Legislature(2023 - 2024)BARNES 124

03/22/2024 01:00 PM House RESOURCES

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
* HB 388 COOK INLET RESERVE-BASED LENDING
Heard & Held
+= HB 295 SALMON HATCHERY PERMITS TELECONFERENCED
Heard & Held
-- Public Testimony --
+= HB 349 RENEWABLE ENERGY PROJECT LEASES TELECONFERENCED
<Bill Hearing Canceled>
+ Bills Previously Heard/Scheduled TELECONFERENCED
+= HB 387 OIL & GAS TAX CREDIT: JACK-UP RIG TELECONFERENCED
Moved CSHB 387(RES) Out of Committee
             HB 388-COOK INLET RESERVE-BASED LENDING                                                                        
                                                                                                                                
1:46:45 PM                                                                                                                    
                                                                                                                                
CHAIR MCKAY  announced that the  next order of business  would be                                                               
HOUSE BILL NO.  388, "An Act relating to state  loans for oil and                                                               
gas projects  in the  Cook Inlet  sedimentary basin;  relating to                                                               
the Alaska  Energy Authority; relating  to the  Alaska Industrial                                                               
Development and Export Authority;  and providing for an effective                                                               
date."                                                                                                                          
                                                                                                                                
1:47:12 PM                                                                                                                    
                                                                                                                                
TERVOR JEPSEN,  Staff, Representative Thomas McKay,  Alaska State                                                               
Legislature, presented  HB 388 on  behalf of the  House Resources                                                               
Standing  Committee,  sponsor,   on  which  Representative  McKay                                                               
serves  as chair.   He  began the  PowerPoint presentation  [hard                                                               
copy included  in committee packet]  on slide 2, "Cook  Inlet Gas                                                               
Shortage,"  and stated  that  a projected  gas  shortage in  Cook                                                               
Inlet threatens the energy security  of Southcentral Alaska, with                                                               
the earliest estimated shortfall being  2027.  He declared that a                                                               
public poll taken  in Southcentral Alaska in  July 2023 expressed                                                               
a  high  level of  opposition  to  importing natural  gas  unless                                                               
importing is  cheaper than  locally produced  natural gas,  and a                                                               
high level  of support for  incentives for oil and  gas companies                                                               
to find  and produce more  Cook Inlet gas.   He stated  that both                                                               
ENSTAR Natural Gas Company and  the Alaska Energy Authority (AEA)                                                               
project liquid  natural gas (LNG)  imports will  be significantly                                                               
more  expensive  than  locally  produced  Cook  Inlet  gas.    He                                                               
referred to the figure in  slide 2 depicting the predicted rising                                                               
fuel cost of coal, natural gas,  LNG, and diesel and claimed that                                                               
HB  388 would  invest  in the  Cook Inlet  gas  reserves for  the                                                               
benefit of  Alaskans.  He opined  why the private sector  has not                                                               
invested in  the Cook Inlet  gas reserves due to  the competitive                                                               
global market and  Cook Inlet being a stranded gas  market with a                                                               
cap on demand.                                                                                                                  
                                                                                                                                
1:49:50 PM                                                                                                                    
                                                                                                                                
MR.  JEPSEN transitioned  to slide  3, "Cook  Inlet Gas:  Private                                                               
Capital  Attraction Issues,"  and discussed  the reasons  for the                                                               
hesitancy  of  private  capital  investing in  Cook  Inlet.    He                                                               
alleged   that  financial   institutions   are  confronted   with                                                               
limitations  to capital,  counter party  risks, and  geopolitical                                                               
factors  which  require  collaboration  with  entities  that  can                                                               
mitigate portions of these risks.   He remarked on the unusuality                                                               
of the lack of private  capital investment even though Cook Inlet                                                               
is a proven,  highly probably reserve.  He explained  the lack of                                                               
investment is  primarily due to  Cook Inlet being a  stranded gas                                                               
market with  a cap  on demand  of roughly  70 billion  cubic feet                                                               
(BCF) per year,  which is a large  disincentive toward investment                                                               
due to the reduced potential rate of return.                                                                                    
                                                                                                                                
1:51:04  PM                                                                                                                   
                                                                                                                                
MR. JEPSEN  continued to slide 4,  "Reserve-Based Lending (RBL),"                                                               
and  explained that  RBL  is a  financing  mechanism tailored  to                                                               
independent   oil  and   gas  companies   that  only   engage  in                                                               
exploration and production.   He noted that  Alaska contained two                                                               
unique independent oil and  gas companies, ConocoPhillips Alaska,                                                               
Inc., which  is the  largest independent oil  and gas  company in                                                               
the  world, and  Hilcorp, which  is the  largest privately  owned                                                               
independent oil and gas company in  the world.  He explained that                                                               
RBL is  a "borrowing-base"  type of loan  based on  the projected                                                               
net  present  value   (NPV)  of  cash  flows   generated  by  the                                                               
underlying  oil and  gas assets,  and the  repayment of  the loan                                                               
comes from  the selling  of oil and  gas.  He  added that  RBL is                                                               
characterized  by  a   dynamic  nature  and  the   value  can  be                                                               
periodically   adjusted   to   reflect   shifts   in   underlying                                                               
assumptions,  which  serves  as   a  "derisking"  factor  as  the                                                               
changing market conditions  can be reflected in  the loan amount.                                                               
He asserted the  RBL is a well-established  financing method that                                                               
started  in  the U.S.  and  expanded  globally with  the  primary                                                               
distinction  being between  the two  markets being  the ownership                                                               
rights of  the oil and  gas reserves, with Alaska  resembling the                                                               
international market compared  to the U.S. market.   He clarified                                                               
that the state  does not need to  be the sole funder  for RBL and                                                               
can share the financing with other entities.                                                                                    
                                                                                                                                
1:54:18 PM                                                                                                                    
                                                                                                                                
MR.  JEPSEN  moved to  slide  5,  "Reserve Classifications,"  and                                                               
described   the   difference   between  the   deterministic   and                                                               
probabilistic  methods of  classifying  reserves.   He  explained                                                               
that  the  most common  method  is  deterministic and  calculates                                                               
reserves based  on geology,  technology, and  economic conditions                                                               
and breaks the classification into  three categories based on the                                                               
allowed degree  of uncertainty.   The probabilistic  method takes                                                               
the  inherent  uncertainty of  the  calculations  and provides  a                                                               
range of values based on  the probability distributions used.  He                                                               
emphasized   that    the   probabilistic   method    provides   a                                                               
comprehensive view of  the uncertainty and risk  to make informed                                                               
decisions.  He  compared the similarity between  the three levels                                                               
of  deterministic method  classification  to the  90 percent,  50                                                               
percent,  and  10  percent  probability  classifications  of  the                                                               
probability method.                                                                                                             
                                                                                                                                
1:56:27 PM                                                                                                                    
                                                                                                                                
CHAIR MCKAY  clarified the  meaning of "oil  behind pipe"  as oil                                                               
and gas wells that have been  drilled and cased that are ready to                                                               
be  harvested and  are classified  as 90  percent probable  to be                                                               
productive.  He  added that exploration is riskier  because it is                                                               
around a 10 percent probability.                                                                                                
                                                                                                                                
1:57:41 PM                                                                                                                    
                                                                                                                                
The committee took an at-ease from 1:57 p.m. to 1:59 p.m.                                                                       
                                                                                                                                
1:59:11 PM                                                                                                                    
                                                                                                                                
MR. JEPSEN  remained on slide  5, "Reserve  Classifications," and                                                               
recommended that a state-funded RBL  program should focus only on                                                               
proven reserves  to maximize the  benefit to Alaska  and minimize                                                               
the risk  of state funds.   He declared that the  current version                                                               
of HB 388 does not  explicitly designate proven reserves, but the                                                               
drafted  committee substitute  explicitly states  that funds  may                                                               
only be used  for developing proven reserves.  He  added that AEA                                                               
is not included in the RBL program in the committee substitute.                                                                 
                                                                                                                                
2:00:23 PM                                                                                                                    
                                                                                                                                
MR.  JEPSEN  transitioned  to  slide  6, "HB  388  -  Cook  Inlet                                                               
Reserve-Based Lending (Ver. A),"  which read as follows [original                                                               
punctuation provided]:                                                                                                          
                                                                                                                                
     Establishes  Cook  Inlet  Reserve Based  Lending  funds                                                                    
     under both AIDEA and AEA                                                                                                   
                                                                                                                                
     Does not specify any  appropriation, simply creates the                                                                    
     fund allowing legislature  flexibility to fund directed                                                                    
     projects                                                                                                                   
                                                                                                                                
     Funds  may  be  used  for  reserve-based  loans  deemed                                                                    
     necessary to  increase oil and gas  production from the                                                                    
     Cook Inlet Sedimentary Basin                                                                                               
                                                                                                                                
2:01:02 PM                                                                                                                    
                                                                                                                                
MR. JEPSEN  followed with slide  7, "HB 388 -  Sectional Analysis                                                               
(Ver.   A),"  which   read  as   follows  [original   punctuation                                                               
provided]:                                                                                                                      
                                                                                                                                
     Sec.  1:  Establishes   the  Cook  Inlet  Reserve-Based                                                                    
     Lending  Fund  within   the  Alaska  Energy  Authority,                                                                    
     specifying its  composition from appropriations  by the                                                                    
     legislature.                                                                                                               
                                                                                                                                
     Sec.  2:  Establishes   the  Cook  Inlet  Reserve-Based                                                                    
     Lending Fund  within the Alaska  Industrial Development                                                                    
     and Export  Authority, specifying its  composition from                                                                    
     appropriations by the legislature.                                                                                         
                                                                                                                                
     Sec. 3: Provides for an immediate effective date.                                                                          
                                                                                                                                
2:01:20 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE RAUSCHER  said he  heard that Hilcorp  was looking                                                               
for investors and asked for  clarification whether loans would be                                                               
what it was looking for.                                                                                                        
                                                                                                                                
2:01:47 PM                                                                                                                    
                                                                                                                                
MR. JEPSEN stated this bill was  put together with input from oil                                                               
and gas companies  and that those companies would  benefit from a                                                               
state-funded loan program.                                                                                                      
                                                                                                                                
2:02:04 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE RAUSCHER  asked whether  the state  would consider                                                               
the financials of the company taking out a loan.                                                                                
                                                                                                                                
2:02:35 PM                                                                                                                    
                                                                                                                                
MR. JEPSEN affirmed  that all factors considered  when taking out                                                               
high capital  loans would  be the  same with  an RBL  program and                                                               
added  that Alaska  Industrial Development  and Export  Authority                                                               
(AIDEA) would speak to the process at the next bill hearing.                                                                    
                                                                                                                                
2:02:58 PM                                                                                                                    
                                                                                                                                
CHAIR  MCKAY  clarified  that  RBL programs  are  used  in  other                                                               
foreign countries similar  to Alaska that own  all mineral rights                                                               
and are usually paid back.                                                                                                      
                                                                                                                                
2:03:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  MEARS  recalled that  AIDEA  already  has a  loan                                                               
program  and asked  what the  difference is  between its  current                                                               
system and a new RBL program.                                                                                                   
                                                                                                                                
2:04:38 PM                                                                                                                    
                                                                                                                                
MR. JEPSEN  answered that  AIDEA can  engage in  bonding projects                                                               
but does  not appear to  be doing  so and having  the legislature                                                               
create  an individual  fund would  encourage  investment in  Cook                                                               
Inlet.   He added that  the current  AIDEA loans are  only within                                                               
tens of  millions of dollars  while the Cook Inlet  project would                                                               
require  three  to  four  hundred  million  dollars,  and  having                                                               
legislative oversight would be preferable.                                                                                      
                                                                                                                                
2:05:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE MEARS  asked whether HB 388  would be capitalizing                                                               
the RBL program at hundreds of millions of dollars.                                                                             
                                                                                                                                
2:05:50 PM                                                                                                                    
                                                                                                                                
MR. JEPSEN answered  it would be up to the  legislature but would                                                               
be an option with the fund.                                                                                                     
                                                                                                                                
2:06:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  MEARS asked  how much  available funds  AIDEA has                                                               
available.                                                                                                                      
                                                                                                                                
2:06:39 PM                                                                                                                    
                                                                                                                                
MR. JEPSEN  replied that  he did  not have  the exact  number but                                                               
alleged that it was low hundreds of millions of dollars.                                                                        
                                                                                                                                
2:07:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  RAUSHER moved  to  adopt  the proposed  committee                                                               
substitute  (CS)  for  HB   388,  [Version  33-LS1237\U,  Nauman,                                                               
3/15/24], as  the working  document.   There being  no objection,                                                               
[Version U] was before the committee.                                                                                           
                                                                                                                                
2:07:55 PM                                                                                                                    
                                                                                                                                
MR. JEPSEN continued the presentation  on slide 8, "CSHB 388(RES)                                                               
   Summary   of  Changes,"  which   read  as   follows  [original                                                               
punctuation provided]:                                                                                                          
                                                                                                                                
     Sec.  1:  Removes the  establishment  of  a Cook  Inlet                                                                    
     reserve-based lending  fund under  AEA and  replaces it                                                                    
     with a  new section to  AS 44.88 relating  to reporting                                                                    
     requirements for AIDEA on the  evaluation of Cook Inlet                                                                    
     oil and  gas development  projects which  the authority                                                                    
     deems  has  the  potential  to  increase  oil  and  gas                                                                    
     production from  the Cook Inlet sedimentary  basin. The                                                                    
     report shall  be delivered to the  senate secretary and                                                                    
     chief clerk by the first day of each regular session.                                                                      
                                                                                                                                
     Sec.  2:  Amends section  2  of  HB  388 version  A  by                                                                    
     removing  the definition  of "reserve-based  loan" from                                                                    
     44.88.850(b).                                                                                                              
                                                                                                                                
     Sec.  3:  Adds  a  new  section  under  44.800.900  for                                                                    
     definitions of  "oil and  gas development  project" and                                                                    
     "reserve-based loan".                                                                                                      
                                                                                                                                
     Sec. 4: Same as section 3 in HB 388 version A.                                                                             
                                                                                                                                
2:09:48 PM                                                                                                                    
                                                                                                                                
CHAIR MCKAY emphasized that Version  U would not commit the state                                                               
to act and  would only create regulatory  and statutory framework                                                               
for AIDEA to analyze possible projects.                                                                                         
                                                                                                                                
2:10:34 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE MEARS  clarified that Version U  would provide the                                                               
legislature with  a way of  approving projects proposed  by AIDEA                                                               
through approving the capitalization of funds.                                                                                  
                                                                                                                                
2:11:21 PM                                                                                                                    
                                                                                                                                
CHAIR MCKAY affirmed that is  correct alongside the governor also                                                               
having to sign funding.                                                                                                         
                                                                                                                                
2:11:48 PM                                                                                                                    
                                                                                                                                
MR.  JEPSEN added  that his  office is  discussing with  AIDEA to                                                               
amend CSHB  388(RES) to allow  it to  involve this new  fund with                                                               
its existing revolving fund.                                                                                                    
                                                                                                                                
2:12:20 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  RAUSCHER  asked   whether  the  legislature  gets                                                               
another fiscal note when loans go through AIDEA.                                                                                
                                                                                                                                
2:12:33 PM                                                                                                                    
                                                                                                                                
MR. JEPSEN responded  that there would not be  an attached fiscal                                                               
note  as  funds  would  be  appropriated  through  the  operating                                                               
budget.   He  clarified  that the  legislature  could fund  these                                                               
projects already,  but Version  U would  make AIDEA  provide more                                                               
information on potential projects to make better decisions.                                                                     
                                                                                                                                
2:13:28 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE RAUSCHER  asked whether  the committee  had talked                                                               
to AIDEA.                                                                                                                       
                                                                                                                                
CHAIR MCKAY  answered that AIDEA  would be testifying  to provide                                                               
feedback on Version U.                                                                                                          
                                                                                                                                
2:13:36 PM                                                                                                                    
                                                                                                                                
MR. JEPSEN clarified  that AIDEA has been  involved throughout HB
388  and has  provided  recommendations for  a further  committee                                                               
substitute.                                                                                                                     
                                                                                                                                
2:13:52 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE MEARS questioned why the original bill involved                                                                  
AEA and why the proposed committee substitute would remove it.                                                                  
                                                                                                                                
2:14:07 PM                                                                                                                    
                                                                                                                                
MR. JEPSEN  explained that after  discussing with  both entities,                                                               
AIDEA  appeared  to  be  better equipped  to  administer  an  RBL                                                               
program due  to the amount of  revolving capital it has  and what                                                               
it specializes in.                                                                                                              
                                                                                                                                
2:14:59 PM                                                                                                                    
                                                                                                                                
CHAIR MCKAY announced that HB 388, Version U, was held over.                                                                    

Document Name Date/Time Subjects
HB 387 Am. Packet.pdf HRES 3/22/2024 1:00:00 PM
HB 387
HB 388 Sponsor Statement.pdf HRES 3/22/2024 1:00:00 PM
HB 388
HB 388 ver. A.pdf HRES 3/22/2024 1:00:00 PM
HB 388
HB 388 Sectional Analysis Version A.pdf HRES 3/22/2024 1:00:00 PM
HB 388
HB 388 Presentation (HRES).pdf HRES 3/22/2024 1:00:00 PM
HB 388
HB 388 Fiscal Note #1 DCCED-AEAREA.pdf HRES 3/22/2024 1:00:00 PM
HB 388
HB 388 Fiscal Note #2 DCCED-AIDEA.pdf HRES 3/22/2024 1:00:00 PM
HB 388
CSHB 388(RES) LS-1237U.pdf HRES 3/22/2024 1:00:00 PM
HB 388
CSHB 388(RES) LS-1237U Summary of Changes.pdf HRES 3/22/2024 1:00:00 PM
HB 388