03/07/2006 05:30 PM House OIL & GAS
| Audio | Topic |
|---|---|
| Start | |
| HB223 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 372 | TELECONFERENCED | |
| += | HB 386 | TELECONFERENCED | |
| += | HB 223 | TELECONFERENCED | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
March 7, 2006
6:26 p.m.
MEMBERS PRESENT
Representative Vic Kohring, Chair
Representative Ralph Samuels
Representative Nancy Dahlstrom
Representative Berta Gardner
Representative David Guttenberg
MEMBERS ABSENT
Representative Lesil McGuire
Representative Norman Rokeberg
COMMITTEE CALENDAR
HOUSE BILL NO. 223
"An Act levying a tax on certain known resources of natural gas,
conditionally repealing the levy of that tax, and authorizing a
credit for payments of that tax against amounts due under the
oil and gas properties production (severance) tax if
requirements relating to the sale and delivery of the natural
gas are met; and providing for an effective date."
- HEARD AND HELD
HOUSE BILL NO. 372
"An Act delaying to June 30, 2010, the last date by which
hydrocarbon exploration geophysical work must be performed or
drilling of a stratigraphic test well or exploratory well must
be completed in order for a person to qualify for an exploration
incentive credit under the oil and gas exploration incentive
credit that is not authorized by the Alaska Land Act."
- SCHEDULED BUT NOT HEARD
HOUSE BILL NO. 386
"An Act making uniform throughout the state the deadline for
certain exploration expenditures used as credits against the
production tax on oil and gas produced from a lease or property
in the state by extending to July 1, 2010, the deadline for
those expenditures on leases or properties located north of 68
degrees, 15 minutes, North latitude."
- SCHEDULED BUT NOT HEARD
PREVIOUS COMMITTEE ACTION
BILL: HB 223
SHORT TITLE: NATURAL GAS PIPELINE INCENTIVE/ GAS TAX
SPONSOR(s): REPRESENTATIVE(s) CROFT
03/17/05 (H) READ THE FIRST TIME - REFERRALS
03/17/05 (H) W&M, O&G, RES
04/25/05 (H) W&M AT 8:30 AM CAPITOL 106
04/25/05 (H) Heard & Held
04/25/05 (H) MINUTE(W&M)
01/11/06 (H) W&M AT 9:00 AM CAPITOL 106
01/11/06 (H) Heard & Held
01/11/06 (H) MINUTE(W&M)
01/18/06 (H) W&M AT 9:00 AM CAPITOL 106
01/18/06 (H) Heard & Held
01/18/06 (H) MINUTE(W&M)
01/25/06 (H) W&M AT 9:00 AM CAPITOL 106
01/25/06 (H) Heard & Held
01/25/06 (H) MINUTE(W&M)
02/01/06 (H) W&M AT 9:00 AM CAPITOL 106
02/01/06 (H) Heard & Held
02/01/06 (H) MINUTE(W&M)
02/03/06 (H) W&M RPT 1DP 3NR 1AM
02/03/06 (H) DP: GRUENBERG;
02/03/06 (H) NR: WILSON, SAMUELS, SEATON;
02/03/06 (H) AM: WEYHRAUCH
02/03/06 (H) W&M AT 9:00 AM CAPITOL 106
02/03/06 (H) Moved Out of Committee
02/03/06 (H) MINUTE(W&M)
02/23/06 (H) O&G AT 5:00 PM CAPITOL 124
02/23/06 (H) Meeting Postponed
03/02/06 (H) O&G AT 5:00 PM CAPITOL 124
03/02/06 (H) Meeting Postponed
03/07/06 (H) O&G AT 5:30 PM CAPITOL 124
WITNESS REGISTER
REPRESENTATIVE HARRY CRAWFORD
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: As co-sponsor, presented HB 223.
KEN ALPER, Staff
to Representative Eric Croft
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Spoke on behalf of the prime sponsor of HB
223, Representative Croft.
JIM WHITAKER, Mayor
Fairbanks North Star Borough
Fairbanks, Alaska
POSITION STATEMENT: Characterized HB 223 as a business decision
that should be passed.
KEN KONRAD, Senior Vice President - Gas
BP Alaska
Anchorage, Alaska
POSITION STATEMENT: Characterized HB 223 as a bad policy.
JACK GRIFFIN, Vice President
External Affairs
ConocoPhillips Alaska, Inc.
Anchorage, Alaska
POSITION STATEMENT: Testified in opposition to HB 223.
JUDY BRADY, Executive Director
Alaska Oil and Gas Association (AOGA)
Anchorage, Alaska
POSITION STATEMENT: Testified in opposition to HB 223.
DEBRA VOGT
Haines, Alaska
POSITION STATEMENT: Characterized HB 223 as a direct and
effective way to encourage the lease holders to get that gas to
market.
MERRICK PEIRCE
Fairbanks, Alaska
POSITION STATEMENT: Testified in support of HB 223.
DAVID GOTTSTEIN
Backbone 2
Anchorage, Alaska
POSITION STATEMENT: Characterized HB 223 is excellent
legislation.
ACTION NARRATIVE
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 6:26:49 PM. Representatives Kohring,
Dahlstrom, Gardner, and Guttenberg were present at the call to
order. Representative Samuels arrived as the meeting was in
progress.
HB 223-NATURAL GAS PIPELINE INCENTIVE/ GAS TAX
6:26:59 PM
CHAIR KOHRING announced that the first order of business would
be HOUSE BILL NO. 223, "An Act levying a tax on certain known
resources of natural gas, conditionally repealing the levy of
that tax, and authorizing a credit for payments of that tax
against amounts due under the oil and gas properties production
(severance) tax if requirements relating to the sale and
delivery of the natural gas are met; and providing for an
effective date."
CHAIR KOHRING announced that it is not his intent to move HB
223.
6:28:20 PM
REPRESENTATIVE HARRY CRAWFORD, Alaska State Legislature, co-
sponsor of HB 223, began by relating that HB 223 was born out of
frustration and the prospects of huge deficits [for the state].
He highlighted that North America's largest gas field, Prudhoe
Bay, sits untapped over the past 30 years. Although Prudhoe
Bay's gas may not have made sense to go to market earlier, he
didn't believe that to be the case over the last six to seven
years. Alaska's gas is in competition with gas fields around
the world. He suggested that the committee imagine countries
such as Indonesia or Venezuela taking a back seat to another
country because it doesn't fit in with the oil companies' plans
and because other countries are telling the oil companies that
they either use the resource or lose it.
6:30:38 PM
REPRESENTATIVE CRAWFORD acknowledged that for the last 30 years,
different administrations and legislatures have tried really
hard to find the right mix of incentives to get this gas to
market. However, incentives alone haven't worked. Therefore,
HB 223 attempts to provide a positive incentive and provide a
penalty if the [oil companies] don't move forward with getting
this resource to market. For every year the companies delay
putting Alaska's gas to market, there would be a financial
penalty imposed on the companies. Representative Crawford
related his belief that this legislation is the right thing to
do in order to get this gas out of the ground and into America's
marketplace.
6:32:46 PM
CHAIR KOHRING inquired as to whether the approach embodied in HB
223 has been used anywhere else in the world.
REPRESENTATIVE CRAWFORD answered that variations on this
approach have been utilized. In fact, Alaska actually had a
reserves tax on oil from 1974-1977. When the oil flowed through
the pipeline, the reserves tax was eliminated.
6:34:01 PM
KEN ALPER, Staff to Representative Eric Croft, Alaska State
Legislature, speaking on behalf of the prime sponsor of HB 223,
related that other jurisdictions in the U.S. tax reserves within
the property tax structure. However, within Alaska's oil and
gas property tax, the reserves are exempt.
CHAIR KOHRING expressed concern with using the force of
government to force the hand of the private sector and industry
to accomplish this objective.
6:35:17 PM
REPRESENTATIVE CRAWFORD opined that without the government doing
its part, Alaskans are placed at a disadvantage. It's incumbent
upon the legislature to do everything it can to stand up for the
people of Alaska and obtain the most of its resources, he said.
REPRESENTATIVE GUTTENBERG thanked the sponsors for introducing
this legislation. He recalled the late 1970s, when the pipeline
was completed and people thought another oil or a gas line was
coming. However, 30 years later, the state is still waiting.
This legislation offers a healthy approach to explore options to
get Alaska's gas to market.
6:38:16 PM
JIM WHITAKER, Mayor, Fairbanks North Star Borough, said he
didn't believe HB 223 should be viewed as even a little
controversial. Furthermore, this legislation doesn't address a
philosophical debate or issue. This legislation is, however, a
question about a business decision. He informed the committee
that legislation similar to HB 223 was considered in the mid
1980s and again in 2000. Therefore, it's not a new idea in this
state or other places in the world either. Drawing upon his
experience living in oil provinces in the Middle East, Mayor
Whitaker said that the notion is very simple: "Produce it or
we'll take it back." He indicated that was also the message he
heard when he was the chair of the House Special Committee on
Oil and Gas when he called the various oil provinces regarding
Alaska's situation.
MAYOR WHITAKER reiterated that the idea embodied in HB 223 isn't
a new idea and is a practice that's fairly common around the
world. In fact, this idea incentivizes the production of
natural gas, which is a normal and ordinary business practice.
He characterized the legislation as an investment incentive. He
mentioned that an internal rate of return analysis is generally
the industry standard utilized when determining whether to
sanction a project or not. Given that an Alaska gas project is
not sanctioned, additional costs will be incurred and a lower
overall rate of return will result. However, if an Alaska gas
project is sanctioned, a rate of return will be maintained or
significantly increased. This is simply a business decision on
the part of the producer's board of directors that relates to
the set of circumstances as should be the same case for the
legislature. Government, particularly the legislature, is
implored to run [the construction of a gas line] as a business.
If that were the case, this [legislation proposes] precisely
what the [government] would do.
6:42:43 PM
MAYOR WHITAKER opined that HB 223 accomplishes the same goals as
the legislature is considering as a replacement for the economic
limit factor (ELF). The proposal in HB 223 incentivizes to
produce and increases the state's revenues either way.
Therefore, if the legislature is going to consider and pass a
replacement for ELF utilizing that logic, the same logic should
be applied to HB 223 and thus it should be passed. He concluded
by saying, "It is an incentive to produce and one way or
another, it does increase the state's revenue. And so, I simply
ask that the legislature consider itself to be the state's board
of directors and make a good business decision."
6:44:26 PM
KEN KONRAD, Senior Vice President - Gas, BP Alaska, paraphrased
from the following written testimony [original punctuation
provided]:
We believe this is bad policy - bad for industry and
bad for Alaska. Furthermore, it de-stabilizes
Alaska's fiscal regime at the very moment Alaska is
trying to attract massive oil and gas investments.
Staggering levels of investment are needed from the
major and also to some extent independent oil and gas
companies to help secure a 50 year oil and gas future
on the North Slope.
That future is anchored by the gas pipeline but it
also requires significant additional ANS [Alaska North
Slope] investment to stem the disturbing ongoing rate
of oil decline to keep oil production at economic
levels. That future requires a stable and competitive
fiscal regime.
All our time and energy over the past six months has
been dedicated towards finalizing a Fiscal Contract
with Alaska. We strongly believe that is the best
means to advance a project.
Simply stated, a gas reserves tax really makes no
sense - you don't tax projects into existence.
It seems the gas reserves tax and many of the other
"gas now" ideas that have cycled through Alaska for
many, many years are born out of frustration.
Frustration driven by the incorrect perception by some
that companies have been "warehousing" the gas.
As we sit here today poised to secure a gas pipeline
deal supported by all three major producers, it is
worth revisiting what has really occurred with ANS
gas, how it has been conserved and put to good use and
how Alaska has benefited by allowing market forces to
guide ANS gas development.
6:46:50 PM
MR. KONRAD continued:
From the outset, I'll remind you that BP's business is
producing and selling oil and gas. We don't make
money by not producing and not selling oil and gas.
The so called "warehousing" of gas makes no sense for
BP or its shareholders. In BP, if projects are
commercially viable and if the risk/reward balance is
right, those projects get funded. If they are not,
they don't.
The initial plan for Prudhoe Bay gas was to build an
overland pipeline to U.S. markets in the early 1980's.
BP with other industry participants invested hundreds
of millions of dollars towards a project that didn't
work. That project would have transported ANS gas at
a cost of $4-$5/mcf [thousand cubic feet] to be sold
into a market averaging $2/mcf that would have yielded
a negative netback for both the resource owners and
the State. It made no economic sense and was not
advanced.
Through the 1990's, various LNG [liquefied natural
gas] ideas were studied by all three major producers
as well as others. Millions were spent. These LNG
projects would have yielded a netback price for
resource owners and the State near zero or at best,
slightly positive. None of these LNG ideas made
economic sense and they did not advance.
But let's not just talk about what hasn't happened and
what won't happen. Let's talk about what has happened
and what will happen with ANS gas.
A series of very large gas related investments have
occurred at Prudhoe Bay over many years. Those
investments, costing billions of dollars and
generating thousands of jobs, increased the oil
recovery from Prudhoe by more than 3 billion barrels
(energy equivalence of more than 18 TCF [trillion
cubic feet] of gas) generating many billions of
dollars to State revenue.
6:49:03 PM
MR. KONRAD continued:
Other North Slope fields have made many similar,
albeit smaller gas related investments with similar
benefits - more jobs, higher oil recovery and more
State revenue.
MR. KONRAD then turned the committee's attention to the last
page of his written testimony, which is a chart entitled "Alaska
Gas Timeline." As mentioned earlier, in the early 1980s the
decision was made not to advance a project that had a
"hopelessly negative netback." However, a series of projects
was started. In 1984 the seawater injection plant was
constructed for water flooding as well as to maintain reservoir
pressure high enough at Prudhoe Bay to support an admissible gas
enhanced oil recovery (EOR) project. In 1986 a central gas
facility, a facility that strips gas of some of its heavier
components in order to manufacture EOR solvents that can strip
more oil out of the rock. In 1990 the Gas Handling Expansion I
(GHX-1) project was completed and increased field gas handling
capacity to cycle more gas and recover more oil. In 1995 GHX-2
was completed and increased gas handling capacity to 7.5 billion
cubic feet (bcf) a day. In 1999 the Miscible Injection
Expansion (MIX) project was completed. During that time, gas
prices increased and the Prudhoe Bay owners realigned their
economic interest. In 2001 the Joint Study Team formed by the
three producers to study the overland gas pipeline.
6:51:11 PM
MR. KONRAD highlighted that in 2003 the Stranded Gas Development
Act was reauthorized and 2004 passed key enabling legislation.
A couple of months later, the major companies placed before the
state a comprehensive proposal that would've allowed the gas
project to advance. The details surrounding that proposal have
been under negotiation ever since, he said. Mr. Konrad then
continued to paraphrase from the following written testimony:
The combination of technological innovation and
allowing natural market forces to work has enabled
wealth creation and benefits for both Alaska and
industry. At the same time, populist gas schemes that
would have effectively given Alaska's gas away without
value were avoided.
Today, a modern, high pressure, large diameter
pipeline as proposed by BP and the other major ANS
resource owners, in partnership with the State, can
bring another round of benefits from Alaska's gas.
It would yield a reasonable netback price for the gas,
create thousands upon thousands of jobs, generate
billions of dollars in State revenues and create a new
industry in Alaska. An industry exploring for, and
developing, both oil and gas. An industry that with
significant additional investment, can create another
50 years of oil and gas activity on the North Slope.
The stars are aligned. The State and all 3 major
producers are aligned behind a single ANS gas export
project - both as resource owners and as equity
partners. The opportunity to advance an economically
efficient gas pipeline is at our doorstep.
This Legislature will soon have an opportunity to
review, and I hope support, a Fiscal Contract that
will advance a gas pipeline.
Thank you for the opportunity to testify. I'd be
happy to answer any questions.
6:53:28 PM
REPRESENTATIVE GARDNER inquired as to the position BP would hold
in regard to development of the gas fields if any of the
following occurred: HB 488 or similar legislation that's
acceptable to the major producers isn't passed; the legislature
doesn't amend the Stranded Gas Development Act; or the
legislature doesn't approve the governor's contract.
MR. KONRAD opined that those outcomes would make it very
difficult. He related that he is very confident that once the
contract is out for a full and open debate, people will see the
benefits and be supportive.
REPRESENTATIVE GUTTENBERG related that many legislators believe
that the negotiations will result in a contract to build [a gas
pipeline]. However, the testimony indicates that it's going to
be a fiscal regime rather than a contract to build. He inquired
as to the difference between a fiscal contract with the state
and building a gas line.
6:55:35 PM
MR. KONRAD answered that the aforementioned will be easier to
explain once the fiscal contract is available. He pointed out
that BP alone doesn't control the construction decision as it
requires a rigorous regulatory process.
6:56:33 PM
JACK GRIFFIN, Vice President, External Affairs, ConocoPhillips
Alaska, Inc. ("ConocoPhillips"), reminded the committee that
ConocoPhillips has presented testimony last year and earlier
this year in opposition to HB 223, which he said remains. Mr.
Griffin then said:
And to clarify, if I can, some confusion regarding the
affect this bill would have on ConocoPhillips, a
company that not only possesses all of the incentives
necessary to move forward on a North Slope gas project
but, in fact, has taken every reasonable step within
its power to do so. Mr. Chairman, as you and the
other members of this committee well know,
ConocoPhillips has reached an agreement with the
administration on the base, fiscal, and other terms
that we need to move forward on a North Slope gas
project. We reached an agreement in principle with
the state on October 21st of last year and worked
diligently over the following weeks to resolve
outstanding technical and drafting issues.
ConocoPhillips now has a deal with the state that it
is willing to use as a basis for moving to the next
phase of project development. Our agreement with the
state is the culmination of a multi-year effort.
Following a $125 million cost study conducted jointly
with the other major North Slope producers to move the
North Slope gas project to the next phase of
development. ConocoPhillips took a leadership role in
seeking from you a reauthorization of the Stranded Gas
Development Act, which has led directly to our
contract with the state. ConocoPhillips took a
leadership role in obtaining several critical pieces
of federal legislation that will help bring greater
predictability and efficiency to the federal
permitting process as well as, we hope, lower the cost
of the debt for the project. We also took a
leadership role in advancing an application to the
state under the Stranded Gas Development Act. And,
obviously, we are taking a leading role in crafting
and finalizing an appropriate fiscal contract for the
project. We believe the time has come to move to the
next phase of North Slope gas development. We are
ready and willing to take that step.
HB 223, however, undermines our gas development
efforts by penalizing ConocoPhillips and the other
major North Slope producers for taking the very steps
that the administration and this legislature have
urged us to take to advance the North Slope gas
project. Specifically, and in contrast to testimony
that has previously been provided on this bill, there
is nothing that ConocoPhillips itself can do under
this bill, as it is currently written, to avoid
imposition of this new tax short of surrendering the
billions of dollars we have already invested in our
lease hold interests at Prudhoe Bay. At a previous
hearing on this bill and in testimony today, it was
suggested that ConocoPhillips could avoid this new tax
by selling its gas or by committing its gas to a
project under an open season. In fact, that is not
the case. This tax is automatic and unavoidable. If
we started welding steel and laying pipe tomorrow, we
could not avoid this new tax. Now supporters of this
new tax have claimed that our tax payment will be
refunded if the North Slope producers move forward
with the gas project. We don't believe that this
claim is accurate. The amount of ConocoPhillips'
obligation under this bill is likely to exceed, by a
substantial amount, $200 million per year over the
next 10 years. Under the proposed legislation, these
tax dollars would not be refunded until perhaps 10-25
years in the future, without any allowance for the
time value of money. That coupled with limitations on
the amount that can be refunded each month as well as
a final cutoff date for refunds guarantee that only a
fraction of the tax that is paid would actually be
refunded.
7:01:04 PM
MR. GRIFFIN continued:
Indeed, ConocoPhillips' obligation to pay the tax
continues even if a gas project is delayed for reasons
beyond its control, such as state or federal inaction.
More specifically, the project cannot move forward
without appropriate state and federal permits, but
there is no guaranteed date by which this permits will
be issued. In fact, if this bill becomes law, the
state will actually have an incentive to delay the
project, simply to force North Slope producers like
ConocoPhillips to continue to pay this punitive tax.
It is difficult to imagine a more destructive tax
policy for the state to date, particularly now when we
are on the verge of moving the project to its next
stage of development. Consequently, we urge you to
reject this bill. In closing, I would like to voice
our belief that the bill raises additional significant
legal and policy issues, including issues under both
the state and federal constitutions. Obviously, we
have not tried to address all of those issues in my
comments today. Again, Mr. Chairman and members of
the committee, thank you for considering our views.
REPRESENTATIVE GARDNER commented that the legislature is at a
disadvantage because members haven't seen the contract that has
been negotiated with the governor. She then inquired as to
ConocoPhillips' timeline, such as when construction would occur
and gas would flow, should everything proposed by the governor
proceed like clock work.
MR. GRIFFIN informed the committee that of the $125 million that
ConocoPhillips, BP, and ExxonMobil Corporation ("ExxonMobil")
spent to study this project, a success-case timeline was
developed. The aforementioned specifies that it will take about
9-10 years from the time the producers re-form the project team
until first gas starts flowing to market. He specified that
there is an upfront period to allow preparation for the
permitting process as well as an extensive permitting process.
7:04:39 PM
REPRESENTATIVE GUTTENBERG recalled Mr. Griffin's testimony that
HB 223 provides the state an incentive to delay. Although that
is [a possibility], he pointed out that there are many scenarios
that can be played out. However, in the end the sponsors of the
legislation and others simply want the gas to reach the market.
MR. GRIFFIN said that he believes the legislature and the public
want to move the gas project forward. However, the reality of
HB 223 is that the state will collect revenues as long as the
project doesn't move forward. Therefore, it becomes a financial
incentive for the state to delay issuing permits. Whether the
desire to move forward on the project will overcome the
financial incentive to delay is hard to predict, as are other
components. Mr. Griffin opined, "It's not hard to imagine a
scenario where the state would actually be collecting more under
this tax than it would as a participant in the gas project."
7:07:03 PM
JUDY BRADY, Executive Director, Alaska Oil and Gas Association
(AOGA), began by relating that all of the members of AOGA are
very interested in having the gas pipeline be a success. She
then paraphrased from the following written testimony [original
punctuation provided]:
AOGA is strongly opposed to the concept of oil or gas
reserve taxes and therefore opposes House Bill 223,
which would impose a gas reserve tax on North Slope
fields.
HB 223 would create, in terms of monetary impact, one
of the most massive new taxes in the United States,
and reflects a basic misunderstanding of how mega
projects are developed, financed and approved. The
$20 plus billion gas pipeline project is unique in its
size, complexity and risk.
HB 223, which is touted as a way of spurring the
development of a natural gas pipeline, only adds to
the economic risk of this project and the potential of
putting the project at risk. The fact is no project
can be taxed into existence. A project can be taxed
out of existence.
We have been asked if AOGA has reconsidered our
opposition to the concept of reserve tax legislation,
in light of the fact that an initiative to enact a gas
reserves tax has been certified for the 2006 General
Election ballot.
The answer to that question is NO. AOGA continues to
strongly oppose the concept of gas reserve tax
legislation for the reasons outlined in our submitted
testimony. Any legislation that would remove the
initiative from the ballot would suffer from the same
flaws that lead us to oppose HB 223.
The many difficult and complicated actions that must
take place to build this mega-project simply will not
be influenced or hurried because of a threat of
retaliation in the form of a huge punitive tax. In
fact, as we have said, a punitive tax is both counter-
productive and unnecessary.
Positive progress continues to be made according to
all public reports. Governor Murkowski has announced
that a contract establishing fiscal terms for a gas
pipeline will be available for public review and
legislative action in the near future. He has
announced his plans for a special session to take
action on the gas contract.
We believe that as Alaskans see positive progress in
the many complicated and difficult policy issues to be
addressed, they will also agree that a gas reserve tax
is unnecessary and counter-productive.
The common goal is to build a gas pipeline. AOGA will
continue to support each positive step that ensures
that goal is accomplished. A gas reserves tax is not
a positive step.
Thank you, Mr. Chairman, for allowing us to make this
testimony on behalf of AOGA and its members.
7:11:39 PM
DEBRA VOGT informed the committee she retired in 1999 after a
20-year career with the state. She related that for most of her
career she was involved with oil and gas taxes. Ms. Vogt
provided the following testimony:
This bill would institute a reserves tax on certain
natural gas in place. The tax would be repealed when
a gas line is built and the gas is traveling down it.
At that time, the taxpayer can take the taxes paid
under the bill as a credit against the taxpayer's
severance tax liability. The credit provisions expire
in 2030. If the taxpayer doesn't want to pay the tax,
it can abandon its leases and the gas will revert to
the state. These provisions will clearly provide an
incentive to get these natural resources to market.
The state had a reserves tax on oil in the years just
before the pipeline ... and other states and
municipalities tax hydrocarbon reserves just as they
tax other property. In my view, this is a much more
direct and effective way to encourage the lease
holders to get that gas to market than is the
undisclosed plan that the governor says he has up his
sleeve. This legislature is being asked to buy a pig
in a poke as far as the governor's plan is concerned -
- you don't get to see the other side of the deal
until you've put all your cards on the table. At the
minimum, you should have all the details of the
rumored plan on the table before you accept or reject
an alternative like this. If you want to see the
benefit of our natural gas resources, this approach
has merit. I urge your serious consideration. Thanks
for letting me testify.
MS. VOGT, in response to Representative Guttenberg, said that
she didn't find the opposition to HB 223 unusual. Ms. Vogt
opined that she doesn't know what HB 223 puts at risk because
there is no knowledge of an alternative plan. Therefore, she
reiterated the need for all plans to be available for review.
7:14:58 PM
MERRICK PEIRCE opined that HB 223 is outstanding legislation
that's long overdue. One of the reasons this approach is a good
way to get Alaska's gas into the market is because the retired
president of ARCO Alaska testified before the legislature years
ago saying that legislation such as HB 223 would be necessary to
get an Alaska gas pipeline built. Mr. Peirce acknowledged that
the oil companies have said that HB 488, as proposed by Governor
Murkowski, has to be passed or they will walk away from a gas
pipeline deal. To that, Mr. Peirce said there may be a better
way to obtain a gas pipeline, which he said would be through the
Port Authority's proposal. Mr. Peirce pointed out that there is
no doubt that the initiative that was just certified will be
passed, and therefore the only question is why the legislature
doesn't tweak this legislation, if necessary, and pass it.
MR. PEIRCE posed a scenario in which HB 223 is passed and no gas
pipeline is built. The aforementioned would result in the
Fairbanks community receiving just shy of $1 billion annually in
revenue, additional revenue beyond what the state currently
receives. That money would make it very likely there would be a
dramatic increase in state and municipal revenue assistance for
the Fairbanks North Star Borough, which has among the highest
property taxes in the state. On the other hand, if HB 223
induces the construction of the gas pipeline, there are many
benefits that he said he wouldn't go into. However, for
Fairbanks in particular it's essential because the community is
bearing a massive burden to keep homes and businesses warm. In
Fairbanks there isn't much of an alternative to oil heating
fuel, he opined. Mr. Peirce opined, "It's a real shame that
legislation like HB 223 wasn't passed over 10 years ago as we
would already be enjoying the benefits that I just described.
All we can do now is to try and make up for lost time and get
this passed as quickly as possible." Mr. Peirce concluded by
noting that he often philosophically agrees with Chairman
Kohring as he, too, isn't a fan of intrusive government.
However, on this particular issue of determining how to best
develop the natural resources of the state, the constitution
requires that the return on the state's natural resources be
maximized. This legislation, he opined, is an appropriate way
to do so.
7:20:16 PM
DAVID GOTTSTEIN, Backbone 2, began by characterizing the
relationship between the state and the oil industry such that
the oil industry on the North Slope represents tenants with the
right of first refusal. The oil industry's obligation is to
produce the resource to the maximum benefit to the state,
although it may not be to the industry's benefit. One of the
issues continuously being raised is that perhaps these projects
doesn't rise to the top of the capital deployment requirements
of the oil companies. However, that's not the requirement, he
opined. He emphasized, "We won't actually know if the gas is
stranded unless we make the gas available in an open, free
competitive bid process." Therefore, if no one shows up, then
it's stranded. If someone does show up and is willing to take
the gas in an economic form and build a pipeline, then it isn't
stranded and proves it's economic. Mr. Gottstein opined that HB
223 is excellent legislation. He expressed concern that the oil
industry is expert at playing hard ball, but the state is not.
Therefore, the state needs to use every tool available to
compete. In conclusion, Mr. Gottstein strongly urged the
committee to review HB 223 seriously because it improves the
state's economic clout.
7:24:14 PM
REPRESENTATIVE GUTTENBERG moved that the committee adopt CSHB
223, Version 24-LS0037\T, Chenoweth, 2/23/06, as the working
document.
CHAIR KOHRING objected for purposes of discussion.
REPRESENTATIVE DAHLSTROM inquired as to the changes embodied in
Version T.
7:24:52 PM
REPRESENTATIVE CRAWFORD clarified that Version T makes changes
such that the legislation mirrors the initiative. He specified
that the language on page 1, line 10, was added. On page 1,
line 12, the language "Tax on certain leases having taxable gas"
was inserted. He then pointed out that the language on page 2,
lines 1 and 17 was added. On page 3, lines 17-18, the language:
"A lessee holding an interest in property taxable under this
chapter". On page 3, lines 22-23, the language: "an operator
of a lease holding an interest in property" was added. On page
5, line 15, the language: "A lessee holding an interest in
property subject to the tax" was added as was the language:
"property subject to the tax imposed under AS 43.58" on line 22.
On page 5, line 29, the term "service" was added. Continuing on
page 5, the language: "from a presubscription agreement made
public within 10 days of execution" on line 31 was added. On
page 6, lines 11 and 15, the term "service" was inserted. He
then pointed out that on page 7, lines 4-7, a new definition of
"binding transportation service agreement" was inserted.
Continuing on page 7, line 16, Section 5 was inserted such that
the uncodified law of the state of Alaska is amended by adding a
new section. On page 8, lines 4-17, is a new section specifying
how the escrow is dealt with to hold the money until such time
until the gas pipeline is built and the gas is flowing.
7:29:34 PM
MR. ALPER reminded the committee that the aforementioned are
technical changes to bring the language of the legislation in
line with the initiative to be on the November ballot. He did
highlight the substantial item, which is [the provision] that
exempts the state's royalty share of the gas. He then explained
that currently before the committee is a fiscal note that places
the estimated revenue at $1.01 billion, which under the revised
language would be about $880 million.
CHAIR KOHRING maintained his objection. He explained that he
isn't sure of the ramifications of Version T. Furthermore,
since HB 223 is of such significance, he said he believes the
legislation should receive further consideration.
REPRESENTATIVE DAHLSTROM commented that she isn't familiar with
the escrow payment and the binding transportation service
agreement provisions and what those accomplish. Therefore, she
expressed her desire to hold off on taking a vote on the
legislation.
7:31:40 PM
REPRESENTATIVE GUTTENBERG related his understanding that the
purpose of Version T is to bring the legislation back to the
same place as the ballot initiative.
7:32:59 PM
REPRESENTATIVE GUTTENBERG withdrew his motion to adopt Version T
as the work draft.
7:33:01 PM
REPRESENTATIVE DAHLSTROM requested a copy of the ballot
initiative.
REPRESENTATIVE GUTTENBERG related his belief that when the
industry looked at the long-term aspect of what will have to be
done to maintain control, they knew that an initiative such as
this would eventually come forward. Therefore, he opined that
it's time for the state and the legislature to play the same
game as the industry. He concluded by highlighting that the
Alaska State Constitution specifies that the [oil industry] is
supposed to manage the resources for the maximum benefit for the
people of Alaska, which is questionable at this point.
Therefore, HB 223 is a step toward getting something done.
7:35:24 PM
CHAIR KOHRING noted that the public hearing would be held open
and then announced that HB 223 would be held over.
7:35:52 PM
ADJOURNMENT
CHAIR KOHRING announced at 7:36 p.m. that the committee would
recess to the call of the chair.
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