr. Gottstein opined that HB
223 is excellent legislation.   He expressed concern that the oil                                                               
industry is  expert at playing hard  ball, but the state  is not.                                                               
Therefore,  the  state  needs  to use  every  tool  available  to                                                               
compete.    In  conclusion,  Mr.  Gottstein  strongly  urged  the                                                               
committee  to review  HB 223  seriously because  it improves  the                                                               
state's economic clout.                                                                                                         
7:24:14 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG moved  that the  committee adopt  CSHB
223,  Version 24-LS0037\T,  Chenoweth,  2/23/06,  as the  working                                                               
CHAIR KOHRING objected for purposes of discussion.                                                                              
REPRESENTATIVE DAHLSTROM  inquired as to the  changes embodied in                                                               
Version T.                                                                                                                      
7:24:52 PM                                                                                                                    
REPRESENTATIVE CRAWFORD  clarified that  Version T  makes changes                                                               
such that the  legislation mirrors the initiative.   He specified                                                               
that the  language on  page 1, line  10, was added.   On  page 1,                                                               
line 12, the language "Tax  on certain leases having taxable gas"                                                             
was inserted.   He then pointed out that the  language on page 2,                                                               
lines 1 and 17 was added.   On page 3, lines 17-18, the language:                                                               
"A  lessee holding  an interest  in property  taxable under  this                                                               
chapter".   On page 3, lines  22-23, the language:   "an operator                                                               
of a lease  holding an interest in property" was  added.  On page                                                               
5,  line 15,  the language:   "A  lessee holding  an interest  in                                                               
property  subject to  the tax"  was  added as  was the  language:                                                               
"property subject to the tax imposed  under AS 43.58" on line 22.                                                               
On page 5, line 29, the  term "service" was added.  Continuing on                                                               
page 5,  the language:   "from  a presubscription  agreement made                                                               
public within  10 days of  execution" on line  31 was added.   On                                                               
page 6,  lines 11 and  15, the term  "service" was inserted.   He                                                               
then pointed out  that on page 7, lines 4-7,  a new definition of                                                               
"binding   transportation   service  agreement"   was   inserted.                                                               
Continuing on page  7, line 16, Section 5 was  inserted such that                                                               
the uncodified law of the state  of Alaska is amended by adding a                                                               
new section.  On page 8,  lines 4-17, is a new section specifying                                                               
how the  escrow is dealt with  to hold the money  until such time                                                               
until the gas pipeline is built and the gas is flowing.                                                                         
7:29:34 PM                                                                                                                    
MR.  ALPER reminded  the committee  that  the aforementioned  are                                                               
technical changes  to bring  the language  of the  legislation in                                                               
line with  the initiative to be  on the November ballot.   He did                                                               
highlight  the substantial  item, which  is [the  provision] that                                                               
exempts the state's royalty share of  the gas.  He then explained                                                               
that currently before the committee  is a fiscal note that places                                                               
the estimated revenue  at $1.01 billion, which  under the revised                                                               
language would be about $880 million.                                                                                           
CHAIR KOHRING  maintained his  objection.   He explained  that he                                                               
isn't  sure of  the  ramifications of  Version  T.   Furthermore,                                                               
since HB  223 is of  such significance,  he said he  believes the                                                               
legislation should receive further consideration.                                                                               
REPRESENTATIVE DAHLSTROM  commented that she isn't  familiar with                                                               
the  escrow  payment  and   the  binding  transportation  service                                                               
agreement provisions  and what those accomplish.   Therefore, she                                                               
expressed  her  desire to  hold  off  on  taking  a vote  on  the                                                               
7:31:40 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG  related  his understanding  that  the                                                               
purpose of  Version T  is to  bring the  legislation back  to the                                                               
same place as the ballot initiative.                                                                                            
7:32:59 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG withdrew his  motion to adopt Version T                                                               
as the work draft.                                                                                                              
7:33:01 PM                                                                                                                    
REPRESENTATIVE  DAHLSTROM   requested  a   copy  of   the  ballot                                                               
REPRESENTATIVE  GUTTENBERG  related  his  belief  that  when  the                                                               
industry looked at  the long-term aspect of what will  have to be                                                               
done to  maintain control, they  knew that an initiative  such as                                                               
this would  eventually come forward.   Therefore, he  opined that                                                               
it's time  for the  state and  the legislature  to play  the same                                                               
game  as the  industry.   He concluded  by highlighting  that the                                                               
Alaska State  Constitution specifies  that the [oil  industry] is                                                               
supposed to manage the resources  for the maximum benefit for the                                                               
people  of   Alaska,  which  is   questionable  at   this  point.                                                               
Therefore, HB 223 is a step toward getting something done.                                                                      
7:35:24 PM                                                                                                                    
CHAIR KOHRING  noted that the  public hearing would be  held open                                                               
and then announced that HB 223 would be held over.                                                                              

Document Name Date/Time Subjects