Legislature(1997 - 1998)
05/09/1998 09:00 AM Senate FIN
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* first hearing in first committee of referral
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HOUSE BILL NO. 393
"An Act relating to contracts with the state
establishing payments in lieu of other taxes by a
qualified sponsor or qualified sponsor group for
projects to develop stranded gas resources in the
state; providing for the inclusion in the contracts of
terms making certain adjustments regarding royalty
value and the timing and notice of the state's right
to take royalty in kind or in value from projects to
develop stranded gas resources in the state; relating
to the effect of the contracts on municipal taxation;
and providing for an effective date."
Co-chair Sharp clarified that the Resources Committee
version of the bill was the most recent version (version
"R").
REPRESENTATIVE MARK HODGINS testified that the legislation
would cover payment in lieu of taxes. He stated that the
liquefied natural gas (LNG) that would be developed from
the project would come from the North Slope through an 800-
mile pipeline. He explained that LNG was a different
commodity than oil, as it did not have a spot market. In
order for the LNG project to go forward, contracts had to
be made beforehand that included the pipeline, the
refinery, and the ships to transport the product to the
marketplace.
Representative Hodgins referenced a report authored by Dr.
Van Meurs that estimated the price at $15 billion, which
would not make Alaska competitive in the international
market. The Van Meurs report advised that the project would
be competitive if the price were reduced to $12 billion. He
pointed out that the North Slope currently had
approximately 35 trillion cubic feet of natural gas proven
reserves. He noted that over 12 percent of the amount
belonged to the people of Alaska. He stressed that the
legislature therefore had a duel role, as both the tax and
regulation authority and as an actual owner of the resource
on behalf of the people.
Representative Hodgins continued with suggestions made in
the Van MeursVreport to bring the $15 billion figure down
to $12 billion by reviewing the state's tax regime. He
noted that the federal government would garner
approximately $26 billion from the project over the course
of its economic life (estimated at 30 to 50 years). The
state and local taxes would be approximately $12.6 billion.
Representative Hodgins reported that Dr. Van Meurs had
suggested reducing state taxes by 2 percent (about $270
million) and convincing the federal government to reduce
its percentage. He thought technological advances would
also help make the project profitable. He emphasized that
the project involved private enterprise and that it would
not proceed if it was not profitable. He underlined that
following the Van Meurs suggestion, the state could reduce
the price of the project by approximately $270 million in
taxes that could be forgiven or deferred to a later date.
The state would then receive at least $12.4 billion.
Representative Hodgins shared that as a member of the
private sector, his concerns were the jobs and economic
opportunity a project would create. He referred to oil and
gas development in Cook Inlet, including an LNG facility
that had been exporting since 1969 and the Unocal plant in
Nikiski that exported fertilizer and ammonia. He stressed
that there was a vast industry that could arise from the
development of natural gas.
Representative Hodgins stated that once the legislation was
enacted, the Department of Administration would be allowed
to negotiate with a sponsor group to contract the project.
The proposed contract had to be ratified by the
legislature, which would provide an opportunity for public
exposure and participation.
Representative Hodgins addressed changes made to the bill
by the House Finance Committee removing the "gas-to-
liquids" intent language. He said the change would allow
future gas-to-liquids technology to be addressed under
different legislation. He explained that some legislators
thought that if the language were contained in the bill,
there could be some relief on the existing pipeline, which
could cause confusion.
Representative Hodgins then spoke to the merits of the
pipeline and the affected communities. He pointed to page
23, starting at line 29, with language related to sponsor
groups. He understood the concerns of local municipalities
and maintained that they would have a voice in the contract
process. He conceded that due to the nature of the
contract, it would be difficult to guarantee that the
municipalities would be able to affect the outcome of the
contract. He asserted that the current version of the bill
had been extensively discussed; he wanted it adopted into
law with no further changes.
Representative Hodgins cited Dr. Van Meurs's projections of
$150 billion in revenues that could come from the North
Slope project. He noted that while there were 35 trillion
cubic feet of proven reserves, there could be two to three
times that amount once the project began, because there
would be incentive to find more gas.
Representative Hodgins relayed concerns regarding the
reinjection of available gas and concerns that the sale of
natural gas could impact black-oil production. He stated
that Phillips Petroleum, Inc. had testified that "Point
Thompson could come on line and could actually develop the
ramp-up period, fill the pipeline with gas from Point
Thompson, and thereby allow reinjection of the North Slope
gas back into Prudhoe Bay and Kuparuk and other fields." He
believed the action would allow the maintenance of the
maximum amount of black oil from the North Slope
facilities.
Representative Hodgins summarized that the legislation
would allow for "a great project for Alaskans" that would
bring in needed revenues. He acknowledged that there would
be impacts to municipalities and to the state. He pointed
out that the state was a taxing and regulation authority,
and most importantly would be an owner in the project. He
noted that approximately 50 percent of the royalty revenues
would be deposited into the permanent fund. He stated that
the complexity of the project was such that the enabling
legislation was necessary to allow the administration to
start a sponsor group; once the sponsor group or private
enterprise started, the preliminary engineering would be
done and there would be suggested timelines. He wanted
Alaskans to be trained and ready to work on the project.
Representative Hodgins noted that local hire provisions
would be considered within the allowances of the
constitution. He suggested that the best local provision
was a well-trained Alaskan workforce.
Senator Adams asked where the market would be and how much
natural gas would have to be sold to make the project
feasible.
Representative Hodgins responded that the primary market
would be the Pacific Rim countries of Japan, Korea, and
Taiwan. He noted there had been economic strife in the
countries, and that the main competitors would be
Australia, Indonesia, and possibly Russia. He explained
that natural gas was primarily sold under contracts and
that current contracts were reaching maturity. He listed
the years 2005, 2008, 2010, and 2015 as dates discussed as
prime times to enter the market. He believed it best to
enter the marketplace as soon as possible using the
speculation of North Slope reserves. He opined that the
Alaska natural gas project could become the largest in the
world.
Representative Hodgins continued that in order for the
project to be successful, 14 million metric tons had to be
transported through the pipeline annually. He pointed out
that the LNG was already sold from the Nikiski plant, and
Alaska had been the sole provider of LNG products to Japan.
While the plant had not reduced its output, he stressed
that increased demand and supply provided from elsewhere
had reduced the state's share to less than 2 percent.
Representative Hodgins spoke to conflicting testimony heard
in other legislative committees regarding the need for
natural gas and the best "window of opportunity" for Alaska
to enter the marketplace. He responded that the decisions
would have to be made as the project progressed.
Representative Hodgins asserted that the project would not
advance unless customers were in place and in partnership
with the state and participating industries. He claimed the
project could become one of the largest, if not the
largest, private-enterprise project in the world.
WILSON CONDON, COMMISSIONER, DEPARTMENT OF REVENUE,
testified that HB 393 would establish a framework for
developing a project-specific fiscal system for
commercializing stranded gas in Alaska. He explained that
the fiscal system would provide for contractual payments in
lieu of some or all state and local taxes. He pointed out
that the bill would not require the administration to come
before the legislature with a proposal to modify royalties,
but would require the consideration that the provisions for
specifying how royalties were valued over the long term
could be included in a contract. He added that the bill
would also stipulate that the contract might modify the
provisions for taking royalty in-kind, such as provisions
governing the six-month notice requirement and the current
right the state had to take royalty in-kind on relatively
short notice for the gas business. He stressed that the
bill would require the executive branch to entertain
applications, develop potential contracts, and present
proposed contracts to the legislature for specific
legislative authority to execute the contracts.
Commissioner Condon referred to a document outlining the
process required for entering into a contract ("CSHB 393,
Flow Chart, the Alaska Stranded Gas Development Act," copy
on file). He detailed the steps of the process. First, the
prospective sponsors had to apply. The commissioners of the
Departments of Revenue (DOR) and Natural Resources (DNR)
would proceed with negotiating a contract if the proposed
project and sponsors met certain qualifications.
Commissioner Condon noted that the stipulations contained
in the bill would govern negotiation of the contract,
including the fiscal terms, local hire, local purchasing,
payment sharing with municipalities, and gas supplies for
local communities. He added that the bill would establish a
municipal advisory group, which the commissioner of DOR
must involve in the contract negotiation process.
Commissioner Condon continued that the bill would provide
for public commentary and preliminary legislative review
periods; following those, the contract could be modified
before being presented to the legislature for formal
consideration, including deciding whether the executive
branch would be given specific authority to execute the
contract. He stressed that the contract could not be
executed without specific legislative approval to the
executive branch.
Senator Phillips pointed to page 22, line 20 of the bill
(Section 43.82.435) and questioned whether "may" meant
"shall" from a legal point of view related to the executive
branch submitting the contract to the legislature.
Commissioner Condon replied that at the end of the process,
the governor could decided that he or she would not submit
the contract to the legislature, if the governor did not
think it was a good idea. The contract would then be dead
without legislative authorization. He stated that "may" did
not reflect the legislature's authority but the governor's
discretion regarding whether or not to proceed with the
proposal.
Co-chair Sharp clarified that any contract that went
forward would have to be ratified by the legislature.
Senator Phillips summarized that the governor could
withdraw the contract if he or she believed it was not in
the best interests of the state. Commissioner Condon
responded that he was correct.
Senator Phillips turned to page 22, lines 27 through 31
(Section 43.82.440), "a person may not bring an action
challenging the constitutionality of the law authorizing a
contract enacted" under the section. He asked why people
would not be allowed to challenge the constitutionality of
the law.
Commissioner Condon replied that the section would give a
shorter period of time for the statute of limitations than
would normally be available. Once somebody entered into a
contract, they would have a 120-day time period, in order
to get an answer regarding constitutionality quickly.
Senator Phillips opined that the two sections were the most
important in the bill.
Senator Adams asked how the affected municipalities and
communities would be treated. He also wanted to know more
about the employment of Alaskans in the newly created jobs.
He commented that sometimes the only way to guarantee local
hire and patronage of local businesses was through a sole-
source contract to an Alaskan company.
Commissioner Condon replied that the involvement of local
communities was both procedural and substantive; the bill
would require (Sections 500 through 520, pages 23 through
25) the establishment of a municipal advisory group and
that the commissioner of DOR involve the advisory group in
the negotiation of the contract and consult with them
regarding the provisions governing payments to local
communities. He pointed out that the principles governing
the contract terms would require that payments be shared
with local municipalities (according to subparagraph (b) of
Section 43.82.210). He noted the extensive provision
regarding local hire and contracting with local businesses
(Section 43.82.230); he stated the language went as far as
state and federal constitutions permitted.
Senator Phillips asked what would happen in the case of a
negotiated preliminary contractor that the governor did not
approve of but the legislature wanted. He wondered whether
the contract would ever be submitted to the legislature.
Commissioner Condon replied "yes and no." He detailed that
the "no" part meant that he did not think the legislature
could structure a set of arrangements or contract on its
own. He believed that the executive branch could bring a
proposal that was a customized fiscal system for a proposed
project. The legislature could consider the proposal and
decide it liked some of the terms and not others. The
legislature could pass a general law that had only the
terms it wanted.
Senator Phillips asked how the legislature would know about
a potentially good contract if it was submitted to and
rejected by the executive branch.
Commissioner Condon responded that an entity submitting a
contract that was ignored by the executive branch would
most likely go to the legislature. He believed the
political process would solve the problem.
JOHN SHIVELY, COMMISSIONER, DEPARTMENT OF NATURAL
RESOURCES, added that the sponsor could bring the contract
to the legislature; it would not be a secret document. He
did not know how the executive branch could be forced to
sign a contract, however. The legislature could pass a
general law related to the structure of the contract, but
the governor would have the option of vetoing that law; if
the legislature overrode the veto, the contract would go
into effect regardless of the governor's opinion on the
matter. He believed that both the governor and the
legislature would share an interest in what was best for
the state.
Senator Torgerson asked how the proposed contract would
differ from other oil contracts. He believed the
legislature only had the authority to either approve or
disapprove a contract presented to it. He wanted to know
whether the contract would hold if the legislature only
approved a portion of the contract in enabling legislation,
and the governor vetoed it.
Commissioner Condon replied that there would be no contract
if the governor vetoed it. He explained that unlike the
normal contract authority the legislature could grant the
executive branch, the bill would not grant specific
authority to the executive branch to enter into a natural
gas development contract without legislative approval. He
likened the situation to the relationship between the two
branches when bonding for building facilities; the
executive branch did not have the specific authority to
enter into contracts without legislative approval.
Co-Chair Sharp voiced concerns with language such as that
contained in subparagraph (2) of Section 43.82.210 and
contract terms relating to payment in lieu of one or more
taxes ("the terms should accommodate the interests of the
state, affected municipalities, and the project sponsors
under a wide range of economic conditions, potential
protect structures, and marketing arrangements"). He
commented that the municipalities would not be given a vote
in the final contract negotiations, yet could lose a
considerable amount of tax revenue; he did not know how the
best interests of the municipalities would be protected
when the bill used the language "should accommodate." He
asked how the local governments could accept the "trust me"
attitude, when they could be negotiated out of tax revenues
for several years.
Co-Chair Sharp cited subsection (3) of the same section
stating that if the profitability of the project decreased,
increases in the economic rent making up for the tax-
revenue losses would not take effect. He surmised that the
state and the municipalities were taking a large share of
the profitability risk in the project.
Commissioner Condon responded that the legislation was
basically a means by which the state and local governments
would be taking risks to facilitate the development of the
resource. He said the question must be asked whether the
resource would be developed if the risks were not taken. He
stressed that community interest was important and that he
hoped it would be protected, but qualified that the
contract would still be dependent on the political process
and the fairness of the players. He opined that it did not
make sense to "tie everyone's hands" to provide protections
that early in the process.
Co-Chair Sharp pointed out that the state and
municipalities were being asked to become equity partners
in assuming risk and to depend on the profitability of the
project, but the two were not equity partners.
Commissioner Condon agreed that was one way to look at the
matter. He envisioned the trade-off would be equitable
returns to the state and municipalities. He stated that
both governments would share the benefits, but would also
have to share the risks.
Co-Chair Sharp focused on the point that the affected
municipalities would be asked to give up local taxes and
state taxes, while the remaining areas of the state would
only give up state taxes. He reminded the committee that
during the construction of the Alyeska pipeline, the
percentage of employees hired from his community was small.
He understood the intent was to not give veto power to the
affected municipalities, but suggested the language "should
accommodate" was inappropriate. He used a freight-train
metaphor to explain the potential for a legislative-
approved contract based on the wishes of the few
legislators representing the impacted communities, not the
majority of legislators from elsewhere in the state. He
stressed that while there could be some employment benefits
from such a project, there were also social challenges that
would be borne by the communities along the new pipeline.
He reiterated concerns.
Commissioner Shively responded that the issue had been
addressed in the past. Communities like the North Slope
Borough and Valdez had limitations on property tax
authority to accommodate the needs of the whole state. He
agreed there were several challenges, such as the impact to
Fairbanks before the revenues were generated. He thought
the issues should be addressed by the governor and the
legislature, but independently from the project's revenues.
Commissioner Shively continued that the only municipality
that would certainly be able to tax if the project was
built was the North Slope Borough; although the primary
route seemed to be to Valdez, there were other options. He
did not think all fears could be addressed until a contract
was negotiated and the risks could be addressed
specifically.
Co-Chair Sharp appreciated that Section 43.82.900 clearly
defined the different kinds of affected municipalities. He
pointed out that municipalities impacted by the Alyeska
pipeline did not have the authority to assess the
facilities in their jurisdiction at the full value because
of the arrangement to promote the pipeline. He noted that
the value was much higher than anticipated.
BEVERLY MENTZER, ALASKA GAS COMMERCIALIZATION MANAGER,
EXXON COMPANY USA, referred to submitted written testimony
(copy on file). She stated that Exxon supported HB 393 in
its current version, which provided reasonable guidelines
and boundaries for development of a fiscal contract. The
bill kept options open for the state of Alaska to maximize
the value of its gas resources. She added that it did not
contain any specific fiscal terms or mandate the method for
gas commercialization.
Ms. Mentzer concluded that the legislation would provide
the opportunity for input from the legislature, local
municipalities, and the public during the contract
development stage. She noted that it appropriately required
legislative review and authorization of any fiscal
contract.
Co-Chair Sharp asked whether the legislation would allow or
prohibit a contract or agreement to be considered for the
economic benefits bestowed on a gas-to-liquids project.
Ms. Mentzer responded that the statutory language in the
bill was broad enough to include a gas-to-liquids
conversion project.
PAUL FUHS, YUKON-PACIFIC CORPORATION, spoke in support of
the bill as it was. He commented that HB 393 was a
framework for negotiating a tax contract, but the most
important provision for his company was that it would
create an incentive for formation of a project sponsor
group. He reported that discussions with the Asian market
had shown that the most important element was to bring gas
supplies together with the permit so that there could be a
unified project to move forward. He noted that the bill had
a sunset date of 2001.
[Tape SFC-98 164, Side B]
Mr. Fuhs stated that his company would be in good faith
with the municipalities; their experience has been that the
municipalities were very positive about the project and
willing to look at flexible ways of approaching the
taxation on the project. He did not see the municipalities
as a problem in any way.
Senator Phillips pointed out that the sunset date applied
to the deadline in which an application for a contract
could be submitted.
PAUL CANALE, ASSISTANT DIRECTOR OF GOVERNMENT AFFIARS, BP
EXPLORATION ALASKA, testified in support of the
legislation. He referred to written testimony given by
David Brooks to the House Finance Committee (copy on file).
He stated that BP believed the bill provided a positive
signal to the industry and developers of stranded gas that
the state was prepared to discuss any fiscal impediments in
the way of a project directed toward the development of the
state's stranded-gas reserves. He assured the committee
that BP supported the legislation.
GEORGE FINDLING, BUSINESS DEVELOPMENT ADVISOR, ATLANTIC
RICHFIELD CORPORATION (ARCO), spoke in support of HB 393
(version "R"). He referred to previous testimony describing
ARCO's gas commercialization plans and how HB 393 would
support those plans. He stated that ARCO believed that the
framework legislation could help advance gas
commercialization in Alaska; ARCO viewed the legislation as
an essential signal that the state wanted to proceed down
the development road in partnership with private parties.
The bill gave ARCO the basic confidence it needed regarding
parallel efforts to assemble sponsor groups, reduce costs,
develop a market, pursue federal fiscal incentives, and
resolve many commercial and regulatory issues facing the
LNG project.
Co-chair Sharp asked whether the bill as worded would allow
economic participation and encouragement by the state for a
gas-to-liquid project.
Mr. Findling responded that ARCO felt that the statutory
language was such that the requested outcome would not be
ruled out.
Commissioner Condon affirmed that the language in the
current version of the bill would allow for the development
of stranded gas. He noted that a lot of work had been done
to deal with the issue from an LNG project perspective; if
another proposal was made, more work would be needed.
Senator Parnell commented that the language was broad
enough to be applicable to a gas-to-liquids project. He
asked whether the department would treat it that way.
Commissioner Condon replied in the affirmative.
Representative Hodgins confirmed for Co-Chair Sharp that
the legislation would cover gas-to-liquid projects. He
noted that the gas-to-liquids language was originally in
the bill and was taken out; the sponsors felt that the
language adequately covered gas-to-liquids technology. He
believed legislation would probably come forward if
additional legislation was needed and there was economic
feasibility shown.
AT EASE 9:57 AM
RECONVENED 10:30 AM
Co-chair Sharp announced that he would NOT OFFER Amendment
1.
Co-chair Pearce MOVED to ADOPT of Amendment 2.
Co-chair Sharp shared that the House Finance Committee
members who authored the current version of the bill had no
objection to the amendment. He stated that that in light of
the testimony heard at the meeting, he urged the committee
give the amendment favorable consideration.
Co-chair Sharp explained that the amendment allowed the
conversion of gas-to-liquids if the necessary technology
was developed before the bill's sunset date. He noted that
the technology did not exist currently and that it was
uncertain whether it would exist by the year 2001.
Senator Adams OBJECTED. He stated that the amendment would
narrow the scope of the bill. He stressed the importance of
keeping options open.
A roll call was taken on the motion.
IN FAVOR: Phillips, Sharp, Pearce
OPPOSED: Adams, Donley, Parnell
Senator Torgerson was absent from the vote.
The motion FAILED (3/3). Amendment 2 was not adopted.
CSHB 393(RES) was HEARD and HELD in committee for further
consideration.
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