Legislature(2003 - 2004)
03/25/2003 01:41 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ 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.
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