Legislature(2005 - 2006)SENATE FINANCE 532
07/28/2006 09:00 AM Senate SPECIAL COMMITTEE ON NATURAL GAS DEV
| Audio | Topic |
|---|---|
| Start | |
| SB3002 | |
| Joseph K. Donohue, Preston Gates & Ellis, Counsel to the Governor | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB3001 | TELECONFERENCED | |
| += | SB3002 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE SPECIAL COMMITTEE ON NATURAL GAS DEVELOPMENT
July 28, 2006
9:16 a.m.
MEMBERS PRESENT
Senator Ralph Seekins, Chair
Senator Lyda Green
Senator Gary Wilken
Senator Con Bunde
Senator Fred Dyson
Senator Bert Stedman
Senator Donny Olson
Senator Thomas Wagoner
Senator Ben Stevens
Senator Kim Elton
MEMBERS ABSENT
Senator Lyman Hoffman
Senator Albert Kookesh
OTHER LEGISLATORS PRESENT
Senator Gary Stevens
Senator Hollis French
Representative Paul Seaton
COMMITTEE CALENDAR
SENATE BILL NO. 3002
"An Act relating to the Alaska Stranded Gas Development Act;
relating to municipal impact money received under the terms of a
stranded gas fiscal contract; relating to determination of full
and true value of property and required contributions for
education in municipalities affected by stranded gas fiscal
contracts; and providing for an effective date."
HEARD AND HELD
SENATE BILL NO. 3001
"An Act relating to the production tax on oil and gas and to
conservation surcharges on oil; relating to criminal penalties
for violating conditions governing access to and use of
confidential information relating to the production tax;
amending the definition of 'gas' as that definition applies in
the Alaska Stranded Gas Development Act; making conforming
amendments; and providing for an effective date."
SCHEDULED BUT NOT HEARD
PREVIOUS COMMITTEE ACTION
BILL: SB3002
SHORT TITLE: STRANDED GAS AMENDMENTS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
07/12/06 (S) READ THE FIRST TIME - REFERRALS
07/12/06 (S) NGD
07/13/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/13/06 (S) Heard & Held
07/13/06 (S) MINUTE(NGD)
07/14/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/14/06 (S) Heard & Held
07/14/06 (S) MINUTE(NGD)
07/24/06 (S) NGD AT 1:30 PM SENATE FINANCE 532
07/24/06 (S) Heard & Held
07/24/06 (S) MINUTE(NGD)
07/25/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/25/06 (S) Heard & Held
07/25/06 (S) MINUTE(NGD)
07/26/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/26/06 (S) Heard & Held
07/26/06 (S) MINUTE(NGD)
07/27/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
07/27/06 (S) MINUTE(NGD)
07/28/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
WITNESS REGISTER
JIM CLARK, Chief Negotiator
Office of the Governor
PO Box 110001
Juneau, AK 99811-0001
POSITION STATEMENT: Explained SB 3002, Version G, and answered
questions about Version G and proposed amendments.
JOSEPH K. DONOHUE
Preston Gates & Ellis
Counsel to the Governor
Office of the Governor
PO Box 110001
Juneau, AK 99811-0001
POSITION STATEMENT: Explained SB 3002, Version G, and answered
questions.
SENATOR HOLLIS FRENCH
Alaska State Legislature
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Asked questions during the hearing on
SB 3002, Version G.
ACTION NARRATIVE
CHAIR RALPH SEEKINS called the Senate Special Committee on
Natural Gas Development meeting to order at 9:16:22 AM. Present
at the call to order were Senators Lyda Green, Gary Wilken, Fred
Dyson, Bert Stedman, Donny Olson, Thomas Wagoner, Ben Stevens,
Kim Elton and Chair Ralph Seekins; Senator Con Bunde arrived
shortly thereafter. Also in attendance were Senators Gary
Stevens and Hollis French, and Representative Paul Seaton.
SB 3002-STRANDED GAS AMENDMENTS
9:17:03 AM
CHAIR SEEKINS announced SB 3002 to be up for consideration. He
informed members that the new proposed committee substitute
(CS), Version G, was basically the version of SB 2004 passed by
the Senate during the last special session.
9:17:47 AM
SENATOR GREEN moved to adopt SB 3002, Version G, labeled 24-
GS2095\G, Bailey, 7/28/06, as the working document. There being
no objection, it was so ordered.
9:19:38 AM
^Jim Clark, Chief Negotiator, Office of the Governor
JIM CLARK, Chief Negotiator, Office of the Governor, introduced
Version G as essentially the package of amendments put together
by Joseph Donohue and presented by the administration [as
SB 2004] in the last special session, with some changes made in
the Senate during that session.
^Joseph K. Donohue, Preston Gates & Ellis, Counsel to the
Governor
JOSEPH K. DONOHUE, Preston Gates & Ellis, Counsel to the
Governor, noted he is under contract with the Department of Law
to provide advice and assistance in the context of the gas
pipeline project. He addressed Version G in three parts:
Sections 1-13, Sections 14-17 and the remainder.
He described Sections 1-13 as substantive conforming amendments
to align the proposed contract with the statutory changes needed
to authorize all the contract's elements. Sections 14-17 relate
to the distribution of impact payments to be paid by the
mainline limited liability company (LLC) to the state; they deal
with distribution, appropriation and allocation among local
subdivisions, and also provide for consultation with the
Municipal Advisory Group (MAG). Mr. Donohue said the third part
of Version G is an adjustment to the public education funding
provisions, correcting an inadvertent problem created by taking
property out of the AS 43.56 tax base and putting it under the
payments in lieu of taxes (PILTs) of the contract.
He reminded members that the committee did substantial work on
the impact payments and school funding formula [in SB 2004] in
the last special session; furthermore, Jim Baldwin had discussed
those sections earlier this week. Thus Mr. Donohue said he
would focus on the first part of Version G, the new provisions
added to SB 3002 as it had been introduced by the governor.
9:23:09 AM
MR. DONOHUE pointed out that provisions in Sections 1-13 are
driven primarily by the administration's policy decision during
negotiations to become a full commercial partner with the
producers in the project. The four components of that decision
are: 1) the requirement that the state become an equity owner;
2) the requirement that the state take its royalty gas in kind
for the life of the contract; 3) the decision to convert the
production tax from an in-value calculation to in-kind gas
delivery; and 4) the decision to participate in financing the
pipeline by making a shipping commitment over the line, which is
also necessary to preserve capacity for the gas that the state
takes in kind.
He characterized Section 1 as a technical amendment to the
Uniform Arbitration Act to allow for the provision in the
contract which stipulates that the Federal Arbitration Act
governs mandatory arbitration proceedings under the fiscal
contract, Article 26 and Exhibit C. Mr. Donohue noted that
under AS 43.82, parties can agree that federal law could apply.
He explained that Section 2, amending AS 43.82.010, expands the
purpose of the chapter to provide that fiscal terms under the
contract can relate to oil fiscal certainty. Mr. Donohue said
it is done in a number of ways. Since oil fiscal certainty
isn't related directly to the project, the authority for
providing fiscal terms and certainty is separated from the
project and goes to, generally speaking, oil and gas business
activities of qualified sponsors in the state. Section 2 also
inserts the concept of "related party", repeated throughout the
Act and defined in Section 19 as an affiliate of a qualified
sponsor that is an owner of a project entity and is an intended
beneficiary of fiscal certainty under the Act.
9:27:45 AM
SENATOR BUNDE paraphrased Section 2, paragraph (3), which read:
(3) maximize the benefit to the people of the
state of the development of the state's stranded gas
resources.
He asked whether this is "feel-good boilerplate" or could
actually be used in court if the producers had adroitly used the
contract to benefit their shareholders at the expense of
Alaskans.
MR. DONOHUE answered that it is more than mere boilerplate.
This language generally reflects the requirement of Article VIII
of the state constitution to develop and maximize the state's
resources for the maximum benefit of the people. Whether or not
it is in the bill, he opined that the duty would apply to
legislative decisions in the disposition of the natural gas
resources. He characterized it as a supervening constitutional
requirement, reading paragraph (3) as trying to capture that.
CHAIR SEEKINS suggested it dovetails with Section .430 of the
Act. Mentioning the final findings and determinations, and
whether any proposed contract or amendments meet the
requirements and purposes of the chapter, he said this is a
stated purpose of the chapter as well, to his belief.
SENATOR BUNDE requested a legal opinion on the following: If it
is believed the system is being gamed, with unfair advantage
given to the stockholders over the citizens of Alaska, would the
courts view this as a tool to allow breaching of the contract or
making substantial changes, if necessary?
MR. DONOHUE answered that there has been lots of discussion in
the public arena as to whether the proposed fiscal contract
satisfies the constitutional requirement of Article VIII. It is
expected that a complaint challenging the fiscal contract, once
it is authorized by the legislature, would go to Alaska Supreme
Court for ultimate determination of whether this contract, with
all its terms, meets that constitutional standard.
9:31:11 AM
SENATOR BUNDE acknowledged the constitutional duty, but asked
whether the purpose of paragraph (3) is to put a finer point
on it.
MR. DONOHUE replied that the constitutional standard and
paragraph (3) are fairly broad. It's not necessarily a specific
test, but is a general test that involves taking into account
all the potential benefits, problems, risks and so forth of
developing the state's natural gas resources.
MR. CLARK indicated it is direction to the administration's
negotiators to ensure they are mindful of the very concern
raised by Senator Bunde. Thus added to the contract were
Exhibits Q, R, S and Y, all calculated to provide the specifics
to deal with that protection.
CHAIR SEEKINS noted a court challenge must be done within 120
days after execution of the contract, according to Section .440
of the Act.
SENATOR BEN STEVENS pointed out that paragraph (3) of
AS 43.82.010 has been in the Act since the original 1998
enactment.
SENATOR BUNDE clarified that he was highlighting this as a tool
- hopefully never needed - in case some gaming occurred and
there was a desire to go to court on this issue. He surmised it
would be prudent to say, for the record, that it is in the
contract that all participants will be working for the maximum
benefit of the people of Alaska.
CHAIR SEEKINS gave his understanding of one requirement, that
the commissioner must certify - in his or her final findings and
determination - that it maximizes the benefit; there also would
be an explanation as to why that belief exists.
9:34:41 AM
MR. DONOHUE, in response to Senator Elton with respect to
paragraph (3), explained that once the Alaska Supreme Court has
determined that this contract satisfies the constitutional
standards that apply to the development of the state's
resources, then this would no longer be a tool to reopen the
constitutionality of the contract. Any concerns during the
course of the contract that relate to the performance of the
producers would have to be enforced through the contract's
arbitration provisions.
MR. CLARK again indicated the administration takes the
constitutional measure and the provisions in paragraph (3) as
direction from the legislature in terms of what must be in the
contract. He said that is why he'd mentioned those exhibits
that deal with fiscal certainty on oil, which is what this
section goes with.
He opined that Alaskans want a gas contract, but don't want to
be flimflammed or gamed, and don't want the state to look
foolish. Indicating the administration has been highly
cognizant of that, Mr. Clark suggested the measure of whether a
good enough job has been done shows up in those exhibits with
respect to this particular issue, fiscal certainty.
9:37:12 AM
CHAIR SEEKINS summarized his understanding: The question of
constitutionality isn't for the arbitrators, but is for the
courts and must be filed within 120 days after execution of the
contract.
AN UNIDENTIFIED SPEAKER affirmed that.
SENATOR BUNDE corrected his earlier remarks with respect to
paragraph (3). He gave his understanding that after the
constitutionality is determined, this can be used a tool with a
board of arbitrators, not in a court; it will be a term in the
contract. If the administration says something isn't in the
best interest of Alaskans, then this provision could be used
with the arbitrators to say that the benefits aren't being
maximized, and it would be a cause to appeal to the arbitrators.
MR. DONOHUE, in response to Chair Seekins as well, clarified
that the arbitrators would just deal with enforcement of the
contract terms, potential breaches and so forth.
MR. CLARK reiterated that this is taken as direction. There are
specific provisions in these exhibits to deal with issues
relating to fiscal certainty for oil. There is a series of
items to ensure the state doesn't get gamed. There is a highly
specific set of requirements, regulations and contract terms
about how the parties would work with each other.
He again opined that the measure of whether a good enough job
has been done already shows up in these exhibits; they are
available for legislators and the public to examine to see
whether, in their opinion, that has been prevented from
happening. Mr. Clark noted these are the provisions that would
be taken to an arbitrator. For example, if it was believed
there'd been inappropriate accounting, a notice of dispute would
be filed, and the state would use the language of these exhibits
to show that a correction was needed.
SENATOR BUNDE mentioned the creativity of the human mind and
that someone might find a loophole. He suggested this is a tool
to deal with such a loophole.
9:41:07 AM
MR. DONOHUE continued with Section 2, bringing attention to
paragraph (1), which read:
(1) encourage new investment to develop the
state's stranded gas resources by authorizing
establishment of fiscal terms related to oil and gas
agreements and taxes for a qualified sponsor, the
members of a qualified sponsor group, or a related
party and related to their oil and gas business
activity in the state, including gas pipeline
expansion pricing that encourages further gas
exploration [THAT NEW INVESTMENT WITHOUT SIGNIFICANTLY
ALTERING TAX AND ROYALTY METHODOLOGIES AND RATES ON
EXISTING OIL AND GAS INFRASTRUCTURE AND PRODUCTION];
He highlighted the phrase "including gas pipeline expansion
pricing that encourages further gas exploration," saying that
underlined language was added by this committee and the previous
language was the proposal from the administration. Mr. Donohue
told members that later in this process the administration would
suggest possibly putting some of these policy concerns elsewhere
in the Act because it is a very narrow, specific policy concern
to be placed within the broader purposes clause.
9:41:58 AM
MR. DONOHUE turned to Section 3, amending AS 43.82.020. He drew
attention to paragraph (1), which read:
(1) periodic payment in lieu of one or more
taxes that otherwise would be imposed by the state or
a municipality on the qualified sponsor, [OR] members
of the qualified sponsor group, or a related party;
[AS A CONSEQUENCE OF THE SPONSOR'S OR GROUP'S
PARTICIPATION IN AN APPROVED QUALIFIED PROJECT UNDER
THIS CHAPTER; AND]
MR. DONOHUE explained that the deleted language, shown in
brackets, is to avoid arguments about whether oil fiscal
certainty relates to the group's participation in an approved
qualified project. He noted it relates to the ability and
authority of the state to negotiate terms related to oil.
He addressed paragraph (2) of Section 3, which read:
(2) certain adjustments regarding oil and
gas lease agreements, unit agreements, and other
agreements [ROYALTY] under AS 43.82.220; in this
paragraph, "oil and gas lease agreements" includes
royalty provisions of those agreements; and
He told members that this relates to a general broadening of
AS 43.82.220, which will be seen later; that provision, under
current law, deals only with the state's ability to negotiate
changes to its royalty-in-kind (RIK) and royalty-in-value (RIV)
provisions, mostly related to timing, notice and valuation
methodologies. The fiscal contract as negotiated involves other
types of changes to the oil and gas lease agreements and the
unit agreements. Mr. Donohue said this provision, along with
other changes to AS 43.82.220, is designed to provide broader
authority to come up with overall terms so that the state is a
full commercial partner with the producers in the project.
9:44:03 AM
MR. DONOHUE pointed out what he believed was an inadvertent
deletion. He turned to paragraph (3) of Section 3, new language
that read:
(3) payment of the gas production tax under
AS 43.55, or payment in lieu of the gas production
tax, by delivery of gas.
He recalled that paragraph (4) [in SB 2004] was deleted by this
committee in the last special session. It read:
(4) acquisition by the state of an ownership
interest in the project that is the subject of the
proposed contract, and terms relating to collateral
agreements authorized under AS 43.82.437.
MR. DONOHUE explained that the committee had deleted language
relating to collateral agreements in this provision and in
subsequent sections of the bill. However, to his recollection,
the language in paragraph (4) relating to acquisition of an
equity interest was deleted inadvertently. Thus he requested,
on behalf of the administration, that the following be
reinserted: "acquisition by the state of an ownership interest
in the project that is the subject of the proposed contract".
MR. CLARK, in response to Chair Seekins, indicated the
administration would prepare such an amendment.
9:45:51 AM
MR. DONOHUE addressed Section 4 of Version G, amending
AS 43.82.200. He highlighted paragraph (1), which read:
(1) terms concerning periodic payment in
lieu of one or more taxes on oil or gas or both as
provided in AS 43.82.210, and terms related to credits
for investment in a project that is the subject of a
contract developed under this chapter;
He advised members that the first portion deals with
clarification of the administration's authority to include
fiscal certainty on oil taxes, including taxes on production
income and property. The second part relates to the provision
in the proposed fiscal contract for credits within the PILT for
production taxes, credits related to investment in the gas
treatment plant (GTP). Mr. Donohue said these credits aren't in
the petroleum production tax (PPT) proposed by the
administration; therefore it was felt that independent authority
was needed to clarify that the commissioner of revenue could
negotiate for those credits within the contract.
MR. DONOHUE turned to paragraph (2), which read:
(2) terms developed under AS 43.82.220
concerning oil and gas leases, unit agreements, and
other agreements under AS 38, including termsrelating
to
(A) timing and notice of the state's
right to take royalty in kind or in value; and
(B) royalty value;
He observed that this relates to the expanded authority sought
from the legislature under AS 43.82.220 to deal with
modifications of oil and gas lease and unit agreements. This is
to clarify that if there are any differences between the fiscal
contract and these agreements, the fiscal contract will
supersede them.
9:47:43 AM
MR. DONOHUE continued with Section 4, amending AS 43.82.200. He
turned to paragraph (6), which read:
(6) terms and conditions for
[ADMINISTRATIVE] termination of a contract [UNDER
AS 43.82.445]; and
He informed members that AS 43.82.445, repealed at the end of
the bill, set up an administrative process within the Department
of Revenue (DOR) for determining whether the contract should be
terminated. Under the proposed fiscal contract, termination is
a contract matter. Article 28 of the contract has an
administrative termination provision, and the work commitment
article has termination provisions; these are intended to
substitute for the department's administrative process. Thu
Mr. Donohue noted this is a conforming amendment to align the
contract with the statutory authority.
MR. DONOHUE turned to paragraph (7) of Section 4, which read:
(7) other terms or conditions that the
commissioner determines are
(A) reasonable and promote [NECESSARY
TO FURTHER] the purposes of this chapter,
including the implementation of AS 43.82.020 -
43.82.270; or
(B) in the long-term fiscal [BEST]
interests of the state.
He described this as broadening the catchall authority under
AS 43.82.200. This is in lieu of a laundry list of authority
initially proposed and attached to the preliminary fiscal
interest findings published by the commissioner of DOR; he
recalled that was Exhibit I. Mr. Donohue added that, from a
litigation standpoint, it was deemed safer to compress some
incidental provisions that deal with implementation of the
contract - credits and offsets and other items that are fairly
standard in these fiscal contracts - into paragraph (7). This
is to avoid a litigation dispute, after the contract is
authorized, about how detailed AS 43.82.200 needs to be to
authorize the many contract provisions that couldn't possibly be
referenced in this statutory list.
MR. DONOHUE characterized the change in subparagraph (B) as a
consistency edit proposed in the last special session [to SB
2004]. He said this is because the commissioner of DOR is
asked, both in the preliminary and final findings, to decide
whether the contract is in the long-term fiscal interest.
Mr. Donohue indicated the administration felt the same standard
should be applied within the contractual-development section.
This is a technical edit to bring it into conformity with the
standard applied, to his belief, in six or seven other
provisions under AS 43.82.
9:52:00 AM
MR. DONOHUE turned to Section 5 of Version G, which read:
* Sec. 5. AS 43.82.200 is amended by adding a new
subsection to read:
(b) Terms relating to arbitration and alternate
dispute resolution may provide for a waiver, with the
concurrence of the attorney general, of the state's
immunity from suit. The waiver may include waiver of
the state's sovereign or other immunity and consent to
entrance and enforcement of an arbitration award in
any state court in the United States that has
jurisdiction over the State of Alaska. The authority
granted in this subsection is effective only after the
arbitration award is entered and enforcement is sought
in the superior court of the state.
CHAIR SEEKINS addressed formatting issues. He observed there is
no subsection (a) under Section 4, and yet Section 5, which also
amends AS 43.82.200, proposes a new subsection labeled (b). He
asked whether it perhaps should be paragraph (8) instead of
subsection (b).
MR. DONOHUE surmised it was proposed initially as separate
subsections because it deals with implementation of a term
identified in paragraph (5) [of Section 4], which, arguably,
could be expanded with the same concepts.
CHAIR SEEKINS said he didn't object to having (a) and (b), but
there would have to be an (a).
MR. DONOHUE gave his understanding that it would be left to the
revisor, but agreed with the need for that.
9:54:01 AM
MR. DONOHUE explained that Section 5 deals with the waiver by
the attorney general (AG) of the state's immunity from suit.
First, the very agreement by the state to enter into
arbitration, especially under the Federal Arbitration Act,
likely requires an express waiver of sovereign immunity.
Second, if the state were to lose an arbitration dispute, that
award could be confirmed and reduced to a judgment. Thus the
provisions allow the producers to enforce judgments in other
jurisdictions against the State of Alaska. This reflects the
agreement in Article 26 of the contract - the mandatory dispute
resolution article - and the accompanying Exhibit C.
He reported that the producers argue they want this waiver and
the ability for enforcement outside of Alaska because once a
judgment is entered in Alaska, the only enforcement allowed
under state law is to come to the Alaska State Legislature and
request an appropriation. Mr. Donohue reminded members that
there is a standing waiver of sovereign immunity for many types
of tort and contract claims. Every year, people who have
succeeded in lawsuits against the state have their judgments
reduced to an appropriation request, handed in by the Department
of Law, and those have always been paid. If perchance the
legislature didn't make an appropriation in this instance,
however, the producers could take that judgment to another state
and, based upon the waiver of sovereign immunity, could try to
pursue enforcement against assets in other jurisdictions.
CHAIR SEEKINS read from subsection (b) of Section 5 and asked:
If the purpose of the waiver is to authorize arbitration under
the state's arbitration statutes, shouldn't that purpose be
specified?
MR. DONOHUE replied that was an excellent point. He recalled at
one time the administration had proposed language that said
"including arbitration" after the word "suit", to clarify the
point just made by Chair Seekins.
9:58:33 AM
CHAIR SEEKINS observed that Section 5 mentions state courts. He
asked whether federal courts should be included as well.
MR. DONOHUE answered that under the circumstances of this
particular contract, federal courts don't have jurisdiction over
the State of Alaska. In response to Senator Dyson, he clarified
that federal leases aren't implicated in this fiscal contract.
10:00:01 AM
MR. DONOHUE, in response to Senator Stedman, said he wasn't
aware of other states that had expressly waived sovereign
immunity to allow enforcement of judgments outside their
jurisdiction. Assuming the Federal Arbitration Act is
applicable, which is in the contract, he surmised the other
purpose for the waiver is this: The contract specifies that if
a producer files a motion to confirm an award in Alaska Superior
Court and 365 days have elapsed without court action, then -
under the contract and the Federal Arbitration Act - the
producer could have that award confirmed in a Lower 48 state
superior court. That is the other reason for using the Federal
Arbitration Act.
He highlighted whether the Alaska court would take 365 days to
act. Mr. Donohue said it is unlikely. Unless there was a
motion to vacate by the state, it would be an administerial act
and thus the court likely would deal with it within a few
months, regardless of how busy its schedule was.
MR. CLARK added that the concern was what would happen if the
legislature didn't make the appropriation and then the court
nullified an arbitration decision by simply sitting on the case.
He reminded members that the state's superior courts have six
months in which to make a decision or else the judge stops
getting paid. He offered his view that this nails down a point
in the contract that has a 0.0001 percent chance of occurring,
since the legislature hasn't ever refused to appropriate for an
arbitration award or to satisfy a judgment. Mr. Clark also
reported that he was unaware of any superior court judge who'd
ever attempted to nullify a decision of a prior court by simply
sitting on it, as opposed to ruling on it. Thus the
circumstances under which this would apply are narrow indeed.
10:03:26 AM
SENATOR DYSON remarked that he could appreciate why the
companies might want this. The worst case for the people of
Alaska, however, is if the industry can influence the political
process and get a governor - and by extension a commissioner -
who does everything the industry wants. Calling attention to
Section 7, he expressed concern that such a commissioner could
figuratively give away the farm.
MR. CLARK replied that it would take a lot more collaboration
than that. It would take going past the arbitration award; a
decision by the legislature not to pay; and a superior court
decision to sit on the arbitration award and do nothing,
although the judge would no longer be paid after six months. He
reiterated that a contract point has been nailed down, but he
believes the likelihood of this ever arising is miniscule.
SENATOR DYSON expressed concern that if that end point were
reached, however, Section 7 appears to give an amazing amount of
power to change significant parts of the agreement.
MR. DONOHUE explained that one issue in terms of determining the
scope of authority being granted in some of these sections is
complicated by the fact that retroactive authority is being
requested to modify lease and unit agreements and so forth. He
noted, however, that there is a contract to compare the
requested authority with how the administration has exercised
that authority and applied it; thus he opined that the issue
should be of lesser concern. He suggested someone from the
Department of Natural Resources (DNR) could discuss with the
committee the differences between the fiscal contract and long
gas lease agreements and unit agreements.
10:07:21 AM
SENATOR STEDMAN asked: Wouldn't fees and penalties be added to
the judgment if the legislature refused to pay it, making it
harder to deal with financially in the next legislature?
Wouldn't it therefore be in the state's best interest to pay it
off earlier rather than later, or to come up with a payment plan
if it was a large settlement?
MR. DONOHUE answered that the judgment would continue to accrue
interest. If a claimant were denied relief in one legislature,
it would come back to the next and ask for the interest as well.
To his belief, there would be no specific penalties. He
emphasized that this relates to the doctrine of sovereign
immunity, that the State of Alaska, pursuant to its
constitution, can define what claims can be brought against the
state; where they can be brought; and what sorts of relief are
available, and how that relief should be granted. In Alaska,
the legislature has enacted laws that essentially restrict
recovery to legislative appropriations.
10:09:13 AM
SENATOR HOLLIS FRENCH, Alaska State Legislature, asked
Mr. Donohue to comment on any effect this section would have on
indemnity provisions, helping the producers collect on the
state's promise to pay under the contract.
MR. DONOHUE explained that arbitration awards under the contract
are divided into two types. Article 22.1 has four specified
indemnification claims, referred to as "indemnification
payments." Pursuant to Article 37.3, enforcement for those is
limited to coming to the state legislature; if a producer gets
an award from the state and reduces it to a judgment, that type
of award cannot be taken outside the State of Alaska for
enforcement purposes. Hence this waiver only applies to the
ability to enforce arbitration awards unrelated to the
indemnification payments specified in Article 22.1.
SENATOR FRENCH relayed his understanding that indemnification
payments are only collectible either through the legislature or
as an offset against other payments that the producers might
make to the state through corporate income tax, a PILT for
production tax, royalties and so forth. They never can be
collected outside the state in another court.
MR. DONOHUE affirmed that, specifying that the remedies of the
producers are limited to recoupment and offset under Article 22,
as well as coming to the legislature for an appropriation.
10:12:08 AM
SENATOR ELTON returned to Section 5, paraphrasing the portion
that says "may provide for a waiver, with the concurrence of the
attorney general". He asked whether his understanding was
correct that a future AG couldn't change the state's position,
revoking a previous decision two or four years down the road.
MR. DONOHUE affirmed that. He provided the administration's
view that the aforementioned language is implemented by the AG's
signing of the fiscal contract at the time and agreeing to the
terms that relate to a waiver in the fiscal contract.
SENATOR ELTON surmised that AG's opinion would be binding on
future AGs, which isn't the usual case in other circumstances.
MR. DONOHUE replied that this is more than an opinion. The AG
will have statutory authority to do this, assuming this
provision passes. After that, it would become a matter of
contract. The AG at the time would make that decision, and it
would be binding for future administrations.
CHAIR SEEKINS suggested this is a blanket concurrence, rather
than a case-by-case concurrence.
MR. DONOHUE affirmed that.
10:14:11 AM
SENATOR STEDMAN said he understands the negotiation process,
with multiple points of give-and-take and compromise. He asked:
If there is such a remote possibility that this may be
triggered, why is it in the state's best interest to include it?
MR. CLARK answered that as the administration went through this
and other articles, the desire was to nail everything down to
protect the state's interests and mitigate the fact of taking
the gas in kind. In terms of payment provisions, this reflects
the producers' nailing down the assurance of getting paid if the
legislature decides otherwise and the judge sits on it. The
effort by all was to address almost every contingency and
eventuality in order to have clarity and certainty for future
legislators, arbitrators and people who must administer this
contract.
SENATOR STEDMAN remarked that it appears the state has always
been in a strong financial position, to the point of never
having trouble paying its obligations, and that it has been
forthright in issues which have come forward. He suggested the
state might have a better historical record than the producers
in terms of ability and timeliness in paying claims.
MR. CLARK offered his belief that the state has never missed a
payment requested by the AG in the ordinary course of business,
and indicated the legislature has never failed to appropriate
money requested by the AG to pay an arbitration award.
10:17:15 AM
MR. DONOHUE turned to Section 6, amending AS 43.82.210(a). He
pointed out that the primary amendments here involve adding the
concept of a related party and deleting "as a consequence of
participating in an approved qualified project". He explained
that this is to avoid disputes about whether providing oil
fiscal certainty relates to the participation in an approved
qualified project.
He returned to Section 7, which read:
* Sec. 7. AS 43.82.220(a) is amended to read:
(a) Notwithstanding any contrary provisions of
AS 38 or regulations adopted under that title, the
commissioner of natural resources, with the
concurrence of the commissioner of revenue and, if
necessary, the affected parties holding a state lease
or unit agreement, may develop proposed terms for
inclusion in a contract under AS 43.82.020 that modify
[THE TIMING AND NOTICE] provisions of the applicable
oil and gas leases, [AND] unit agreements, and other
agreements under AS 38, including provisions
(1) pertaining to the state's rights to
receive its royalty on gas in kind or in value if
(A) [(1)] the viability of the
approved qualified project depends on long-term
gas shipping commitments [PURCHASE AND SALE
AGREEMENTS];
(B) [(2)] certainty over time
regarding the quantity of royalty gas that the
state may be taking in kind is needed to enter
into long-term gas shipping commitments or
marketing agreements [SECURE THE LONG-TERM
PURCHASE AND SALE AGREEMENTS;
(3) THE SPECIFIED PERIOD OF THE STATE'S
COMMITMENT TO TAKE ITS ROYALTY SHARE IN VALUE OR IN
KIND DOES NOT EXCEED THE TERM OF THE PURCHASE AND SALE
AGREEMENTS]; and
(C) [(4)] the modification does not
impair the ability of the approved qualified
project or the state to meet the reasonably
foreseeable demand in this state for gas within
economic proximity of the project during the term
of the contract developed under AS 43.82.020; and
(2) relating to lease or unit expenses for
separation, cleaning, dehydration, gathering, salt
water disposal, and preparation for transportation on
or off the lease.
MR. DONOHUE highlighted the deleted language, in brackets. He
explained that the initial 1998 legislation related to providing
authority to the state to negotiate terms and conditions with
respect to long-term agreements to take royalty either in value
or in kind. That was to facilitate long-term purchase and sale
agreements either by the producers or by the state if it decided
to take its gas in kind.
He indicated the administration proposes modifying the
aforementioned "purchase and sale agreement" concept, converting
it to the state's ability to enter into long-term shipping
commitments. Mr. Donohue noted this ties in with the decision,
in the contract, that the state will take its royalty gas in
kind for the life of the agreement, and will convert its
production tax payments to gas in kind, also for the life of the
agreement. This is designed to conform to the different type of
position taken by the state in this contract. It isn't
significantly different from the underlying statute, but is done
in the contract in the context of the overall broadening of
authority to modify other provisions of Title 38.
MR. DONOHUE drew attention to paragraph (3) of Section 7. He
explained that this is being deleted because it restricts the
state's ability to enter into a long-term agreement to take its
royalty gas in kind.
10:20:15 AM
MR. DONOHUE described paragraph (2) of Section 7 as relating to
some provisions in the fiscal contract that deal with the
state's decision to pay various types of conditioning costs; to
take gas at different delivery points than otherwise might be
provided for in the contract; to share in the cost of the
disposal of impurities; and to take on certain field costs not
otherwise provided for in the lease agreement.
He added that the Prudhoe Bay leases already have field-cost
provisions, agreed to in the early 1980s as part of a settlement
with the producers. Mr. Donohue said he believed that field-
cost amount was captured in the contract. What is being talked
about here, therefore, is primarily changes to other leases
issued subsequent to the initial Prudhoe Bay lease sale.
10:21:37 AM
SENATOR ELTON drew attention to new language in Section 7, "and
other agreements under AS 38, including provisions". He
requested confirmation that this doesn't limit changes to what
is subsequently listed and covered in Title 38.
MR. DONOHUE replied that the commissioner, as part of this
agreement, can modify obligations in unit agreements, oil and
gas leases or other agreements pertaining to those leases.
Noting there is a Point Thomson article in the fiscal contract,
for example, Mr. Donohue said there is an ongoing dispute
between the producers and the state about whether Point Thomson
is being developed properly and timely in accordance with the
lease obligations and unit obligations. The article provides
for suspension of those disputes, and tries to incorporate the
planning and development of Point Thomson into the planning and
development of the gas project as a whole.
10:23:15 AM
SENATOR ELTON alluded to subsection (a) of Section 7, asking
whether the commissioner of DOR has veto power over what the
commissioner of DNR may want to determine.
MR. DONOHUE answered that it is a collaborative effort. There
are issues that the commissioner of DNR has the lead on, and
issues that the commissioner of DOR has the lead on. In the
end, because natural resources and revenue issues are involved,
it has to be a joint decision on most of the major issues.
10:24:31 AM
CHAIR SEEKINS addressed Mr. Clark, recalling conversations
regarding whether the integration clause of the contract would
allow the administration to renegotiate, by agreement, the taxes
and royalties as part of that agreement after it was approved.
He highlighted the need to discuss this further.
MR. CLARK replied that, at the appropriate point, the
administration would have some language in this regard.
MR. DONOHUE turned to Section 8, which read:
* Sec. 8. AS 43.82.220(c) is amended to read:
(c) The commissioner of revenue shall include
any proposed terms [RELATING TO ROYALTY] developed in
accordance with this section in the proposed contract
under AS 43.82.400.
He explained that AS 43.82.220 has now been broadened to deal
with issues beyond RIK, RIV, royalty valuation, timing and
notice.
MR. DONOHUE turned to Section 9, which read:
Sec. 9. AS 43.82.220 is amended by adding a new
subsection to read:
(e) An agreement by the state to take royalty
gas in kind as part of a contract developed under this
chapter that satisfies (a)(1)(A) - (C) of this section
is not subject to the provisions of AS 38, or
regulations adopted under that title, relating to
decisions to take royalty in kind.
He explained that Section 9 just clarifies that, with respect to
compliance with the provisions of AS 43.83.220(a) in terms of
whether it is appropriate to make a long-term shipping
commitment, those statutory standards prevail over any potential
conflicting statutory standards in Title 38. Mr. Donohue
specified the intent to clarify that the royalty advisory board
doesn't have a role in this particular decision. While that
board might have a role in subsequent years in terms of purchase
and sale, it is an issue for legislative deliberation and
doesn't have to be decided at the front end of the contract.
MR. DONOHUE turned to Section 10, which read:
* Sec. 10. AS 43.82.250 is amended to read:
Sec. 43.82.250. Term of contract; effective date.
The term of a contract developed under AS 43.82.020
[MAY BE FOR NO LONGER THAN IS NECESSARY TO DEVELOP THE
STRANDED GAS THAT IS SUBJECT TO THE CONTRACT; HOWEVER,
THE TERM OF THE CONTRACT] may not exceed 35 years from
the commencement of commercial operations of the
approved qualified project, excluding suspensions of
contract obligations that are covered by the force
majeure terms of any contract developed under this
chapter. However, the term of contract may not exceed
45 years from the effective date of a contract
approved under AS 43.82.435.
He explained that this relates to the overall term of the
contract. Current law provides a maximum of 35 years from
commencement of commercial operations. The new underlined
language provides that the 35-year period can be expanded for
periods of suspensions caused by force majeure terms of the
contract; however, the total cannot exceed 45 years. The
deletion of the language shown in brackets relates to trying to
avoid debates about how long this period is. Mr. Donohue
recalled that members had been briefed that the success of this
project, in part, depends on finding unknown reserves to fill
the line towards the second half of its life. The debate to be
avoided is whether unknown gas is "stranded" or not.
10:28:21 AM
MR. DONOHUE turned to Section 11, reminding members that this
was an amendment [to SB 2004] by this committee during the last
special session. Section 11 read:
* Sec. 11. AS 43.82 is amended by adding a new section
to read:
Sec. 43.82.255. Terms of contract provisions
related to oil. (a) The provisions of this section
apply to a contract developed under AS 43.82.020 that
provides for periodic payment in lieu of taxes on oil
under AS 43.55.
(b) For the period of the contract term
beginning immediately after the date of full project
funding or the date of issuance of a certificate of
public convenience and necessity for construction and
initial operation of the Alaska Natural Gas Pipeline,
whichever date is later, and ending 14 years after
that date, the commissioner may modify those terms of
the contract relating to payments in lieu of the taxes
on oil set out in AS 43.55. For the period of the
contract term covered by this subsection, the payments
in lieu of taxes may be established with as much
certainty as the Constitution of the State of Alaska
allows.
(c) For the period of the contract term
beginning immediately after the period described in
(b) of this section, and ending on a date not later
than 25 years after the effective date of the
contract, the amount of the payment in lieu of tax on
oil under AS 43.55 must be equal to the amount of the
tax levied by law. However, the commissioner may
develop a contract term that, in the event of a
material change in the taxes enacted after the
effective date of the contract, establishes a
procedure for restoring the parties to substantially
the same economic position they had as of the end of
the period described in (b) of this section
immediately before the change.
(d) Implementation of a contract provision
authorized in (c) of this section may be made subject
to the dispute resolution procedures of the contract.
MR. DONOHUE described Section 11 as providing for a 25-year
period that begins with the effective date of the contract and
is divided into three phases. The first, subsection (b), is
from the beginning of the contract and up through full project
funding, a term defined in AS 43.82 that is equivalent to
"project sanction" used in connection with the contract. There
would be no fiscal certainty during this phase, and taxpayers
would pay production tax under AS 43.55.
He explained that the second phase, 14 years beginning with full
project funding or project sanction, would have a provision for
oil and gas fiscal certainty. Mr. Donohue emphasized that
during this 14-year period, the producers clearly would be
subject to dispute resolution provisions of the contract.
He referred to subsection (c), relating to the third and final
phase. He reminded members that it has a fiscal-balancing
concept whereby the taxpayer would be outside the contract and
would pay production taxes in accordance with the law. However,
a contractual term would provide for balancing should the taxes
change materially or otherwise materially affect the economics
of the project. Mr. Donohue went on to say that subsection (d)
clarifies that the taxpayers still have rights to resolve
disputes about whether there has been a material change to their
circumstances in accordance with dispute resolution procedures
required by the fiscal contract.
10:31:08 AM
SENATOR STEDMAN highlighted the importance of Section 11.
CHAIR SEEKINS suggested setting it aside for discussion after
Version G was described in full.
MR. DONOHUE turned to Section 12, which read:
* Sec. 12. AS 43.82.270 is amended to read:
Sec. 43.82.270. Project plans and work
commitments. A contract under AS 43.82.020 must
include provisions for implementation of the qualified
project plan approved under AS 43.82.140, as may be
modified as a result of the development of a contract
under this chapter, and provisions for updating the
plan at reasonable intervals until the commencement of
commercial operations of the approved qualified
project. The commissioner of revenue, in consultation
with the commissioner of natural resources, may, as a
term in a contract under AS 43.82.020, include work
commitments or other obligations in the contract to be
accomplished before the commencement of commercial
operations of the approved qualified project.
He explained that the contract must include provisions for
implementation of a Qualified Project Plan as it is modified,
both as the result of negotiations - reflected in the contract -
and going forward throughout the contract period.
MR. DONOHUE turned to Section 13. He highlighted the only
substantive change, in paragraph (4), which read:
(4) establish a period of at least 60 [30]
days for the public and members of the legislature to
comment on the proposed contract and the preliminary
findings and determination made under AS 43.82.400.
He opined that this is moot and thus probably no longer
necessary, given the administration's actions in extending the
comment period.
MR. DONOHUE turned to Section 14, which read:
* Sec. 14. AS 43.82.500 is amended to read:
Sec. 43.82.500. Obligation to share payments with
municipalities. If the commissioner develops a
contract under AS 43.82.020 that includes terms that
exempt a qualified sponsor, the members of a qualified
sponsor group, or a related party to the contract, and
the property, gas, products, and activities associated
with the approved qualified project that is subject to
the contract, from a municipal tax or assessment in
accordance with AS 29.45.810 or AS 29.46.010(b), or
AS 43.82.200 and 43.82.210, the commissioner shall
include a term in the contract that provides for [THE
PARTY PAY] a portion of the periodic payments to be
made payable [DUE UNDER THE CONTRACT] to the revenue-
affected municipality.
He reminded members that Jim Baldwin had addressed this area
earlier in the week.
The committee took an at-ease from 10:33:13 AM to 10:51:18 AM.
SENATOR BEN STEVENS began discussion of Amendment 1. Returning
to Sections 10 and 11, he recalled that even before May 10, when
the PPT concept was introduced, there was discussion of possible
fiscal certainty for the duration of the oil terms and gas
terms. That was looked at, and a lot of concern was expressed
in the last special session. Some concern about oil fiscal
certainty was addressed by adding Section 11 [to SB 2004], which
at the time he'd thought would mitigate many concerns, including
those relating to guaranteeing certainty before there is a
project. He emphasized the work done by this committee and the
Senate to move the project forward by addressing concerns
expressed by the general public, the legislative consultants and
the producers and explorers.
10:54:24 AM
SENATOR BEN STEVENS offered Amendment 1, which read:
A M E N D M E N T 1
OFFERED IN THE SENATE BY SENATOR BEN STEVENS
TO: CSSB 3002(NGD)-Version G
Page 6, line 6:
Delete "35"
Insert "25"
Page 6, line 10:
Delete "45"
Insert "35"
SENATOR BEN STEVENS noted this relates to AS 43.82.250,
Section 10. He recalled that when Amendment 4 to SB 2004 was
adopted, adding Section 11, 25 years was the maximum term from
the effective date. He referred to two terms in the fiscal
contract, one relating to gas and one to oil. He pointed out
that Section 11 relates to the provision regarding oil, whereas
Amendment 1 relates to gas. It changes the length, saying the
term of the contract developed under AS 43.82.020 may not exceed
25 years from commencement of commercial operations; however,
the term of the contract may not exceed 35 years.
He explained why he believes this is prudent to consider.
Senator Ben Stevens opined that it should be split into two
terms, one not to exceed 35 years from the contract's effective
date. When the project will be completed isn't known. With 25
years from commencement of commercial operations, from the time
of first revenue there'll be 25 years to meet firm
transportation (FT) commitments in the first go-round.
He recalled hearing from the Federal Energy Regulatory
Commission (FERC) that most FT commitments will range between 15
and 25 years; those terms will be set under the open season.
Senator Ben Stevens suggested that having both timelines creates
an incentive to complete the project. Completing it within
8 years, for example, would give 27 years of certainty on gas;
completing it within 15 years, however, would only give 20 years
of certainty.
10:58:25 AM
SENATOR BEN STEVENS moved to adopt Amendment 1 and asked for
unanimous consent.
SENATOR ELTON objected for discussion purposes. Noting this
language was recommended by the executive branch, he asked to
hear from the administration about the amendment.
MR. CLARK explained that the basis for the term which the
administration used was laid out by Dr. van Meurs yesterday.
Because of asymmetrical risk taken by the producers to move this
project forward, the state sought to provide more opportunity
for them to capture the upside. Given that the administration
thought getting this infrastructure in place was critical to the
state, the administration believed the terms worked out were
reasonable. Agreeing that various concerns have been expressed
by Alaskans about these terms, Mr. Clark specified that the
foregoing was what was negotiated with the producers.
SENATOR WILKEN remarked that the industry standard for long-term
gas contracts - the reason for fiscal stability related to gas -
seems to be 20 years. Amendment 1 provides 35 years of fiscal
certainty, allowing 5 years for sanctioning, 5 for construction,
20 for the initial gas contracts and 5 left over for variables
not foreseen during the sanctioning or construction periods.
Opining that this is fair, Senator Wilken said this helps him
relate in the real world to the need for 35 years, whereas he'd
been unable to tell people why it was 45 years. He asked
whether this is the correct thing to tell people when they ask,
"Why 35?"
SENATOR BEN STEVENS agreed it seems 35 years is a reasonable
amount of time for the state to consider certainty during the
first 20-25 years of revenue, incorporating 10 years of cash
outflow or expenditures, as well as a buffer of 3-5 years on
either side. If it is shorter, it is an incentive. If
unanticipated hurdles prolong it, there is no penalty. But it
maintains a reasonable amount of time, the 20 years, to stay in
effect for FT commitments and the financing as presented by
FERC, the industry and the consultants.
11:03:32 AM
SENATOR STEDMAN recalled discussion about these dates over the
past year. He surmised that bringing this number down more
substantially than Amendment 1 would create additional
difficulty in negotiating the contract. He agreed that this
timeframe seems reasonable, and said it shouldn't be
unreasonable for the producers to agree to.
SENATOR BEN STEVENS emphasized that Sections 10 and 11 are
interrelated. Section 10 says the contract lasts from the
effective date through 35 years, but he suggested the first
10 years are meaningless because there is no revenue to the
state until the project is built; in Section 11, the first term
of fiscal certainty for oil is essentially meaningless as well,
because there is no certainty until there is a sanctioned
project. When the two are combined, saying there is no
certainty on oil until there is a project, the public can be
told that if a project is built, there will be certainty;
otherwise, the state hasn't committed anything and thus there is
no risk to the state. He noted an exception: If the state
becomes a partner in the limited liability company (LLC), there
will be a commitment of upfront capital for design and
expansion, and whatever obligations exist at that point.
He opined that there is no risk from passing either of his two
amendments in the first phase of the project. Senator Ben
Stevens explained that if there is a project and FERC issues a
certificate of public convenience, then phase two of Section 11
applies, which says certainty on oil will last 14 years, until
"expenditures equals revenues minus corporate income tax," at
which point it changes.
11:06:32 AM
MR. CLARK didn't disagree, but asked that the basic economics of
the contract be considered. He explained that as the
administration has negotiated these terms, the various terms
have been "risked" by the producers. The overall economics
affect the producers' risk analysis and, consequently, their
decision on whether to proceed. The following will affect their
risk assessment: 1) having no fiscal certainty prior to project
sanction and 2) the shorter time period.
He emphasized the administration's goal of getting the
infrastructure in place because of the timeline with respect to
the oil pipeline - projected to run out in 2030 - and the lead
time to get a gas pipeline in place, about 10 years. "We are
playing with a narrow window here," Mr. Clark cautioned.
11:08:24 AM
SENATOR BEN STEVENS acknowledged that Amendment 1, if passed,
would significantly affect negotiations. He mentioned the
fiscal interest findings, page 106, and read the following,
suggesting this exemplifies why it would be a huge concern for
the industry:
Firm transportation agreements are considered
liabilities to the shipper. These liabilities are
defined as probable future sacrifices of economic
benefits arising from present obligations of a
particular entity to transfer assets or provide
services to other entities in the future as a result
of past transactions or events.
SENATOR BEN STEVENS indicated this was from the Financial
Accounting Standards Board (FASB) in 2000. He continued:
Such liabilities may not appear on the balance sheet
of the shippers per GAAP procedures. Whether a debt
goes off balance sheet or not depends on whether the
length of the commitment exceeds 75 percent of the
estimated economic life of the asset or whether the
present value of the payment exceeds 90 percent of the
fair market value.
He remarked that there is no question Amendment 1 would change
the dynamics with regard to FASB or generally accepted
accounting principles (GAAP), and how they'll be able to list
those liabilities on their balance sheets. With respect to the
concerns heard about the contract terms, and trying to move the
project forward, Senator Ben Stevens suggested it is prudent for
the state to allow certainty within the contract, but only in
the realm of what is believed acceptable and what falls within
the probability of financial realities of the project.
11:10:46 AM
SENATOR BUNDE spoke in favor of Amendment 1 as a necessary
adjustment. He reminded the producers that while they might be
used to intricate business deals, the state has a further
intricacy in having a "board of directors" of 630,000 residents.
Although his constituents tend to be in favor of the oil
industry, they are concerned about the certainty and its length.
If this period of certainty isn't changed so the public is more
comfortable, Senator Ben Stevens cautioned, it will jeopardize
having a successful contract.
SENATOR STEDMAN referred to Senator Ben Stevens' comments.
Questioning the impact on the aforementioned balance sheet with
respect to the potential posting of a particular liability,
Senator Stedman said those are normally handled as a footnote on
the balance sheet. Instead, he suggested the impact on the
balance sheet will be in booking those reserves; it will all
flow back to the producers in the end, looking at the
subsidiaries and different layers. Senator Stedman predicted it
will be a win-win situation when there is the ability to book
those reserves. As for shortening the timeframe, he reported
that the biggest concern voiced by people who've contacted him
is giving up the sovereign right to adjust the taxing authority
as the legislature sees fit. He surmised a shorter timeframe
wouldn't materially affect the state's ability to secure
construction of the pipeline.
11:14:14 AM
SENATOR WILKEN recalled previous testimony that the critical
fiscal-analysis period is from today until 15 or 20 years; this
is what makes or breaks a deal, given the "time value" of money,
and so both sides are focused on that first 15 or 20 years. He
suggested, therefore, that 90 percent of the effort and accuracy
should be concentrated in that period; he asked to be corrected
if he was wrong. Referring to previous discussion of
"reopeners," Senator Wilken cautioned that while he believes
this rubs some of the edges off, he doesn't want people to
believe this takes care of the reopener issue; he indicated the
need to learn more about that issue.
MR. CLARK discussed the rationale for the additional time. He
emphasized that the FT commitment is what gets the gas pipeline
built. He said 2 years from now, when it gets to the open
season, and 6 years before the line is built - under the current
timeline in the summary of the Qualified Project Plan - the
state is asking the producers to take an FT commitment, a take-
or-pay contract. That is the period of probably 15 to 20 years.
However, the periods must be added together to think about the
period during which there is that commitment.
He explained that the additional period allowed by the state was
for the very point raised by Dr. van Meurs yesterday with
Senator Dyson: the opportunity for taking that risk, for
signing on 6 years ahead of time for a take-or-pay contract.
Mr. Clark recalled that Dr. van Meurs had said those would
impact the companies $60 billion to $80 billion because of
making that commitment. Mr. Clark noted that take-or-pay could
end up at a low-price scenario or that there could be a
construction-cost overrun that justified the remaining term.
11:18:04 AM
CHAIR SEEKINS, following some questions to Senator Ben Stevens,
gave his understanding that Amendment 1 provides certainty on
the tax rate for gas beginning with execution of the contract;
that remains in effect for a maximum of 35 years. For oil,
however, certainty isn't established until such time as there is
sanctioning of the project; then it goes into the formula
established in Section 11.
SENATOR BEN STEVENS affirmed that.
CHAIR SEEKINS requested that Senator Wilken perhaps create
another timeline chart for the committee.
SENATOR WILKEN noted he was drawing one already.
11:21:04 AM
CHAIR SEEKINS asked whether Senator Elton maintained his
objection. [Senator Elton shook his head no.] He asked whether
there was any objection to adoption of Amendment 1. There being
no objection, it was so ordered.
The committee took an at-ease from 11:21:41 AM to 11:27:55 AM.
MR. CLARK advised members that his earlier statement that the
Alaska State Legislature had never refused to pay a judgment or
arbitrator's award might need correction. Mr. Erickson had just
brought to his attention several situations in which that might
have occurred, whereas a previous Department of Law survey at
Mr. Clark's request hadn't reflected those. Mr. Clark announced
that he would check the points raised by Mr. Erickson and would
correct his statement on Monday, 7/31/06, if necessary.
SENATOR GREEN recalled one case that the legislature had delayed
a year or two.
MR. CLARK said he was aware of that one, but would check out the
ones raised by Mr. Erickson.
SENATOR BUNDE remarked, "We tend to pay our judgments, whether
they make sense or not." He cited the example this year of
paying someone a quarter million dollars after that person sued
the state for letting him kill his own father.
11:29:35 AM
SENATOR BEN STEVENS moved to adopt Amendment 2, which read:
A M E N D M E N T 2
OFFERED IN THE SENATE SPECIAL BY B. STEVENS
COMMITTEE ON NATURAL GAS DEVELOPMENT
TO: CSSB 3002(NGS)(24-GS2095\G)
Page 8, following line 8:
Insert new bill sections to read:
"* Sec. 14. AS 43.82.430(b) is amended to read:
(b) After considering the material described in
(a) of this section and securing the agreement of the
other parties to the proposed contract regarding any
proposed amendments prepared under (a) of this
section, if the commissioner determines that the
contract is in the long-term fiscal interests of the
state, the commissioner may execute [SHALL SUBMIT] the
contract [TO THE GOVERNOR].
* Sec. 15. AS 43.82.430(c) is amended to read:
(c) The commissioner's final findings and
determination under (a) of this section and decision
regarding whether to execute the contract under (b) of
this section are final agency decisions under this
chapter.
* Sec. 16. AS 43.82.440 is amended to read:
Sec. 43.82.440. Judicial review. An [A PERSON
MAY NOT BRING AN] action challenging the
constitutionality of a law authorizing a contract
developed under this chapter [ENACTED UNDER AS
43.82.435] or the enforceability of a contract
executed under a process authorized by [A] law may not
be brought [AUTHORIZING A CONTRACT ENACTED UNDER
AS 43.82.435] unless the action is commenced within
120 days after the date that the contract was executed
by the state and the other parties to the contract."
Renumber the following bill sections accordingly.
Page 11, following line 30:
Insert new bill sections to read:
"* Sec. 24. The uncodified law of the State of Alaska
is amended by adding a new section to read:
APPROVAL AND RATIFICATION. The provisions of the
Alaska Stranded Gas Fiscal Contract between the State
of Alaska and BP Exploration (Alaska) Incorporated,
ConocoPhillips Alaska, Incorporated, and ExxonMobil
Alaska Production, Incorporated, as amended to conform
to the provisions of this Act, are approved and
ratified.
* Sec. 25. The uncodified law of the State of Alaska
is amended by adding a new section to read:
SUSPENSION OF OTHER LAW. The provisions of the
Alaska Stranded Gas Fiscal Contract between the State
of Alaska and BP Exploration (Alaska) Incorporated,
ConocoPhillips Alaska, Incorporated, and ExxonMobil
Alaska Production, Incorporated, as amended to conform
to the provisions of this Act, are effective
notwithstanding the provisions of any other law,
including AS 43.82.200 - 43.82.270. Any inconsistency
between the Alaska Stranded Gas Development Act (AS
43.82) and the fiscal contract executed under AS 43.82
are cured and authorized by this section.
* Sec. 26. The uncodified law of the State of Alaska
is amended by adding a new section to read:
ADVISORY VOTE. At the 2006 general election to
be held on November 7, 2006, in substantial compliance
with the election laws of the state, the lieutenant
governor shall place before the qualified voters of
the state a question advisory to the governor and the
commissioner of revenue. Notwithstanding other laws
relating to preparation of the ballot proposition, the
question shall appear on the ballot in the following
form:
QUESTION
Shall the commissioner of revenue sign and make
binding upon the State of Alaska the Alaska Stranded
Gas Fiscal Contract between the State of Alaska and BP
Exploration (Alaska) Incorporated, ConocoPhillips
Alaska, Incorporated, and ExxonMobil Alaska
Production, Incorporated?
Yes [ ] No [ ]
* Sec. 27. If secs. 14 - 16 and 25 of this Act take
effect, they take effect on the date that the director
of elections certifies the results of the 2006 general
election at which a majority of the votes cast on the
proposition favor execution by the commissioner of
revenue and binding effect on the State of Alaska of
the Alaska Stranded Gas Fiscal Contract between the
State of Alaska and BP Exploration (Alaska)
Incorporated, ConocoPhillips Alaska, Incorporated, and
ExxonMobil Alaska Production, Incorporated."
Renumber the following bill sections accordingly.
Page 12, line 7:
Delete "Sections 2 - 14 and 17 - 20"
Insert "Sections 2 - 13, 17, and 20 - 23"
Page 12, following line 9:
Insert a new bill section to read:
"* Sec. 30. Sections 24, 25, and 26 of this Act take
effect immediately under AS 01.10.070(c)."
Page 12, line 10:
Delete "This"
Insert "Except as provided in sec. 30 of this
Act, this"
SENATOR BEN STEVENS objected for discussion purposes. He
described Amendment 2 as a simple but complex amendment. He
explained that proposed Section 14 goes back to language in the
original bill introduced in 1998, saying the commissioner may
execute the contract. Mentioning the point at which there is a
question of constitutionality, he said Section 15 just
reinforces that the commissioner's action is the final agency
action. Section 16 is a slight change to the judicial review
process; the phrase "process authorized by law" relates to what
is established in Sections 14-15 and the whole Act. It doesn't
shorten the period of time, but says it may not be brought until
the final agency action is complete.
He explained that the remainder of Amendment 2, a new concept to
be included in the process, adds ratification of the contract
upon a vote of the general public on November 7, 2006.
Asserting there is a logjam, and that the majority of Alaskans
and Americans want this project to move forward, Senator Ben
Stevens opined that it is of national interest from a standpoint
of both security and economics. If the legislature passes this
Act, it gives the commissioner authority to execute the
contract, but it won't be ratified and the effective date won't
occur until the general public agrees this is the path to take.
11:34:38 AM
SENATOR BEN STEVENS further explained that if the public doesn't
agree at that time, it will be back to square one. He'd come up
with the concept in order to break the logjam, because he
believes this is a project of immense complexity and
uncertainty, and that the public is mired in minutia. He
pointed out there is no way to be certain about what will happen
10 years from now, at first gas. Calling this project a work in
progress, he acknowledged both the complexities and certainties
in the contract. Emphasizing his belief that it should move
forward, Senator Ben Stevens agreed with elevating this to where
every Alaskan of voting age has the ability to vote on it, in
spite of its uncertainties.
He gave some history, noting people have made lifetime careers
out of trying to move this gas to market. Senator Ben Stevens
told members, "This is the closest we've ever come." Referring
to multiple options presented over the years, he gave his view
that none of them, in 30 years, were as complete as this
project, which has: upstream fiscal certainty; a mechanism to
build and have access to a GTP; methodologies for expansion and
access by future participants; and a methodology and financial
backing provided by Congress to build the line to Alberta or the
Lower 48. He reiterated his belief that the public has the
right to vote on it.
11:38:29 AM
CHAIR SEEKINS held Amendment 2 over until Monday, 7/31/06.
Noting he would propose another amendment then, he explained its
concept. Referring to .230 of the Alaska Stranded Gas
Development Act ("Stranded Gas Act"), contract terms related to
hiring of Alaska residents and contracting with Alaska
businesses, Chair Seekins advised members that his new amendment
provides the following: Should the state acquire an ownership
interest in this project, in the contract the parties shall
agree to enter into negotiations for project labor agreements to
facilitate construction. To the extent it is lawful, the
parties would be required to include provisions in any project
labor agreement that would promote hiring of Alaska residents
and establish hiring halls in both the rural and urban
communities of the state.
He emphasized wanting to ensure the ability - to the greatest
extent of the law - to employ Alaskans first on this pipeline.
Chair Seekins clarified, however, that he doesn't want to create
a situation in which there is a requirement that they become
"predatory on other employees." Beyond hiring Alaskans first,
under the terms of a project labor agreement, other requirements
would stay as they are; he mentioned requirements for
advertising about the availability of positions. With respect
to extending this into the rural areas, Chair Seekins
highlighted looking to that labor force to answer some of the
demand and to provide income to people in those communities.
11:41:57 AM
SENATOR GREEN announced she might not be available Monday. She
pointed out that in past discussion of bringing issues to the
people for a vote, it has been noted how terribly expensive and
unfair some campaigns are. She suggested it is a dangerous
path, since it cannot be determined whose money will be placed
out there to change opinions.
SENATOR STEDMAN noted he might not be available Monday either.
CHAIR SEEKINS announced that Monday there'd be a report from the
consultants, with questions and answers. Discussion of some of
the amendments would then begin, but whether they would be voted
on he couldn't say. He provided further scheduling details.
11:47:22 AM
SENATOR BEN STEVENS reiterated earlier points regarding
Amendment 2, adding his understanding that the deadline for
ballot language is August 18. He emphasized the desire to move
this project forward and to consider the option under
Amendment 2. In response to Senator Stedman, he explained that
a motivation for introducing this has been the cost to the
state's economy of postponing the decision on this project
another year. The potential is to create sustainable investment
in a project that will last 50 years. With postponement,
however, the cost to the economy cannot be recouped between now
and the sanctioning date.
He explained that he isn't concerned as much about the costs to
the state's coffers, which he opined are awash with money even
under the existing tax system, but about Alaskan workers, young
people who want to move to Alaska to find employment, as well as
children in Alaska's education system who want to stay and find
jobs in future years. That is what this initiative achieves,
Senator Ben Stevens concluded. It creates economy, spending and
growth. Thus he urged acting on this provision now.
CHAIR SEEKINS held SB 3002 over.
There being no further business to come before the committee,
Chair Seekins adjourned the Senate Special Committee on Natural
Gas Development meeting at 11:52:30 AM.
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