Legislature(2005 - 2006)

01/25/2006 09:01 AM House W&M

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 223-NATURAL GAS PIPELINE INCENTIVE/ GAS TAX                                                                                
9:01:58 AM                                                                                                                    
CHAIR WEYHRAUCH 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."                                                                                                                
9:03:08 AM                                                                                                                    
JACK  GRIFFIN, Vice  President, External  Affairs, ConocoPhillips                                                               
Alaska,  Inc.,  said HB  223  is  described  by its  sponsors  as                                                               
"creating  an  incentive  for   companies...to  move  forward  on                                                               
developing  a  North  Slope   gas  project,"  and  ConocoPhillips                                                               
Alaska,  Inc.  (Conoco)  has presented  testimony  in  opposition                                                               
before,  so he  does  not want  to  repeat it.    He said  Conoco                                                               
already possesses all the incentive  necessary to move forward on                                                               
a North Slope  gas project, and has "taken  every reasonable step                                                               
within its  power to do so."   He added that  the committee knows                                                               
well that Conoco  has reached an agreement with the  state on the                                                               
base  fiscal  and  other  terms necessary  to  move  the  project                                                               
forward.   He  said  an  agreement was  reached  in principle  on                                                               
October 21,  2005, and  Conoco has  worked diligently  to resolve                                                               
technical and drafting  issues.  He stated that Conoco  now has a                                                               
deal with the state that it is willing  to use as a basis to move                                                               
forward.   Since reaching  that deal, Conoco  and the  state have                                                               
been trying to negotiate a  comprehensive agreement that includes                                                               
the other major North Slope producers.                                                                                          
MR. GRIFFIN said the agreement  with the state is the culmination                                                               
of a  multi-year effort  following a $125  million cost  study in                                                               
2001 to  move the gas project  to the next phase  of development.                                                               
His company took  a leadership role in  seeking a reauthorization                                                               
of the  Stranded Gas Development  Act, which has led  directly to                                                               
its contract with  the state.  Conoco took a  leadership role, he                                                               
opined, in  several pieces of  federal legislation  to streamline                                                               
the  permitting  process  and  lower  the cost  of  debt  on  the                                                               
project.  "Obviously we have  taken a leadership role in crafting                                                               
and in finalizing an appropriate  fiscal contract for development                                                               
of North  Slope gas."  He  said the company is  ready and willing                                                               
to move to the next phase.                                                                                                      
MR.  GRIFFIN stated  that  the next  step  requires economies  of                                                               
scale  that can't  be met  by  his company  alone.   He told  the                                                               
committee  that  the  governor  said   that  the  best  and  most                                                               
efficient  way  to  move  forward  is  to  conclude  negotiations                                                               
between  the state  and the  three major  North Slope  producers.                                                               
"We  agree," he  said.    He added  that  HB  223 undermines  the                                                               
efforts by  penalizing Conoco.  "There  is nothing ConocoPhillips                                                               
can  do  to avoid  imposition  of  HB  223's  new tax,  short  of                                                               
surrendering the billions of dollars  we have already invested in                                                               
the development at  Prudhoe Bay."  He said it  has been suggested                                                               
that the company  can avoid this new tax by  selling its gas, but                                                               
he said  that is  not true.   He  said the  tax is  automatic and                                                               
unavoidable.   Supporters of the tax  say it will be  refunded if                                                               
the North Slope  producers move forward with the  project, and he                                                               
said that  is misleading.   The tax  for his company  will likely                                                               
exceed $200 million per year over  the next ten years, he stated.                                                               
That money will not  be refunded for 10 to 25  years from now, he                                                               
said,  with no  allowance for  the time  value of  money.   That,                                                               
coupled  with a  limit on  deductions, ensures  that the  refunds                                                               
will only be  a fraction of the taxes that  are actually paid, he                                                               
said.   He  concluded  that the  bill is  bad  public policy  and                                                               
unfair, and  there are  a host  of other issues  that he  has not                                                               
addressed, including constitutional ones.                                                                                       
9:09:52 AM                                                                                                                    
REPRESENTATIVE SAMUELS asked how  the agreement works between the                                                               
three  companies  and if  it  was  possible  for Conoco  to  move                                                               
forward  without its  Prudhoe Bay  partners.   He noted  that Mr.                                                               
Griffin said that Conoco can't ship or sell gas.                                                                                
9:10:37 AM                                                                                                                    
MR.  GRIFFIN said  the unit  agreement is  a partnership  for the                                                               
development of  the resources to  ensure there isn't  physical or                                                               
economic waste of  the resource within a given area.   "Right now                                                               
there  are no  clear  provisions for  allowing ConocoPhillips  to                                                               
move forward  on its own.   That is something that  would have to                                                               
be addressed if we  ever got to that point.   But clearly, as the                                                               
governor stated, the best and  most efficient way to move forward                                                               
is to do  so with the agreement  of all of the  major North Slope                                                               
lease holders."                                                                                                                 
9:11:34 AM                                                                                                                    
REPRESENTATIVE SAMUELS  said that when  gas comes up,  Conoco re-                                                               
injects  it.   He asked  if one  third [of  the gas]  belonged to                                                               
Conoco and was enough gas to  pay the tariff to build a pipeline,                                                               
could the  company take that gas  and claim it to  be theirs with                                                               
BP and Exxon's gas remaining in the ground.                                                                                     
9:12:07 AM                                                                                                                    
MR.  GRIFFIN  answered  that  it   would  be  difficult  but  not                                                               
impossible.  He added that it would not be ideal for Conoco.                                                                    
9:12:36 AM                                                                                                                    
REPRESENTATIVE SEATON asked  if Conoco was to  sell its one-third                                                               
share of  gas, if there  would be a  cause of action  between the                                                               
other  parties if  doing so  would reduce  the flow  of oil  from                                                               
Prudhoe Bay.   He asked if the production  agreement requires the                                                               
production of gas, and if only  one party is producing gas, which                                                               
then reduces the amount of oil,  would that be a violation of the                                                               
9:13:36 AM                                                                                                                    
MR. GRIFFIN said,  "I can't say it would be  a violation; I think                                                               
I could say  that if one party to the  North Slope unit agreement                                                               
-  or  the  Prudhoe  Bay  unit  agreement  and  the  Prudhoe  Bay                                                               
operating agreement - wanted to take  its gas in kind without the                                                               
participation of the other unit  owners, we would most likely see                                                               
the  courts asked  to resolve  differences  in interpretation  of                                                               
those agreements."                                                                                                              
9:14:14 AM                                                                                                                    
CHAIR WEYHRAUCH said he thinks that is a "yes."                                                                                 
MR. SEATON  said that oil  companies have indicated that  to him.                                                               
He added,  "Although it could  legally be possible under  gas, it                                                               
would  be legally  very  involved  when you  got  into one  owner                                                               
taking part  of the gas  and that impact  on the  oil.  And  so I                                                               
think we need to consider that as well."                                                                                        
9:14:52 AM                                                                                                                    
REPRESENTATIVE SAMUELS  said he believes  the Alaska Oil  and Gas                                                               
Conservation Commission  and the court  system would have  "a lot                                                               
of issues with  how much gas you  can take off and  how much goes                                                               
back in also, so it would be complicated even further."                                                                         
9:15:12 AM                                                                                                                    
REPRESENTATIVE  GRUENBERG asked,  on  the flip  side, how  Conoco                                                               
prevents itself  from being held up  by one of the  other parties                                                               
who doesn't want to produce.                                                                                                    
9:15:23 AM                                                                                                                    
MR. GRIFFIN  said that is  exactly how he would  characterize the                                                               
negotiations under the Stranded Gas  Development Act.  "We're all                                                               
trying to come  together on a set of commercial  terms that works                                                               
for all of the  major North Slope gas owners."   He added that if                                                               
the state,  Conoco, BP  and ExxonMobil  Corporation "are  not all                                                               
holding  hands,"  moving  forward  on   a  gas  project  will  be                                                               
9:15:59 AM                                                                                                                    
REPRESENTATIVE  GRUENBERG said  that  is a  new negotiation,  but                                                               
what he  would like to  know is what  the agreement allows  on an                                                               
on-going basis.  "Suppose one or  more of you decides to cut down                                                               
on the production, how does  the one-of-you that wants to produce                                                               
stop the others from just stopping  that?"  He said he knows they                                                               
are all smart enough to have  figured that out, and he would like                                                               
to know how.                                                                                                                    
9:16:26 AM                                                                                                                    
MR.  GRIFFIN  said,  "Generally speaking,  the  working  interest                                                               
owners in  a unit such  as the Prudhoe Bay  unit are going  to be                                                               
aligned in trying to maximize  the production that can be derived                                                               
economically from  a unit like  that."   He added that  there are                                                               
complex agreements to govern the relationship between them.                                                                     
9:17:03 AM                                                                                                                    
REPRESENTATIVE GRUENBERG  said, "So  you have  already pre-agreed                                                               
to agree."                                                                                                                      
9:17:12 AM                                                                                                                    
MR. GRIFFIN  said, "Obviously we  have agreements at  Prudhoe Bay                                                               
governing  our  relationship  with  the  other  working  interest                                                               
owners  there, and  we  have  come together  for  the purpose  of                                                               
maximizing  the  production  and  maximizing  the  value  of  the                                                               
Prudhoe Bay oil and gas resource."                                                                                              
CHAIR WEYHRAUCH asked, "And not in restraint of trade?"                                                                         
REPRESENTATIVE GRUENBERG  asked if that agreement  was in writing                                                               
or just an oral understanding.                                                                                                  
9:17:59 AM                                                                                                                    
MR.  GRIFFIN  said  it  is   written  in  the  Prudhoe  Bay  Unit                                                               
9:18:26 AM                                                                                                                    
CHAIR  WEYHRAUCH said  the purpose  of  this bill  is to  develop                                                               
Alaska's gas  "to get those  who are sitting  on the gas  to move                                                               
forward on a  gas pipeline.  If  we don't do that  we're going to                                                               
tax you.  Once you develop it we  will refund the tax."  It is an                                                               
incentive to  move the gas to  market to benefit Alaskans,  so he                                                               
asked why it is bad public policy.                                                                                              
9:19:07 AM                                                                                                                    
MR. GRIFFIN said  it is bad public policy because  Conoco has all                                                               
of the  incentives necessary.   "This bill reaches  too broadly,"                                                               
he  opined.   The  state  has  provided  the right  incentive  by                                                               
authorizing  the administration  to enter  negotiations with  the                                                               
other major North Slope gas owners  on a set of fiscal terms that                                                               
will increase investor confidence and  allow this project to move                                                               
forward.   Using a tax "as  a weapon to force  private parties to                                                               
expend billions of  dollars on the state's  behalf without regard                                                               
to whether  the investment makes  sense, and there is  nothing in                                                               
the bill that requires that  the investment actually makes sense,                                                               
is a  novel and unprecedented  use of a state  taxing authority,"                                                               
he stated.                                                                                                                      
9:20:37 AM                                                                                                                    
CHAIR  WEYHRAUCH  said,   "The  gas  is  used  as   part  of  the                                                               
corporation's portfolio  to show  stockholders that the  price of                                                               
the stock  is adequately valued  because you are sitting  on this                                                               
large resource,  and it is unfair  to serve as a  reserve for the                                                               
benefit  of the  corporation  just  to show  that  on the  bottom                                                               
line."   He  added that  it does  Alaskans more  good to  have it                                                               
developed.  He  said perhaps Conoco wouldn't be  taxed because it                                                               
is poised to go forward, but others should be taxed.                                                                            
9:21:21 AM                                                                                                                    
MR. GRIFFIN said  there is no benefit to a  corporation to sit on                                                               
Prudhoe Bay  gas.   "You cannot  count that gas  as part  of your                                                               
reserves base  for purposes  of reporting  to the  Securities and                                                               
Exchange  Commission  and  to  your  shareholders  and  potential                                                               
shareholders  until  you've  authorized the  development  of  the                                                               
project necessary to  move that gas to market."   He said even if                                                               
the  bill is  constitutional,  it is  unfair  because it  reaches                                                               
those who  are in agreement with  the state and are  motivated to                                                               
move forward.                                                                                                                   
9:22:41 AM                                                                                                                    
REPRESENTATIVE  SEATON  inferred   that  ExxonMobil  Corporation,                                                               
ConocoPhillips Alaska,  Inc., and other  owners of leases  on the                                                               
North Slope do  not have any gas reserves listed  in any of their                                                               
9:23:11 AM                                                                                                                    
MR. GRIFFIN said  he can't speak for any other  company, but "our                                                               
understanding"  is that  "until  you  authorize the  expenditures                                                               
necessary to  make those reserves  marketable, they  don't become                                                               
reserves for  reporting purposes.   They're known  resources, but                                                               
they're not reserves ... and that is what shareholders look at."                                                                
9:23:57 AM                                                                                                                    
REPRESENTATIVE ROKEBERG asked Mr.  Griffin to provide information                                                               
on the constitutional  issues he spoke of.  He  noted that former                                                               
Governor  Hickel said  this tax  was  a form  of punishment,  and                                                               
Representative  Rokeberg finds  it "grossly  unfair," because  it                                                               
points a gun  at the company when in fact  it is doing everything                                                               
to move forward to market.                                                                                                      
9:25:18 AM                                                                                                                    
MR. GRIFFIN  said he agrees,  and Conoco  has done its  utmost to                                                               
work  with the  state, so  it would  be punishing  a company  for                                                               
doing exactly what the state has requested.                                                                                     
9:26:16 AM                                                                                                                    
REPRESENTATIVE  ROKEBERG said  that  Mr.  Griffin testified  that                                                               
this legislation  would require Conoco  to pay $2 million  a year                                                               
for  10 years.   He  asked if  the company  would stay  in Alaska                                                               
under those terms.                                                                                                              
9:26:46 AM                                                                                                                    
MR. GRIFFIN said that he doesn't  see Conoco leaving the state as                                                               
a consequence  of this bill.   "The  state is too  important," he                                                               
said, and  it would be  disappointing and  have an effect  on how                                                               
the company  looks at future investments  in the state.   He said                                                               
he considers the state a partner of Conoco.                                                                                     
9:27:41 AM                                                                                                                    
REPRESENTATIVE  ROKEBERG  asked  for Mr.  Griffin's  thoughts  on                                                               
former  Governor Hickel's  comment that  the producers  would not                                                               
sell the gas to Yukon Pacific,  and what Mr. Griffin thinks would                                                               
have happened if the state had  sold the gas to Yukon Pacific and                                                               
how much the state would have lost.                                                                                             
9:28:24 AM                                                                                                                    
REPRESENTATIVE  GRUENBERG, regarding  Mr. Griffin's  comment that                                                               
his  shareholders  would  be  disappointed  with  HB  223,  asked                                                               
whether the  voters are  shareholders too,  "and don't  you think                                                               
they are disappointed when you don't produce?"                                                                                  
9:28:51 AM                                                                                                                    
MR.  GRIFFIN  said his  message  is  that  Conoco wants  to  move                                                               
forward with North Slope gas  development in partnership with the                                                               
state, which will  be a decades-long partnership.   He said there                                                               
are   members   of   the  Alaskan   public   who   reflect   some                                                               
disappointment, but  his company is  working very hard.   He said                                                               
to keep  in context "where  we've been  and where we  are today."                                                               
When  Prudhoe  Bay was  developed,  natural  gas prices  did  not                                                               
support transportation infrastructure.  "The  state would be in a                                                               
far, far poorer  place today had we been foolish  enough to build                                                               
a  gas project  back then  ... We  would have  lost not  only the                                                               
value of  the gas for all  Alaskans, we would have  also lost the                                                               
value of  approximately three billion  barrels of oil  at Prudhoe                                                               
Bay that  we have been  able to recover  as a consequence  of re-                                                               
injecting that gas."                                                                                                            
9:31:00 AM                                                                                                                    
REPRESENTATIVE  GRUENBERG said  the legislature  does not  expect                                                               
people to be clairvoyant, "but  there is a reasonable expectation                                                               
that if you  enter into a lease,  you will get a  royalty as soon                                                               
as possible, and  it will be continuing.  That's  what any lessor                                                               
requires."  He  wondered if it is fairly common  to have a clause                                                               
in a  lease to require  production and asked, "Isn't  that pretty                                                               
much of a standard elsewhere in the world?"                                                                                     
9:32:32 AM                                                                                                                    
MR. GRIFFIN  said he is unfamiliar  with a clause or  law like HB
223  anywhere in  the world.   North  Slope leases  do have  term                                                               
limits, which are extended if the leases  are in a unit.  "We are                                                               
in compliance with all of the requirements of those leases."                                                                    
9:33:33 AM                                                                                                                    
REPRESENTATIVE   WILSON  said   production   of   oil  has   been                                                               
decreasing, and  she asked  what will  production do  without the                                                               
gas being re-injected.                                                                                                          
9:34:14 AM                                                                                                                    
MR. GRIFFIN said the company  uses water for pressure maintenance                                                               
and enhanced  oil recovery  on the  North Slope,  but he  said he                                                               
can't give an estimate.                                                                                                         
9:35:05 AM                                                                                                                    
REPRESENTATIVE  SEATON noted  that  Mr. Griffin  said  he is  not                                                               
aware of terms  similar to the bill before the  committee, and he                                                               
asked if he was aware of  any other contract provisions that seek                                                               
the same goal of stimulating and ensuring production.                                                                           
9:36:12 AM                                                                                                                    
MR.  GRIFFIN  said  every  resource owner  has  an  incentive  to                                                               
encourage leaseholders to produce as  soon as practical.  He said                                                               
in  other   jurisdictions  around   the  world  there   might  be                                                               
production-sharing  agreements,   which  are  analogous   to  the                                                               
negotiation  his company  is involved  with in  the Stranded  Gas                                                               
Development  Act.    Most lease  provisions  include  lease  term                                                               
limits in  the event that they  are not developed, he  said.  The                                                               
Alaska project  is truly unique,  at least in the  United States,                                                               
he opined.                                                                                                                      
9:38:06 AM                                                                                                                    
CHAIR WEYHRAUCH announced that HB 223 would be held over.                                                                       

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