Legislature(2003 - 2004)

03/25/2003 01:41 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                  HOUSE FINANCE COMMITTEE                                                                                       
                       March 25, 2003                                                                                           
                         1:41 P.M.                                                                                              
                                                                                                                                
TAPE HFC 03 - 38, Side A                                                                                                        
TAPE HFC 03 - 38, Side B                                                                                                        
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Williams called the House  Finance Committee meeting                                                                   
to order at 1:41 P.M.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative John Harris, Co-Chair                                                                                            
Representative Bill Williams, Co-Chair                                                                                          
Representative Kevin Meyer, Vice-Chair                                                                                          
Representative Mike Chenault                                                                                                    
Representative Eric Croft                                                                                                       
Representative Richard Foster                                                                                                   
Representative Mike Hawker                                                                                                      
Representative Reggie Joule                                                                                                     
Representative Bill Stoltze                                                                                                     
Representative Jim Whitaker                                                                                                     
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Carl Moses                                                                                                       
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Larry  Dietrick,  Director, Spill  Prevention  and  Response,                                                                   
Department  of   Environmental  Conservation;   Mike  Nugent,                                                                   
General  Manager, Agrium  Kenai  Nitrogen Operations,  Kenai;                                                                   
Eric McDowell,  Partner-McDowell  Group, Resource  Solutions,                                                                   
Juneau;  Lisa   Parker,  Government  &  Community   Relations                                                                   
Advisor for Agrium U.S., Kenai                                                                                                  
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Marilyn  Crocket,   Deputy  Director,  Alaska   Oil  and  Gas                                                                   
Association   (AOGA),  Anchorage;   Mark  Meyers,   Director,                                                                   
Division  of Oil and  Gas, Department  of Natural  Resources,                                                                   
Anchorage; Bill  Popp, Oil and  Gas Liaison, Kenai  Peninsula                                                                   
Borough, Kenai                                                                                                                  
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 57     An Act amending the manner of determining the                                                                         
          royalty received by the state on gas production as                                                                    
          it relates to the manufacture of certain value-                                                                       
          added products.                                                                                                       
                                                                                                                                
          HB 57 was HEARD and HELD in Committee for further                                                                     
          consideration.                                                                                                        
                                                                                                                                
CS SB 74(RES) am                                                                                                                
          An Act extending the renewal period for oil                                                                           
          discharge prevention and contingency plans; and                                                                       
          providing for an effective date.                                                                                      
                                                                                                                                
          CS  SB 74 (RES)  am was  reported out of  Committee                                                                   
          with  a "do  pass" recommendation  and with  fiscal                                                                   
          note   #1  by  the   Department  of   Environmental                                                                   
          Conservation.                                                                                                         
                                                                                                                                
CS FOR SENATE BILL NO. 74(RES) am                                                                                             
                                                                                                                                
     An Act extending the renewal period for oil discharge                                                                      
     prevention and contingency plans; and providing for an                                                                     
     effective date.                                                                                                            
                                                                                                                                
LARRY  DIETRICK,  DIRECTOR, SPILL  PREVENTION  AND  RESPONSE,                                                                   
DEPARTMENT OF  ENVIRONMENTAL CONSERVATION, stated  that SB 74                                                                   
would streamline  the permitting  process by lengthening  the                                                                   
time for renewal of oil discharge  prevention and contingency                                                                   
plans from three to five years.                                                                                                 
A five-year  renewal period would streamline  the contingency                                                                   
review  process  for  industry   while  maintaining  Alaska's                                                                   
strong  spill   prevention  and  response  standards.     Oil                                                                   
Discharge  Prevention   and  Contingency  Plans   are  public                                                                   
noticed and then  reviewed and approved by the  Department of                                                                   
Environmental Conservation.                                                                                                     
                                                                                                                                
Mr.  Dietrick continued,  the  Oil Discharge  Prevention  and                                                                   
Contingency   Plans  are  required   for  operators   of  oil                                                                   
terminals, refineries, crude oil  transmission pipelines, oil                                                                   
exploration and production facilities,  oil tank vessels, oil                                                                   
barges, non-tank vessels of over  400 gross tons and railroad                                                                   
tank cars.                                                                                                                      
                                                                                                                                
Mr. Dietrick emphasized that the  bill would provide multiple                                                                   
benefits from the proposed change:                                                                                              
                                                                                                                                
     ·         The bill furthers the goal of permit                                                                             
               streamlining  with  no loss  of  environmental                                                                   
               protection    and   complements    initiatives                                                                   
               currently  being undertaken by  the Department                                                                   
               to    shift    the    emphasis    away    from                                                                   
               the administrative    review   and    approval                                                                   
               process  to  field  verification  of  response                                                                   
               capability.                                                                                                      
                                                                                                                                
     ·         The bill would significantly reduce the                                                                          
               administrative   burden   on   the   regulated                                                                   
               community   and   shift  the   emphasis   from                                                                   
               paperwork to performance.                                                                                        
                                                                                                                                
     ·         The reduction in paperwork would increase the                                                                    
               ability  of operators  and  the Department  to                                                                   
               focus   on  spill   prevention  and   facility                                                                   
               operation.                                                                                                       
                                                                                                                                
     ·         The change would allow operators more time to                                                                    
               make  practical  enhancements  to their  spill                                                                   
               prevention and response capabilities.                                                                            
                                                                                                                                
     ·         The change would improve environmental                                                                           
               protection and  preparedness through increased                                                                   
               field   presence  and  the  ability   to  work                                                                   
               directly  with  operators to  ensure  response                                                                   
               readiness through  on-site facility and vessel                                                                   
               inspections, spill drills and exercises.                                                                         
                                                                                                                                
     ·         Finally, the change would make the State                                                                         
               renewal  cycle consistent  with the  five-year                                                                   
               renewal  cycle   for  the  federal  oil  spill                                                                   
               contingency  plans   required  under  the  Oil                                                                   
               Pollution  Act of  1990, as  well as those  of                                                                   
               other West Coast states.                                                                                         
                                                                                                                                
Co-Chair Harris  clarified that  the legislation  proposes to                                                                   
change the  time period for  the contingency plan  from three                                                                   
to  five  years.    He  referenced   the  zero  fiscal  note,                                                                   
commenting  that  the  review  and  approval  process  should                                                                   
consume  less  time  for  the  Department  given  the  longer                                                                   
extension.   Co-Chair Harris thought that  information should                                                                   
reduce costs to the Department.                                                                                                 
                                                                                                                                
Mr.  Dietrick responded  that  the Department  had looked  at                                                                   
that  closely, however,  the  trade off  was  a reduction  in                                                                   
litigation  which  the Department  presently  is  under.   He                                                                   
emphasized  the  "extraordinary"   workload  assumed  by  the                                                                   
Department.    Additionally,  there could  be  a  fundamental                                                                   
shift in  field verification.   The intent  was not  to lower                                                                   
the standard  of protection but  rather to make a  shift from                                                                   
the time spent on paperwork to  the time spent with operators                                                                   
working on the  standards.  He continued, the  focus would be                                                                   
on exercising  drills with additional time  guaranteeing that                                                                   
the readiness is maintained.                                                                                                    
                                                                                                                                
Co-Chair  Harris  reiterated  that  the intent  was  only  to                                                                   
extend  the time  period with  no regulatory  function.   Mr.                                                                   
Dietrick acknowledged  that was correct and  that there would                                                                   
be  no  other   change  in  the  statutory   requirements  or                                                                   
lessening  of any  of  the current  environmental  protection                                                                   
measures.                                                                                                                       
                                                                                                                                
Co-Chair  Harris asked  if any  comments  had been  submitted                                                                   
from local regional citizen advisory  councils.  Mr. Dietrick                                                                   
advised  that  the Prince  William  Sound  Regional  Citizens                                                                   
Advisory  Committee  had  provided a  letter  dated  February                                                                   
26th,  2003.  (Copy on  File).    He  added that  Cook  Inlet                                                                   
Regional  Citizens   Advisory  Committee  had   not  provided                                                                   
testimony  or comments  to the Department  to date,  however,                                                                   
understood that they had indicated three points of concern:                                                                     
                                                                                                                                
     ·         Extending the time frame;                                                                                        
     ·         Reducing the frequency of the technology                                                                         
               reviews; and                                                                                                     
     ·         Reducing agency and plan familiarization with                                                                    
               the contingency plans.                                                                                           
                                                                                                                                
Representative  Hawker   questioned  the  context   of  these                                                                   
contingency plans  and who would be impacted  by the changes.                                                                   
Mr. Dietrick responded that the  categories of facilities are                                                                   
the same categories  regulated under current  statute.  Under                                                                   
that  statute,  they  are  required  to  have  oil  discharge                                                                   
prevention contingency  plans with  the thresholds  varying a                                                                   
little.    Generally  speaking,  if  there  is  a  crude  oil                                                                   
terminal  with a  total volume  of over  5,000 barrels,  they                                                                   
then are required to submit a plan.                                                                                             
                                                                                                                                
Representative   Stoltze    questioned   if    the   proposed                                                                   
legislation  would include  railroad tankers,  of which  some                                                                   
pass  through  some  of  his  neighborhoods.    Mr.  Dietrick                                                                   
advised  that  this  plan  is not  required  for  the  Alaska                                                                   
Railroad.                                                                                                                       
                                                                                                                                
MARILYN  CROCKET,  (TESTIFIED   VIA  TELECONFERENCE),  DEPUTY                                                                   
DIRECTOR, ALASKA  OIL AND GAS ASSOCIATION  (AOGA), ANCHORAGE,                                                                   
testified that  AOGA is a  trade association whose  17 member                                                                   
companies   account  for   the  majority   of  oil   and  gas                                                                   
exploration,    development,   production,    transportation,                                                                   
refining and marketing activities in Alaska.                                                                                    
                                                                                                                                
Every  AOGA   member  conducting  activities  in   Alaska  is                                                                   
required  to have  an Oil  Spill  Prevention and  Contingency                                                                   
Plan (or  C-Plan) approved  and in place.    Therefore,  AOGA                                                                   
has  a  significant  interest  in SB74,  and  encourages  the                                                                   
Committee to report it out.                                                                                                     
                                                                                                                                
Ms. Crocket stated  that AOGA spent a considerable  amount of                                                                   
time over the past 12 months identifying  permitting programs                                                                   
that were in  need of updating and streamlining.   Initially,                                                                   
AOGA adopted a  principle to guide them through  the process.                                                                   
That principle reads:                                                                                                           
                                                                                                                                
     "To accomplish updates and streamlining without                                                                            
     compromising   environmental    protection   or   safety                                                                   
     standards".                                                                                                                
                                                                                                                                
Ms. Crocket commented  that SB 74 fits perfectly  within that                                                                   
principle.   The bill  would extend the  renewal cycle  for C                                                                   
Plans from the  current period of three years  to five years,                                                                   
the  cycle required  by the  federal  government, west  coast                                                                   
states and other oil producing states.                                                                                          
                                                                                                                                
She  added  that  preparation  and processing  of  a  renewal                                                                   
application  is an  expensive  endeavor.   Renewal costs  can                                                                   
average  between $60,000  and $100,000  dollars for just  the                                                                   
renewal.     Additionally,  the  renewal  process   is  time-                                                                   
intensive.    Experience  has  shown  that  for  some  plans,                                                                   
approvals  can average  360  days, essentially  meaning  that                                                                   
once a renewal  is complete, the work must begin  on the next                                                                   
renewal.                                                                                                                        
                                                                                                                                
Ms. Crocket  pointed out  that it  is important to  recognize                                                                   
what the purpose of the C Plan  serves.  It is a "blueprint",                                                                   
describing  how  an operator  responds.    The proof  of  the                                                                   
effectiveness of the plan is whether  the response identified                                                                   
in the Plan  can be delivered as promised.   Demonstration of                                                                   
effectiveness  has been  accomplished through  drills.   That                                                                   
area should  be the largest  benefit of the extended  renewal                                                                   
cycle,   shifting   the  focus   away   from   administrative                                                                   
processing to field performance.                                                                                                
                                                                                                                                
Representative  Stoltze MOVED  to AMEND the  bill on  Page 2,                                                                   
Line 2,  deleting "five years"  and inserting  "three years".                                                                   
Co-Chair Williams OBJECTED for the purpose of discussion.                                                                       
                                                                                                                                
Mr. Dietrick explained  that there is one renewal  time frame                                                                   
set in  statute that applies to  all facilities.   The change                                                                   
from three  to five years  would need  to apply to  all other                                                                   
facilities.  Under  the current bill, if the  change is made,                                                                   
it would apply to all categories.                                                                                               
                                                                                                                                
Co-Chair Harris asked if Representative  Stoltze's intent was                                                                   
that the  Alaska Railroad  be required to  go through  a full                                                                   
compliance review  on oil discharge every three  years, while                                                                   
other facilities  covered  by the legislation  would  then be                                                                   
every five years.  Mr. Dietrick thought that was correct.                                                                       
                                                                                                                                
Co-Chair  Harris asked  if  the Department  of  Environmental                                                                   
Conservation provides  reviews of existing  contingency plans                                                                   
on a  year-to-year basis.   Mr.  Dietrick responded  that the                                                                   
Department  has  looked  at  the  process  for  renewals  and                                                                   
updates currently in the Alaska  Statutes.  In 1990, when the                                                                   
Legislature   made  the  updates,   they  did  provide   many                                                                   
mechanisms  in  Statute that  spell  out an  "evergreen  type                                                                   
process"   with  a  requirement   for  non-notification   for                                                                   
readiness.   If at  any time,  the capability is  diminished,                                                                   
they would be required to immediately  notify the Department.                                                                   
The Legislature had built in a  strong continuous process for                                                                   
the notification including routine  plan updates.  The intent                                                                   
of  the years  involved supercedes  the fact  that there  are                                                                   
strong  mechanisms in  place to  provide  for the  continuous                                                                   
update and refreshing of the plan.                                                                                              
                                                                                                                                
Co-Chair Harris asked  what would be the "down  side" for the                                                                   
State  in implementing  three rather  than five  years.   Mr.                                                                   
Dietrick observed  that the renewal process itself  is not as                                                                   
important  as  the  ability  to   routinely  check  the  test                                                                   
capability base for inspection  as well as increased emphasis                                                                   
on prevention.   With  the mechanisms  currently in  statute,                                                                   
the Department believes that the State could go to a five-                                                                      
year plan and  not sacrifice anything while at  the same time                                                                   
provide greater efficiency in reducing paperwork.                                                                               
                                                                                                                                
Representative  Stoltze   thought  that  the   amendment  was                                                                   
arbitrary, noting  that many people  in his district  live on                                                                   
the  railroad line.    He identified  the  need  to make  the                                                                   
Railroad more responsive to the public.                                                                                         
                                                                                                                                
Representative Hawker  voiced his support for  the concept of                                                                   
the  amendment.  He  noted  that  he  had  received  comments                                                                   
regarding the  non-responsiveness of the Alaska  Railroad and                                                                   
that they  do not act as a  "team-player".  He noted  that he                                                                   
would not favor passing the amendment  at this time, however,                                                                   
suggested   that   further  consideration   regarding   these                                                                   
concerns be brought forward.                                                                                                    
                                                                                                                                
Representative  Stoltze  WITHDREW  the  MOTION to  adopt  the                                                                   
amendment.                                                                                                                      
                                                                                                                                
Co-Chair  Harris  echoed concerns  voiced  by  Representative                                                                   
Stoltze, agreeing that they would be addressed later.                                                                           
                                                                                                                                
Representative Foster  MOVED to report CS SB 74  (RES) am out                                                                   
of Committee  with  individual recommendations  and with  the                                                                   
accompanying fiscal  note.  There being NO  OBJECTION, it was                                                                   
so ordered.                                                                                                                     
                                                                                                                                
CS SB  74 (RES)am was  reported out of  Committee with  a "do                                                                   
pass"  recommendation and  with zero  fiscal note  #1 by  the                                                                   
Department of Environmental Conservation.                                                                                       
                                                                                                                                
HOUSE BILL NO. 57                                                                                                             
                                                                                                                                
     An Act amending the manner of determining the royalty                                                                      
     received by the state on gas production as it relates                                                                      
    to the manufacture of certain value-added products.                                                                         
                                                                                                                                
REPRESENTATIVE MIKE  CHENAULT MOVED to ADOPT  work draft #23-                                                                   
LS0303\S,  Chenoweth, 3/12/03,  as  the version  of the  bill                                                                   
before the Committee.                                                                                                           
                                                                                                                                
Representative  Croft OBJECTED in  order to hear  the changes                                                                   
made to the previous bill.                                                                                                      
                                                                                                                                
Representative Chenault explained  that changes had been made                                                                   
to address concerns regarding  a windfall/profit made for the                                                                   
gas  contract   between  the  Agrium  facility   and  Unocal.                                                                   
Language was  added to guarantee  that the legislation  would                                                                   
not apply to Unocal.                                                                                                            
                                                                                                                                
Representative  Croft  noted   that  he  would  WITHDRAW  his                                                                   
OBJECTION  to passage  of the  committee  substitute.   There                                                                   
being NO further OBJECTION, the work draft was adopted.                                                                         
                                                                                                                                
Co-Chair Williams  interjected that it was not  his intent to                                                                   
move the bill out  of Committee at this time.   He referenced                                                                   
the draft fiscal note.                                                                                                          
                                                                                                                                
Representative  Chenault stated  that HB  57 would allow  the                                                                   
manufacturers  and producers  to  know the  basis upon  which                                                                   
royalty would be calculated before  entering into a contract.                                                                   
He believed  it would help  the acceleration of  business for                                                                   
oil and  gas production companies.   The companies  currently                                                                   
can be  subject to  audits as  much as  five years  after the                                                                   
sales have  been completed.   Adoption of the  proposal could                                                                   
promote  development and  would  provide  producers with  the                                                                   
knowledge  that  they  would   not  have  to  pay  additional                                                                   
royalties at some point in the  future.  With a fixed royalty                                                                   
rate, it would benefit the State  of Alaska and its residents                                                                   
by  providing local  manufacturing  industries  with a  solid                                                                   
foundation  providing  stable  jobs, increased  sales  and  a                                                                   
greater investment in the local communities.                                                                                    
                                                                                                                                
MIKE   NUGENT,  GENERAL   MANAGER,   AGRIUM  KENAI   NITROGEN                                                                   
OPERATIONS, KENAI,  spoke in favor of HB 57.   He stated that                                                                   
the  legislation  was  a  "piece of  the  pie",  which  would                                                                   
provide  producers in  Cook Inlet with  stability and  Agrium                                                                   
with  certainty of  what the  costs are  to manufacturer  the                                                                   
products.   He stated natural  gas is the major  raw material                                                                   
used by Agruim.                                                                                                                 
                                                                                                                                
Mr. Nugent continued,  Agrium's Kenai Nitrogen  Operations is                                                                   
one  of   Alaska's  few   major  value  added   manufacturing                                                                   
operations.  The  Kenai plant is the second  largest producer                                                                   
of nitrogen  products in the United  States.  From  Kenai, 6%                                                                   
of  the   total  nitrogen  products   in  North   America  is                                                                   
manufactured.   The majority  of the  product is exported  to                                                                   
the Pacific  Rim countries  including Korea, Taiwan,  Mexico,                                                                   
Thailand,  and  Australia.   He  added  that Kenai  has  been                                                                   
competitive in the world markets  because of its location and                                                                   
the skilled workforce and stable government.                                                                                    
                                                                                                                                
Mr. Nugent  listed the countries  that compete with  Kenai to                                                                   
sell fertilized  products:  Russia, Indonesia,  Saudi Arabia,                                                                   
and Venezuela;  however,  none have the  same attributes,  in                                                                   
particular  a stable government  but they  do have  extremely                                                                   
low  natural gas  prices.   That  situation puts  Kenai at  a                                                                   
disadvantage  in marketing their  product.  The  disadvantage                                                                   
is  partly  due  to  provisions  in  State  contracts,  which                                                                   
require  the   State  of  Alaska   to  receive   the  highest                                                                   
prevailing price for the State's royalty gas.                                                                                   
                                                                                                                                
HB 57  could help in  that it would  allow the Department  of                                                                   
Environmental Conservation's  Commissioner to accept  a price                                                                   
paid to the State for gas, a price  negotiated between Agrium                                                                   
and the  producer.  He  noted that over  the past  few weeks,                                                                   
there have been questions regarding  the fiscal impact of the                                                                   
bill.  He offered the following comments:                                                                                       
                                                                                                                                
     ·         The Department of Natural Resources has                                                                          
               supplied a fiscal  note.  It does not consider                                                                   
               the  other  economic  impacts such  as  wages,                                                                   
               purchases  of goods  and services, taxes,  and                                                                   
               new developments,  to the State of Alaska.  It                                                                   
               only  considers  the  impact  of  natural  gas                                                                   
               value.                                                                                                           
     ·         The analysis is based on forecasts and the                                                                       
               forecasts  involve several  variables such  as                                                                   
               volume,  price,  and ownership,  all of  which                                                                   
               are difficult  to predict.  The  analysis also                                                                   
               assumes    full    capacity   operations    or                                                                   
               consumption  of  maximum  volumes  of  natural                                                                   
               gas.                                                                                                             
     ·         As opposed to forecasting the future, the                                                                        
               reality  is that  Agrium's Kenai operation  is                                                                   
               currently  curtailed due  to the inability  of                                                                   
               suppliers  to  deliver  adequate  natural  gas                                                                   
               supplies.   The plant is operating  on average                                                                   
               at 75% capacity  making a revenue reduction to                                                                   
               the  State, Agrium,  and the local  economies,                                                                   
               regardless of which price forecast is used.                                                                      
     ·         Unless the State can find a producer who can                                                                     
               provide  a large quantity of natural  gas at a                                                                   
               competitive   price   in   the   future,   the                                                                   
               curtailment   will  last  for   several  years                                                                   
               and/or  could result  in a  shutdown.   Agrium                                                                   
               has   had   repeated  discussions   with   the                                                                   
               producers  in Cook Inlet.  The  concern is the                                                                   
               additional  royalties  that  the  producer  is                                                                   
               currently subject to.                                                                                            
     ·         The development of new natural gas reserves                                                                      
               is  more  difficult  because  of the  risk  of                                                                   
               unknown  State royalty gas  values.   The risk                                                                   
               is  associated with the  value or  price being                                                                   
               set  by others in  a process not  participated                                                                   
               in.                                                                                                              
     ·         If the State is not successful in developing                                                                     
               additional  competitive  gas reserves,  Agrium                                                                   
               will not survive  as a business.  As a result,                                                                   
               revenues  to the State from royalty  gas sales                                                                   
               could be zero.                                                                                                   
     ·         Natural gas has a different value to                                                                             
               different consumers.  One price does not fit                                                                     
               all.                                                                                                             
                                                                                                                                
Co-Chair Harris  inquired how many employees  did Agruim have                                                                   
and what was  their average salary.  Mr. Nugent  replied that                                                                   
there  were approximately  292  full time  employees with  an                                                                   
average  salary   of  $84,000  dollars   a  year.     If  the                                                                   
legislation does  not passed,  the organization would  not be                                                                   
able to  operate at  capacity, raising the  unit cost  of the                                                                   
product.   If there are  no additional reserves,  then Agrium                                                                   
cannot help  other producers in  the Cook Inlet  area develop                                                                   
their resources.   He emphasized that Agrium could  go out of                                                                   
business without  the requested reserves.  He  stated that HB
57 would help to  reduce the risk that producers  see as they                                                                   
go to develop natural gas reserves in Cook Inlet.                                                                               
                                                                                                                                
Co-Chair Harris  inquired how  much can  the State  expect to                                                                   
receive from gas  royalties versus Agrium would  going out of                                                                   
business.   The  fiscal note  assumes that  the State  should                                                                   
receive a certain  royalty; however, if the gas  is not sold,                                                                   
the State will  loose much more revenue.  He  understood that                                                                   
the fiscal  note indicates that  by FY 2009, the  State might                                                                   
loose up  to $4.5 million dollars  in revenue.  He  asked how                                                                   
much gas that  would represent.  Mr. Nugent  replied that the                                                                   
gas stream would  be approximately 34.4 billion  cubic feet a                                                                   
year.                                                                                                                           
                                                                                                                                
Co-Chair Harris  inquired the  amount of revenue  that Agrium                                                                   
provides the  Kenai Peninsula  Borough.   He stated  that the                                                                   
Committee was looking at benefits  for a specific area versus                                                                   
the benefits to the entire State.                                                                                               
                                                                                                                                
Mr. Nugent responded that taking  the total economic value of                                                                   
the  facility's impact  on the  economy, dividing  it by  the                                                                   
billions of cubic  feet of gas equals the economic  impact at                                                                   
approximately  $6.28  dollars  per cubic  foot,  which     is                                                                   
higher than what is paid for the gas.                                                                                           
                                                                                                                                
ERIC MCDOWELL,  PARTNER-McDOWELL  GROUP, RESOURCE  SOLUTIONS,                                                                   
JUNEAU,  commented   that  his  company  had   analyzed  many                                                                   
entities  across  the State,  noting  that the  situation  is                                                                   
unique in  regard to  value added and  overall benefits.   He                                                                   
added  that there  are  varying  numbers regarding  how  this                                                                   
would affect the Kenai economy.                                                                                                 
                                                                                                                                
Mr. McDowell  referenced the fiscal  note, pointing  out that                                                                   
the  State  would  be  gaining  approximately  $6-$7  million                                                                   
dollars a  year over a seven  year period.   Additionally, it                                                                   
would be a good  investment of the State's  resources to have                                                                   
the use  of policy force  stability and resources  to enhance                                                                   
the  economy, keeping  the costs  private  rather than  going                                                                   
public.   He  added  that would  not assure  the  State of  a                                                                   
revenue stream  from the  manufacturing operation  of Agrium.                                                                   
Mr.  McDowell stressed,  "Agrium  more than  carries its  own                                                                   
weight"  and  concluded  that the  stability  policy  assures                                                                   
Alaska of revenue and economic benefit.                                                                                         
                                                                                                                                
Representative Stoltze commented  on how the loss of 300 jobs                                                                   
would  affect the  Kenai  community and  economy.   He  hoped                                                                   
there was someway to quantify the fiscal note.                                                                                  
                                                                                                                                
Representative  Croft inquired if  the State was  pricing the                                                                   
royalty gas too high and questioned  making statutory changes                                                                   
that results in a loss of money.   Mr. Nugent guaranteed that                                                                   
the agreement  between the producer  and the user would  be a                                                                   
fair  economic  value for  that  gas.   Representative  Croft                                                                   
pointed out that  over a period of time, it could  be a lower                                                                   
price.   Mr. Nugent interjected  that there is  a possibility                                                                   
that over time, the value price could increase in value.                                                                        
                                                                                                                                
Representative  Croft  questioned  why  the  market  has  not                                                                   
operated to address this concern.   Mr. Nugent responded that                                                                   
Cook Inlet is in the stranded  gas system with five producers                                                                   
and three  major consumers.   Representative Croft  mentioned                                                                   
that  there are  seven  other  producers to  buy  from.   Mr.                                                                   
Nugent corrected  that there are only five  producers in Cook                                                                   
Inlet.                                                                                                                          
                                                                                                                                
LISA  PARKER, GOVERNMENT  & COMMUNITY  RELATIONS ADVISOR  FOR                                                                   
AGRIUM   U.S.,   KENAI,  advised,   currently,   Alaska   has                                                                   
stipulated that  the highest paying  rate should be  paid for                                                                   
natural gas in Cook Inlet.  The  State has never received the                                                                   
"higher-of"  in any  of the  gas that  they have  sold.   The                                                                   
utilities  right now have  the ability  to negotiate  and get                                                                   
between   the  price   that  they  and   the  producer   have                                                                   
negotiated.    The State  could  accept  that as  the  price.                                                                   
Currently,  the  State  of  Alaska,  through  their  process,                                                                   
negotiates settlement  agreements with the  company following                                                                   
an audit  years past  to negotiate that  price.   The "higher                                                                   
up"  price has  actually  never  been paid  to  the State  of                                                                   
Alaska in the Cook Inlet.                                                                                                       
                                                                                                                                
Representative  Croft stated that  the fiscal note  indicates                                                                   
that the  State will loose  some revenue on the  arrangement.                                                                   
He questioned  if that  was appropriate  in order to  protect                                                                   
three hundred  jobs, and asked why  the State is not  able to                                                                   
buy from someone that is not inflating the price.                                                                               
                                                                                                                                
Mr. Nugent  spoke to the fiscal  note, claiming that  it acts                                                                   
as  a  forecast and  that  the  nature  of a  forecast  makes                                                                   
assumptions.   Predictability  and stability  are the  goals.                                                                   
Agrium believes that they will  be able to strike a deal that                                                                   
is fair to both Agrium and the State of Alaska.                                                                                 
                                                                                                                                
Representative Croft questioned if it could be lower.                                                                           
                                                                                                                                
                                                                                                                                
TAPE HFC 03 - 38, Side B                                                                                                      
                                                                                                                                
                                                                                                                                
Mr.  Nugent responded  that  compared  to today's  value,  it                                                                   
could be a lower price.                                                                                                         
                                                                                                                                
Co-Chair Williams  recommended that Representative  Croft get                                                                   
together  with the Agrium  staff to  discuss these  concerns.                                                                   
He  recommended  that  the Committee  could  further  discuss                                                                   
these ideas at the next scheduled meeting.                                                                                      
                                                                                                                                
Representative  Croft asked  why Agrium  was not buying  from                                                                   
the other producers.   Mr. Nugent responded that  they do buy                                                                   
gas  from producers  on  property that  does  not have  State                                                                   
ownership.     He  noted  that  there  are   several  private                                                                   
individuals  who  would like  to  develop their  natural  gas                                                                   
fields.    Agrium  would  like   to  receive  definition  and                                                                   
predictability around  the wells and properties  owned by the                                                                   
State.                                                                                                                          
                                                                                                                                
Representative Whitaker inquired  about future production and                                                                   
contracts.   He  asked  about the  royalty  certainty on  all                                                                   
State  leased  lands  regardless  of  the  producer.    Given                                                                   
additional gas supply,  he assumed that it would  be probable                                                                   
that production would  increase.  Mr. Nugent  advised that in                                                                   
the current  situation, the gas  in Cook Inlet has  reached a                                                                   
point where the  demand exceeds supply.  Currently,  they are                                                                   
at a 75% capacity.   He stated  that it would be difficult to                                                                   
get back to capacity during the next two years.                                                                                 
                                                                                                                                
Representative  Whitaker  asked if  given  the "feed  stock",                                                                   
could the  market bear  productivity increases.   Mr.  Nugent                                                                   
thought it  would.  Representative  Whitaker asked if  it was                                                                   
fair to assume that there would be an increased supply.                                                                         
                                                                                                                                
Representative  Whitaker  inquired how  long  after the  fact                                                                   
could  an  audit appear  for  royalty  charges.   Mr.  Nugent                                                                   
stated that it could take place  four or five years after the                                                                   
fact.  Representative  Whitaker advised that  a company might                                                                   
not know their  full cost until after royalty  charges, which                                                                   
could be four or five years after the fact.                                                                                     
                                                                                                                                
Co-Chair  Williams inquired  how the  federal royalty  system                                                                   
works for  Agrium.  Ms. Parker  explained that the  manner in                                                                   
which  the State gets  their royalty  is based  on the  costs                                                                   
which the   producer and consumer  have negotiated.   That is                                                                   
the  manner in  which royalties  are calculated.   She  added                                                                   
that the proposed legislation  would establish that standard.                                                                   
                                                                                                                                
MARK  MEYERS,   (TESTIFIED  VIA  TELECONFERENCE),   DIRECTOR,                                                                   
DIVISION  OF OIL AND  GAS, DEPARTMENT  OF NATURAL  RESOURCES,                                                                   
stated that  the federal  system was  based on market  value,                                                                   
which is similar  to the State's prevailing  or market value.                                                                   
Mr. Meyers commented  that it is difficult to  determine arms                                                                   
length contracts with many factors  involved and added that a                                                                   
company could  be audited  up to six  years.  In  most cases,                                                                   
the  audits are  done  to ensure  proper  royalties are  paid                                                                   
based on  the allocation  and that  the transportation  costs                                                                   
are reasonable.  He noted that  due diligence was standard as                                                                   
with any business.                                                                                                              
                                                                                                                                
Mr. Meyers  recognized the value  of the Agrium  plant, which                                                                   
adds value  to the  gas and the  high paying jobs  available.                                                                   
No  one wants  to threaten  that  business or  industry.   He                                                                   
voiced a  concern regarding the  effectiveness of  the relief                                                                   
provided.   He  pointed  out the  volatility  of gas  prices,                                                                   
noting that in Cook Inlet, it rests in smaller amounts.                                                                         
                                                                                                                                
Mr.  Meyer  observed  that  one   of  the  challenges  is  to                                                                   
determine  how to provide  effective relief.   To close  down                                                                   
the business  would be  value and economy  lost to  the State                                                                   
for the short term.  Additionally,  he asked if shutting them                                                                   
down would deter  gas exploration throughout the  State.  All                                                                   
explorers  want  the  highest  value  contract.    There  are                                                                   
natural  market  economics  occurring  in  the  market.    He                                                                   
suggested  that  the  situation  could  be  remedied  if  the                                                                   
balance  of gas in  the Cook  Inlet area  would change.   The                                                                   
State  does  need  more  offshore  exploration  and  ways  to                                                                   
stimulate it.                                                                                                                   
                                                                                                                                
The legislation  provides  some certainty  in terms of  audit                                                                   
cases.   Mr. Meyer  commented  on the fiscal  note, based  on                                                                   
creating  many  different scenarios  at  various  capacities.                                                                   
The  fiscal   note  attempts  to  encompass   all  reasonable                                                                   
outcomes.   Clearly,  if the  plant  were to  close down,  it                                                                   
would be devastating  to the local community  and would defer                                                                   
gas there.   That  consideration was  not taken into  account                                                                   
when preparing the note.                                                                                                        
                                                                                                                                
Representative  Croft inquired if  the demand for  Cook Inlet                                                                   
gas exceeds the  current supply.  Mr. Meyers  replied that it                                                                   
is about even  now.  People are  not willing to pay  less for                                                                   
the  gas  because  of the  problems  getting  it,  which  has                                                                   
created  a  "squeeze"  on  those that  cannot  pay  the  high                                                                   
utility market  value.  In previous  years, there has  been a                                                                   
surplus.   He noted that the gas  price in general  has a lot                                                                   
of  volatility.    There  are  few  long-term  fix  contracts                                                                   
anymore  based on a  market value  approach.   Representative                                                                   
Croft asked  if that applied more  broadly to Cook  Inlet and                                                                   
the risk to the North Slope's collateral value.                                                                                 
                                                                                                                                
Mr.  Meyers replied  that it  was limited  to utilities  that                                                                   
manufacture the  agricultural chemicals.   He noted  that the                                                                   
original  bill   could  have  applied  to  any   value  added                                                                   
manufacturer  but  the bill  was  amended  to limit  that  to                                                                   
manufacturers of agricultural chemicals.                                                                                        
                                                                                                                                
BILL POPP,  (TESTIFIED VIA  TELECONFERENCE), KENAI  PENINSULA                                                                   
BOROUGH, OIL AND GAS LIAISON,  KENAI, spoke in support of the                                                                   
bill.  He commented  that the legislation would be  a step in                                                                   
providing a stable  business environment for  the value added                                                                   
manufacturing industry  in the Cook  Inlet basin.   There are                                                                   
various value added industries located within that borough.                                                                     
                                                                                                                                
HB 57  address issues faced by  the Agrium facility.   Agrium                                                                   
is a  key component  of the  borough's economy  as the  third                                                                   
largest  local employer  accounting for  $25 million  payroll                                                                   
annual dollars.  Agrium generates  about $2.5 million dollars                                                                   
in property  taxes annually.   Mr. Popp stated that  the bill                                                                   
addresses the  issues of planning stability by  providing for                                                                   
a consistent and reliable price  structure.  He urged passage                                                                   
of the bill.                                                                                                                    
                                                                                                                                
Representative   Stoltze  asked   what  percent  of   royalty                                                                   
payments were  made for the  Cook Inlet gas production  going                                                                   
to Anchorage.   Mr. Meyer responded  that he did not  know at                                                                   
that moment, the  value of AA treatment for  utilities.  Vice                                                                   
Chair Meyer inquired  if that reference was  to the one-third                                                                   
ownership that the City of Anchorage has.                                                                                       
                                                                                                                                
Representative   Stoltze  responded   that  there   had  been                                                                   
legislation  passed in  the early  nineties, which  benefited                                                                   
Anchorage  consumers and royalty  rate in  terms of  a "long-                                                                   
term dependable" gas supply.                                                                                                    
                                                                                                                                
In response to Vice Chair Meyer's,  Mr. Meyers explained that                                                                   
they would  qualify for AA  treatment and would  be receiving                                                                   
that value  on the  royalty.  The  lessee would be  receiving                                                                   
the benefit  and hopefully they  would pass that on  to their                                                                   
contract,  but they  are  not required  to.   Many  utilities                                                                   
value from  1991 to 1999 was  about $6 million dollars.   The                                                                   
value  of the  incentive has  declined because  of the  price                                                                   
paid  for gas,  becomes  prevailing value  over  time.   Last                                                                   
year's average was less than anticipated.                                                                                       
                                                                                                                                
Representative Whitaker asked  if AA treatment was determined                                                                   
by a contract price between a  producer and a gas or electric                                                                   
utility.   He commented that  with the State  involved, would                                                                   
they  be  providing  more  value.     He  suggested  that  an                                                                   
insertion that AA should not be a give away.                                                                                    
                                                                                                                                
Representative   Joule  commented   that  there  are   always                                                                   
accommodations made so that projects  can have some validity.                                                                   
He recommended  another revenue generation discussion  in the                                                                   
Committee,  determining when  it  becomes a  "tradeoff".   He                                                                   
agreed that the bill would stimulate economy, however, it is                                                                    
important to understand the State's need for revenue                                                                            
generating capabilities.                                                                                                        
                                                                                                                                
Co-Chair Williams noted that work would be done on the                                                                          
fiscal note during the following week.  He voiced his                                                                           
support for the bill.                                                                                                           
                                                                                                                                
HB 57 was HELD in Committee for further consideration.                                                                          
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 2:56 P.M.                                                                                          
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects