Legislature(1999 - 2000)
04/04/2000 05:25 PM House O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
April 4, 2000
5:25 p.m.
MEMBERS PRESENT
Representative Jim Whitaker, Chairman
Representative Fred Dyson
Representative Joe Green
Representative John Harris
Representative Allen Kemplen
MEMBERS ABSENT
Representative Gail Phillips
Representative Brian Porter
Representative Tom Brice
Representative Hal Smalley
COMMITTEE CALENDAR
HOUSE BILL NO. 399
"An Act levying and collecting an ad valorem tax on North Slope
natural gas in place; and providing for an effective date."
- HEARD AND HELD
PREVIOUS ACTION
BILL: HB 399
SHORT TITLE: AK NATURAL GAS PIPELINE INCENTIVE ACT
Jrn-Date Jrn-Page Action
2/16/00 2218 (H) READ THE FIRST TIME - REFERRALS
2/16/00 2218 (H) O&G, RES, FIN
2/16/00 2218 (H) REFERRED TO O&G
3/30/00 2797 (H) COSPONSOR(S): WHITAKER
4/04/00 (H) O&G AT 5:00 PM CAPITOL 17
WITNESS REGISTER
REPRESENTATIVE ERIC CROFT
Alaska State Legislature
Capitol Building, Room 400
Juneau, Alaska 99801
POSITION STATEMENT: Sponsor of HB 399.
JEFF LOWENFELS, President
Yukon Pacific Corporation
1049 West Ninth Avenue
Anchorage, Alaska 99513
POSITION STATEMENT: Testified on HB 399.
WILLIAM M. WALKER, General Counsel
Alaska Gasline Port Authority
Walker, Walker, Wendlandt and Osowski
550 West Seventh Avenue, Suite 1850
Anchorage, Alaska 99501
POSITION STATEMENT: Testified on HB 399.
ACTION NARRATIVE
TAPE 00-21, SIDE A
Number 0001
CHAIRMAN JIM WHITAKER called the House Special Committee on Oil
and Gas meeting to order at 5:25 p.m. Members present at the
call to order were Representatives Whitaker, Dyson, Green, Harris
and Kemplen. Chairman Whitaker expressed displeasure with those
who had chosen not to attend.
HB 399-AK NATURAL GAS PIPELINE INCENTIVE ACT
Number 0098
CHAIRMAN WHITAKER announced that the purpose of the meeting was
to discuss HOUSE BILL NO. 399, "An Act levying and collecting an
ad valorem tax on North Slope natural gas in place; and providing
for an effective date."
CHAIRMAN WHITAKER read a letter received earlier in the day from
former Governor Walter J. Hickel:
I would like to congratulate you and the committee for
giving serious consideration to additional incentives
the State of Alaska can offer its leaseholders to
commercialize Alaska North Slope Natural Gas.
As I see it, the state has three major options as an
owner:
It can work with the producers and pipeline
companies to promote gas sales. It should do this
by continuing the state offices abroad, supporting
the property tax exemption proposed by the Mayors'
group, and otherwise working to improve project
economics and market interest.
It can take back the gas interest if it determines
the gas producers are not fulfilling their
leasehold commitment. I considered this option as
Governor with the Point Thomson leases, but as far
as I know, the option has not been used with any
of our major untapped gas fields at present.
It can charge a tax on gas reserves that are not
produced, reflecting the argument that gas is more
valuable "in the ground" than "in the market" in
competition with supplies leaseholders sell from
other areas.
Your bill, HB 399, puts the third option in place and
strengthens the second option. I hope a reserve tax
never needs to be used, but it is high time - given the
fact gas was discovered over 30 years ago - that the
option is there. Other nations have much stronger
"disincentives" to a lack of production, and I believe
that is part of the reason producers put us off as an
option for the Asia marketplace.
CHAIRMAN WHITAKER thanked Governor Hickel for his
support and echoed many of the things he had said.
Number 0307
REPRESENTATIVE CROFT, prime sponsor of HB 399,
presented the bill. He said he thinks that if this
legislation were to pass, it could be one of the most
significant steps toward the most significant
construction project, economic opportunity, and
resource development opportunity for the state seen in
the past 30 years or likely to be seen in the next 30
years.
REPRESENTATIVE CROFT offered a 1955 quotation of
Senator Bob Bartlett before the Alaska Constitutional
Convention. Senator Bartlett believed that the future
of Alaska for a long time was going to be dependent
upon mineral development. Representative Croft noted
that this was before any significant discoveries on the
North Slope, but that Senator Bartlett's points are as
true for oil resources now as they were for mineral development
in that day. He read:
The financial welfare of the future state and the well-
being of its present and unborn citizens depend on the
wise administration and oversight of these
developmental activities. Two very real dangers are
present. The first, and most obvious danger, is that
of exploitation under the thin disguise of development.
The taking of Alaska's mineral resources without
leaving some reasonable return for the support of
Alaska governmental services and the use of all the
people of Alaska will mean a betrayal in the
administration of the people's wealth.
The second danger is that Outside interests determined
to stifle any development in Alaska which might compete
with their activities elsewhere, will attempt to
acquire great areas of Alaska's public lands in order
not to develop them until such time as they, in their
omnipotence and the pursuance of their own interests,
see fit. If large areas of Alaska's patrimony are
turned over to such corporations, the people of Alaska
may be even more the losers than if the lands had been
exploited.
REPRESENTATIVE CROFT emphasized the words of Senator Bartlett
about the second of the two dangers. He expressed concern about
getting a fair return for the people of Alaska, and asked if the
resources of the state are being developed in a timely manner by
those who have contractual rights to develop them.
REPRESENTATIVE CROFT said one way to answer that question might
be to look at indicators including the following:
Is it a small or a large deposit?
Is there an established market for the product?
Is that market anywhere on the Pacific Rim, which is our
natural trading partner?
Is it a valuable commodity, sought world-wide.
Is it likely to be in demand in the future?
Has there been any export of it from the state in the past?
Is there an existing transportation path?
Is the project do-able, both technologically and
economically?
He concluded that the natural gas deposit owned by the people of
Alaska and for whom legislators are trustees meets those
criteria.
Number 0766
REPRESENTATIVE CROFT highlighted a difference between what he and
some of the producers mean by "economical." He means, "Can it
show a profit to do it?" What a company sometimes means is, "Is
it more profitable than other competing, worldwide projects?"
The latter "is not what we [of Alaska] mean," he said, "and it is
not what we should demand from the people who have contractual
rights to develop our resource."
Number 0823
REPRESENTATIVE CROFT noted that there are significant other
natural gas projects being developed around the world by some of
the same multinational corporations that are reluctant to develop
Alaska's resources. He called attention to the Prudhoe Bay
operating agreement and changes that would occur in it, if there
were a major gas sale. These changes are significant, they
affect the players differently, and they may have provide
disincentives for one or more players to allow a major gas sale,
he said.
REPRESENTATIVE CROFT reminded listeners that Alaska's
constitution, unlike those of other states, preserves all of the
mineral, oil and gas resources for the people of the state.
Legislators have an obligation to look after Alaska's interests
and are trustees for the people in disposing of their resources.
Although some leaseholders sometimes refer to it as "their" oil,
he said, "it is more accurately ours, and they have a contractual
right and duty to develop it. He stated that it is important to
look to Alaska's interests in terms of the revenue and jobs that
can be created. It is in Alaska's interest to have the cheap
energy and the economic engines of development that this gas line
can provide.
Number 0972
REPRESENTATIVE CROFT concluded by quoting former President
Theodore Roosevelt, "Speak softly and carry big stick."
Representative Croft proposed that Alaska continue to speak
softly with the people who have leasehold interests in the
state's oil, [and] "that we continue to push ... to build this
gas line and bring this gas to market," he said, adding:
But, in HB 399, I propose that we take a very big stick
[to the] table. If this gas line is a doable project,
there is very little excuse for the delay, and no
excuse that is justifiable to us as the trustees.
REPRESENTATIVE CROFT suggested it is appropriate for this
legislature to determine whether North Slope gas is, in effect,
being warehoused; if so, the legislature has an obligation to fix
it.
Number 1132
CHAIRMAN WHITAKER asked Representative Croft whether the intent
of HB 399 is to tax.
REPRESENTATIVE CROFT said there is clearly a tax in the bill, but
he hopes never to collect it. He hopes it is enough of an
incentive that this legislation is passed. He noted that the
bill defines reasonable benchmarks, and if they are met, the tax
never will go into effect.
Number 1193
JEFF LOWENFELS, President, Yukon Pacific Corporation, applauded
the legislature for introducing HB 399. He testified that Yukon
Pacific has an economic project and is ready, willing and able to
work with any producer who has gas on the North Slope to ensure
that they never have to pay the tax under HB 399. He said Yukon
Pacific is convinced that the market is there. There are no
technological barriers to the gas line project. Yukon Pacific
has secured the major permits. "Frankly, we think it is time for
people to put down studies and start working on a project," he
said.
MR. LOWENFELS said there are a lot of issues involving the
Prudhoe Bay Unit Agreement, some of which are beginning to be
discussed publicly. Yukon Pacific believes it is not necessary
for a North Slope producer to invest in the gas line project.
What the producers have to do is make gas available, and they are
going to be paid for that gas.
Number 1333
CHAIRMAN WHITAKER said, "Assuming that the gas is purchased from
the producers, there is a logical conclusion that it would be
profitable for them to sell it or they would not sell it. Would
you agree?"
MR. LOWENFELS agreed and went one step further. He said:
We have always said that a liquified natural gas [LNG]
project, because of the duration of the contracts -
long-term contracts - has to be a marriage, a non-
divorce marriage. And that means everybody in the
marriage has to be happy, including the buyer and the
seller of the gas.
Number 1358
CHAIRMAN WHITAKER asked about the economics inherent in Yukon
Pacific's new cost model.
MR. LOWENFELS said the project would be phased, starting as small
as possible, at about 9 million metric tons, with about 7.5
million tons of that going to markets outside of Alaska.
Pipeline and compressor stations will cost about $5 billion, the
North Slope conditioning plant about $1 billion, the ships (which
do not necessarily have to be included in the capital costs)about
$1.8 billion, "so you could get a 9 million metric ton project up
for $8.16 billion." He added:
The rule of thumb in the LNG business, around the
world, is that if you have a project that can come in
under $1 million per metric ton a year, then you have
an economic project. Our 9 million metric ton project
comes in at $8 billion a year. When we expand up to
13.5 billion metric tons a year, we are at $10.5
billion. If you expand to 18, we are at $12-13
billion.
MR. LOWENFELS concluded by saying that all of these numbers tell
him that this project is economic.
Number 1440
CHAIRMAN WHITAKER asked if that estimate is bankable.
MR. LOWENFELS replied:
Our estimate is very close to bankable. For about $10-
15 billion, we will be at a bankable cost estimate, in
my opinion. That is a staggering statement I'm making
because it shows how much work we have done at Yukon
Pacific. It shows how accurate and detailed this
latest cost estimate is.
MR. LOWENFELS added that he thinks that with cooperation from
North Slope producers, the project could be up and running by the
first quarter of 2007.
Number 1489
CHAIRMAN WHITAKER asked how much Yukon Pacific has spent.
MR. LOWENFELS said more than $100 million.
Number 1513
REPRESENTATIVE KEMPLEN asked if Yukon Pacific could work within
the parameters of HB 399.
MR. LOWENFELS replied, "Absolutely."
REPRESENTATIVE KEMPLEN followed with, "You do not consider this
piece of legislation to be an onerous burden?"
MR. LOWENFELS said it shouldn't be an onerous burden on the
producers, since all they have to do is make the gas available.
"The burden is on our shoulders, and it is a burden we are
willing to take," he added.
Number 1587
REPRESENTATIVE GREEN reported that when he was in Japan last
summer and talked with several of the gas-importing companies
there, he heard that they did not want to depend more than 20-25
percent on any single source for their gas. He asked: Would 9
million metric tons of gas be far more than they can utilize?
MR. LOWENFELS said if Alaska were dealing only with Japan, that
might be true. However, the plan is to sell to Korea and China,
too, so gas would be distributed among those three countries. He
pointed out that the Middle East now supplies 80 percent of the
oil and 70 percent of the LNG that goes to Japan. Buying from
Alaska would provide Japan with desirable diversification.
REPRESENTATIVE GREEN said he was just quoting what they told him.
MR. LOWENFELS responded that he has gone to Japan 59 times, is
well acquainted with those buyers, and has never been told they
were worried about too high a percentage of natural gas coming
from the United States.
REPRESENTATIVE GREEN volunteered to give him the names of those
with whom he had talked.
MR. LOWENFELS said he is not questioning the accuracy of
Representative Green's reporting, but the ability of those buyers
to speak for all of Japan.
Number 1800
WILLIAM M. WALKER, General Counsel, Alaska Gas Pipeline Port
Authority, testified on behalf of the port authority that they,
too, believe that an LNG pipe line project in Alaska is economic.
That is based on the past year's work.
MR. WALKER said that they have closely followed Dr. Pedro Van
Meurs' study, and have exceeded what he said needed to be
accomplished for Alaska's gas to compete on the world market.
Mr. Walker said in addition, the port authority has obtained an
Internal Revenue Service (IRS) ruling, which was not suggested or
even contemplated in the 1997 study. Two weeks ago, Mr. Walker
spent some time with Dr. Van Meurs, and they went over the IRS
ruling. Dr. Van Meurs, he said, estimated that the IRS ruling
brought $10-$20 billion economic benefit to the project.
MR. WALKER said the port authority has nine representatives in
the Far East, and they are reporting, as did Mr. Lowenfels, that
there is great interest in Alaska's gas. He said the port
authority has retained the best financial advisers that money can
buy to assist in the modeling to confirm the economics of the
project.
Number 1983
MR. WALKER further explained that Dr. Van Meurs, in his 1987
report, had made about six different recommendations which he
thought were going to be necessary in order to make Alaska gas
competitive. The only one involving the federal government was a
suggestion that they might provide an accelerated depreciation
schedule for the assets of the owner of the gas line. When he
compared those economic projections with having no federal tax
obligation whatsoever, Dr. Van Meurs had said the impact is
"absolutely huge, monumental to the economics."
Number 2038
CHAIRMAN WHITAKER asked Mr. Walker if he thought a bill of this
nature would serve as an incentive to have meaningful discussions
with the producers in Alaska.
MR. WALKER echoed the previous speakers' hopes that the tax would
never be imposed, but he anticipated that gas lease holders would
be most interested in engaging with a project which has no risk
to them, as described by both Yukon Pacific and the port
authority. "So, yes, I believe it would," he concluded.
Number 2080
CHAIRMAN WHITAKER called attention to the proposed amendments in
the bill packet.
Number 2113
REPRESENTATIVE HARRIS moved to adopt the proposed committee
substitute (CS) for HB 399, Version I [1-LS1474\I, Chenoweth,
3/29/00] as the working document before the committee.
CHAIRMAN WHITAKER explained the intent of Amendment 1 [1-
LS1474\I.1, Chenoweth, 4/4/00]. He said it is to allow the
lessees the option of surrendering their rights in the land held
under the lease if they choose not to contract for sale or
deliver gas. In other words, if they do not wish to pay the tax,
they may simply surrender their leases to the state. Amendment 1
read:
Page 1, line 1, following "on":
Insert "certain"
Page 8, following line 19:
Insert a new bill section to read:
"* Sec. 5. The uncodified law of the State of
Alaska is amended by adding a new section to read:
LESSEE AUTHORIZED TO SURRENDER LEASE. To avoid
liability under AS 43.58, added by sec. 4 of this Act,
for payment of the tax on certain proven North Slope
gas reserves, a lessee who owns gas subject to the
provisions of AS 43.58 may, consistent with the
regulations adopted by the Department of Natural
Resources under authority of AS 38.05.020 relating to
surrenders of rights in land held under lease,
surrender the lessee's rights under the lease to the
Department of Natural Resources if the lessee
surrenders the rights no later than December 31, 2002,
and complies with all applicable requirements of the
department's regulations and of the lease that relate
to surrender of the lessee's rights in it."
Renumber the following bill sections accordingly.
Page 8, line 23:
Delete "sec. 9"
Insert "sec. 10"
Page 9, line 4:
Delete "sec. 10"
Insert "sec. 11"
Page 9, line 5:
Delete "sec. 5"
Insert "sec. 6"
Page 9, line 10:
Delete "sec. 5"
Insert "sec. 6"
Page 9, line 14:
Delete "SECS. 5 AND 6"
Insert "SECS. 6 AND 7"
Page 9, line 27:
Delete "sec. 5"
Insert "sec. 6"
Page 9, line 29:
Delete "sec. 6"
Insert "sec. 7"
Number 2158
REPRESENTATIVE GREEN asked whether, in those cases where a lease
covers both oil and gas deposits, the lessees would be
surrendering their oil rights, too.
CHAIRMAN WHITAKER said they would not surrender any oil rights,
that this was exclusively related to gas. If that is not clear
in the amendment as proposed, it would be revised to make it
clear.
Number 2197
CHAIRMAN WHITAKER explained that Amendment 2 [1-LS1474\I.2,
Chenoweth, 4/4/00] creates an exemption from the provisions of HB
399 for gas that is needed for re-injection to enhance recovery
operations. Amendment 2 read:
Page 1, line 1, following "on":
Insert "certain"
Page 4, line 18, following "reserves":
Insert "except gas from a lease that before, on,
or after the effective date of this section is
determined to be necessary for reinjection into a
reservoir in the course of enhanced recovery operations
ordered or approved by the Alaska Oil and Gas
Conservation Commission in accordance with AS 31.05.030
and regulations adopted under authority of that
section"
REPRESENTATIVE GREEN noted that both in Cook Inlet and on the
North Slope there is gas from one field being injected for
enhanced recovery in another field. He asked: Would this gas
that is transferred from one field to another be subject to this
[taxation under HB 399] once it is injected in the other
reservoir?
CHAIRMAN WHITAKER said that is a good question to which he did
not have an answer, and he indicated it would be appropriate to
include.
Number 2257
CHAIRMAN WHITAKER turned to Amendment 3 [1-LS1474\I.3, Chenoweth,
4/4/00], which creates an exemption from the provisions of HB 399
for gas that is necessary for in-field operations, use and
consumption, that is, for electrical generation and other
reasonable use. Amendment 3 read:
Page 1, line 1, following "on":
Insert "certain"
Page 4, line 18, following "reserves":
Insert "except gas from a lease that before, on,
or after the effective date of this section is
determined to be necessary for consumption or use in
production operations for the lease or that is to be
sold or otherwise transferred by the lessee to another
producer for consumption or use in production
operations involving North Slope oil and gas production
facilities"
CHAIRMAN WHITAKER explained that Amendment 4 [1-LS1474\I.4,
Chenoweth, 4/4/00] deletes references to "stranded gas" and
provides a definition for the condition in which gas must be
sold. Amendment 4 read:
Page 1, line 4:
Delete "stranded gas"
Page 3, line 12:
Delete "stranded gas, as that term is defined in
AS 43.82.900,"
Insert "produced from the lease and delivered, in
good and merchantable condition and pipeline quality,
on the lease or at another mutually agreed location"
Page 3, line 18:
Delete "stranded gas, as that term is defined in
AS 43.82.900,"
Insert "produced from the lease and delivered, in
good and merchantable condition and pipeline quality,
on the lease or at another mutually agreed location"
Page 4, line 8:
Delete "stranded"
Number 2288
CHAIRMAN WHITAKER explained that the final proposed amendment was
Amendment 5 [1-LS1474\I.5, Chenoweth, 4/4/00]. It deletes
language that specifically prohibits "arms length" and related
party transactions from the sale of gas. It also changes
references from "producer" to "lessee." That essentially allows
the producers to do their project. Amendment 5 read:
Page 4, line 2:
Delete "an arms-length"
Insert "a"
Page 4, line 3:
Delete "producer or producers if the agreement or
agreements do not constitute a related party
transaction under generally accepted accounting
principles"
Insert "lessee or lessees"
Number 2328
CHAIRMAN WHITAKER said he hoped the committee would give serious
consideration to what had been presented. It is obviously a
"very, very touchy subject," he said. "We know that, and it is
not done lightly." He emphasized that HB 399 was not a
disincentive, not a tax, but was put forward as an incentive. He
said he "would go with Bartlett and Hickel any day."
Number 2345
REPRESENTATIVE CROFT urged members and all interested Alaskans to
consider their interests in North Slope gas. He reiterated that
the project is economic and questioned why, then, it is not being
done. He noted that the lead article in a recent issue of World
Gas Intelligence was about British Petroleum's joint venture with
Petro China. Those plans include a trans-China pipeline about
three times as along as the Alaska pipe line would be. The
amount of gas to be tapped there is about half of what Alaska's
reserves are estimated to be. There are major projects being
undertaken in other places. He asked: If this project is
economical, why is it not being undertaken here?
Number 2432
REPRESENTATIVE KEMPLEN asked about Mr. Hickel's reference to the
Point Thomson leases. As he recalled, Exxon Mobil Corporation
(Exxon) is the major holder of those leases. He said he
understands that this legislation is not directed at Exxon, but
"isn't it the case that Exxon filed suit against the Phillips
[Petroleum]/BP Amoco agreement because they felt Phillips will
develop the gas... [ends midspeech because of tape change].
TAPE 00-21, SIDE B
REPRESENTATIVE CROFT replied, "We have high hopes for Phillips
coming in." They are a company with experience in natural gas,
he said, and have been doing it here for a long time. He said he
and many other legislators were very disappointed to see Exxon's
suit, and that under the Prudhoe Bay Operating Agreement, Exxon
is the one that has the biggest disincentive for a major gas
sale.
Number 2432
REPRESENTATIVE GREEN posed a hypothetical question: "I have a
significant amount of gas on the North Slope, and I finally agree
to Yukon Pacific and say, 'OK, I'll make that gas available to
you.' And Yukon Pacific says, 'Great,' and they start out
working on a gas pipeline, but they don't get it done by 2008.
Is my gas then subject to tax under this bill?"
REPRESENTATIVE CROFT answered that if they had not [finished the
pipeline] by December 31, 2008, the tax would come into effect.
However, if it looked as if the pipeline would be completed by
2009 or 2010, he didn't think there would be much of a problem
amending to accommodate.
REPRESENTATIVE CROFT said he worries that there are a lot of
other places that negotiate on a far different plane than Alaska
does. He mentioned China, where one's involvement in the country
is conditioned on doing some very specific things, where the
threat of nationalization is not theoretically possible but has
been done in the past. He said, "In natural gas, a lot of the
world plays hardball, and we just haven't been. So we can still
play hardball and change the rules a little later, if you want."
Number 2342
REPRESENTATIVE GREEN said he had several questions, and asked
whether they should be submitted in writing or held until the
committee hears the bill again.
CHAIRMAN WHITAKER replied that if they are detailed questions
that will require research to answer, he would very much
appreciate having them in writing. He indicated that he hoped
the bill could be heard again Thursday, April 6. He said he
thought the support for HB 399 was "realistic despite the
lobbying effort that has been put against it over the last few
days." He urged all members of the legislature to stand firm.
[HB 399 was held over.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 6:12
p.m.
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