Legislature(1997 - 1998)
04/02/1998 02:30 PM House RES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE RESOURCES STANDING COMMITTEE
April 2, 1998
2:30 p.m.
MEMBERS PRESENT
Representative Bill Hudson, Co-Chairman
Representative Scott Ogan, Co-Chairman
Representative Beverly Masek, Vice Chair
Representative Ramona Barnes
Representative Fred Dyson
Representative Joe Green
Representative William K. (Bill) Williams
Representative Irene Nicholia
Representative Reggie Joule
MEMBERS ABSENT
All members present.
COMMITTEE CALENDAR
HOUSE BILL NO. 393
"An Act relating to contracts with the state establishing payments
in lieu of other taxes by a qualified sponsor or qualified sponsor
group for projects to develop stranded gas resources in the state;
providing for the inclusion in such contracts of terms making
certain adjustments regarding royalty value and the timing and
notice of the state's right to take royalty in kind or in value
from such projects; relating to the effect of such contracts on
municipal taxation; and providing for an effective date."
- MOVED CSHB 393(RES) OUT OF COMMITTEE
(* First public hearing)
PREVIOUS ACTION
BILL: HB 393
SHORT TITLE: DEVELOP STRANDED GAS RESOURCES
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR
Jrn-Date Jrn-Page Action
2/11/98 2280 (H) READ THE FIRST TIME - REFERRAL(S)
2/11/98 2281 (H) OIL & GAS, FINANCE
2/11/98 2281 (H) 2 FISCAL NOTES (DNR, REV)
2/11/98 2281 (H) GOVERNOR'S TRANSMITTAL LETTER
2/19/98 (H) O&G AT 11:00 AM CAPITOL 124
2/19/98 (H) MINUTE(O&G)
2/24/98 (H) O&G AT 10:00 AM CAPITOL 124
2/24/98 (H) MINUTE(O&G)
2/26/98 (H) O&G AT 10:00 AM CAPITOL 124
2/26/98 (H) MINUTE(O&G)
3/03/98 (H) O&G AT 10:00 AM CAPITOL 124
3/03/98 (H) MINUTE(O&G)
3/05/98 (H) MINUTE(O&G)
3/09/98 2578 (H) RES REFERRAL ADDED
3/10/98 (H) O&G AT 10:00 AM CAPITOL 124
3/10/98 (H) MINUTE(O&G)
3/12/98 (H) O&G AT 10:00 AM CAPITOL 124
3/12/98 (H) MINUTE(O&G)
3/19/98 (H) O&G AT 10:00 AM CAPITOL 124
3/19/98 (H) MINUTE(O&G)
3/24/98 (H) O&G AT 10:00 AM CAPITOL 124
3/24/98 (H) MINUTE(O&G)
3/24/98 (H) O&G AT 5:00 PM CAPITOL 124
3/24/98 (H) MINUTE(O&G)
3/26/98 (H) O&G AT 10:00 AM CAPITOL 124
3/26/98 (H) MINUTE(O&G)
3/26/98 (H) O&G RPT PROPOSED COMMITTEE SUBSTITUTE
O&G NT & ATTACHED AM 1DP 5NR DP:
HODGINS; NR: BUNDE, OGAN, ROKEBERG,
BRICE, KEMPLEN
3/26/98 2750 (H) 2 FISCAL NOTES (DNR, REV) 2/11/98
3/26/98 (H) RES AT 1:00 PM CAPITOL 124
3/26/98 (H) MINUTE(RES)
3/28/98 (H) RES AT 1:00 PM CAPITOL 124
3/28/98 (H) MINUTE(RES)
3/31/98 (H) RES AT 1:00 PM CAPITOL 124
3/28/98 (H) MINUTE(RES)
3/31/98 (H) RES AT 1:00 PM CAPITOL 124
3/31/98 (H) MINUTE(RES)
4/02/98 (H) RES AT 1:00 PM CAPITOL 124
WITNESS REGISTER
WILSON CONDON, Commissioner
Department of Revenue
P.O. Box 110400
Juneau, Alaska 99811-0400
Telephone: (907) 465-2300
POSITION STATEMENT: Answered questions of the committee members on
HB 393.
JOHN SHIVELY, Commissioner
Department of Natural Resources
400 Willoughby Avenue
Juneau, Alaska 99801-1724
Telephone: (907) 465-2400
POSITION STATEMENT: Answered questions of the committee members on
HB 393.
ACTION NARRATIVE
TAPE 98-41, SIDE A
Number 001
CO-CHAIRMAN SCOTT OGAN called the House Resources Standing
Committee meeting to order at 2:30 p.m. Members present at the
call to order were Representatives Hudson, Ogan, Masek, Green, and
Williams. Representatives Barnes, Dyson, Nicholia and Joule
arrived at 2:31 p.m., 2:36 p.m., 3:10 p.m., and 3:15 p.m.,
respectively.
HB 393 - DEVELOP STRANDED GAS RESOURCES
CO-CHAIRMAN OGAN announced the only order of business today was
House Bill Number 393, "An Act relating to contracts with the state
establishing payments in lieu of other taxes by a qualified sponsor
or qualified sponsor group for projects to develop stranded gas
resources in the state; providing for the inclusion in such
contracts of terms making certain adjustments regarding royalty
value and the timing and notice of the state's right to take
royalty in kind or in value from such projects; relating to the
effect of such contracts on municipal taxation; and providing for
an effective date."
CO-CHAIRMAN OGAN entertained a motion to adopt the proposed
committee substitute for HB 393, version 0-GH2006\Q, Glover,
4/1/98.
Number 056
CO-CHAIRMAN BILL HUDSON made a motion and asked unanimous consent
to adopt the proposed committee substitute for HB 393, version 0-
GH2006\Q, Glover, 4/1/98, for consideration. There being no
objection, it was so adopted.
CO-CHAIRMAN OGAN announced that Roger Marks, a petroleum economist
from the Department of Revenue; and Bill Van Dyke, Division of Oil
and Gas, Department of Natural Resources, are online in Anchorage.
to answer any technical questions in regards to gas-to-liquids
(GTL).
CO-CHAIRMAN OGAN announced the arrival of Representative Barnes.
CO-CHAIRMAN OGAN called on Commissioner Condon from the Department
of Revenue and Commissioner Shively from the Department of Natural
Resources.
Number 116
WILSON CONDON, Commissioner, Department of Revenue, testified in
Juneau. He is prepared to talk about the chemistry of GTL.
CO-CHAIRMAN OGAN stated it seems that incorporating GTL in the bill
is an apple-orange comparison. It would no doubt take a
considerable capital investment to create a facility to convert
natural gas to liquid. He asked Commissioner Condon to brief him
on the logic of including GTL language in the bill, especially in
light of the effective date.
Number 159
COMMISSIONER CONDON replied the sunset date in the bill means that
the chances of someone bringing a GTL proposal are remote, given
where technology stands today. Nevertheless, we believe that
taking the gas to market as liquid natural gas (LNG) is the best
alternative today for monetizing the tremendous resource on the
North Slope. But, GTL technology is being developed. The bill is
a framework for the executive branch to develop proposals to bring
to the legislature in order to develop stranded gas either as an
LNG, GTL, methanol, or a gas pipeline project.
Number 213
REPRESENTATIVE RAMONA BARNES asked Commissioner Condon whose idea
was it to put GTL in the bill.
COMMISSIONER CONDON replied he really doesn't remember.
REPRESENTATIVE BARNES asked Commissioner Condon whether he knows
how long the technology for GTL has been around.
COMMISSIONER CONDON replied it has been around in one form or
another since the 1920s.
REPRESENTATIVE BARNES asked Commissioner Condon whether Hitler
developed it during World War II.
COMMISSIONER CONDON replied it was developed well before he gained
political power, but Hitler used it to manufacture fuel for his war
machines.
REPRESENTATIVE BARNES asked Commissioner Condon why hasn't it been
developed commercially to this point in time.
COMMISSIONER CONDON replied it has been commercially developed for
some limited uses. It has not been commercially developed on a
scale that would be useful for Alaska. It has been developed in a
way that it is economical for making wax. It was also developed in
South Africa when it was subject to an oil embargo.
REPRESENTATIVE BARNES asked Commissioner Condon, with a project the
size of the stranded gas reserves at Prudhoe Bay and Point Thomson,
how long would it take for technology to develop in order to take
it to the marketplace.
COMMISSIONER CONDON replied at least a decade, but that is his own
personal guess.
REPRESENTATIVE BARNES asked Commissioner Condon whether he was the
person who hired Dr. Pedro van Meurs.
COMMISSIONER CONDON replied he is the person responsible for having
him hired.
REPRESENTATIVE BARNES asked Commissioner Condon whether Pedro van
Meurs indicated the window of opportunity for Alaska is around the
year 2005, otherwise other projects would "nibble ours to death."
She read the following from Dr. van Meurs' report:
"The main drawback of delays in the Alaska project is
that the project may be nibbled to death by small
projects coming in ahead of the Alaska project.
Petroleum exploration in Asia used to be primarily for
oil; gas was considered a byproduct. However, the
strongly emerging gas markets in Asia have now created a
situation where petroleum companies are now exploring for
gas."
COMMISSIONER CONDON stated he does remember him talking about that.
REPRESENTATIVE BARNES asked Commissioner Condon whether anything
has changed that would cause Alaska to think it would be viable in
the marketplace as late as the year 2010 and before the year 2015.
COMMISSIONER CONDON replied the sooner Alaska's project gets in the
cue the better the chances of successfully marketing its gas. Dr.
van Meurs didn't indicate that the window would close, but it needs
to be in-line as quickly as possible.
REPRESENTATIVE BARNES stated van Meurs didn't indicate that the
window would close. He laid out a scenario of how the economy of
Asia would grow and the window would broaden. Since that time, the
economy of Asia has contracted considerably and it is not likely to
grow anywhere near the rate he laid out. She asked Commissioner
Condon whether he believes that the window of opportunity will
continue to grow as fast as the scenario that was laid out in van
Meurs' report.
COMMISSIONER CONDON replied he does not. He thinks there will be
a period of two to three years where growth will be close to zero
then it will continue at its previous rate.
REPRESENTATIVE BARNES stated it is her belief that with the GTL
language in the bill it will be used as an excuse to slow down the
development of building a gas pipeline to get the gas to the
marketplace. She asked Commissioner Condon whether he would take
exception to that language coming out of the bill.
COMMISSIONER CONDON replied he understands her concerns, but he
doesn't share the same belief. There are some good reasons for
leaving all possibilities open. It is a question of evaluating
motives.
REPRESENTATIVE BARNES asked Commissioner Condon what would preclude
the administration from coming back to the legislature when the
technology is developed.
COMMISSIONER CONDON replied, "Not a thing."
REPRESENTATIVE BARNES asked Co-Chairman Ogan whether there is
anybody to discuss the makeup of GTL, the loss of the product to
the atmosphere, and the fact that there is no taxing structure in
place for diesel fuel.
CO-CHAIRMAN OGAN replied there are people here to testify on those
concerns.
Number 385
REPRESENTATIVE JOE GREEN asked Commissioner Condon whether it would
make sense to keep all of the avenues open even though there might
be a loss of a product.
COMMISSIONER CONDON replied, "Yes." Both LNG and GTL options would
use the resource and take it to the market. A little less than 10
percent of the gas would be used to run the pipeline, power the
refrigeration plant, and run the ships for an LNG project. The
state would tax and get a royalty on all of the gas supplied at the
front end of the project. About 65 to 70 percent of the energy
would get to the market for a GTL project. The other 35 percent
would be used to run the chemical plant. Nevertheless, the state
would get a royalty on it or tax the entire volume delivered to the
GTL plant. In both instances the economics would be the cost of
getting it there and to make it. It would be a net-back procedure.
It would be cheaper by a considerable amount to move liquid rather
than gas to the marketplace. Once it is at the market the values
would be roughly the same. Diesel would go for a little bit more
than delivered gas, but it would be roughly the same. The cost to
get the diesel there would be a lot less, but it would cost a lot
of money to make it.
REPRESENTATIVE GREEN said, "As we move through our utilization from
stationary sources to maybe mobile sources of using the energy
right now we're unfortunate in realizing a glut of conventional
oil, but in the future is it conceivable that, as I understand this
product, whatever form it is it's essentially pure in that you
don't have impurities like sulfur really common in other forms of
diesel and lower-ends than the normal gas line - CH4 gas. That
there could be with flexibility of going either way a market
response that would not necessarily be there if you maintained your
eggs in one basket so to speak. So that--for example, if gas
becomes a like oil is right now that if--at that same time maybe
diesel fuel or whatever this product is GTL. I wish we had a
sample of that so we could see what it looked like. But, if that
might be a more marketable product, that you would have the
flexibility and that both the operators and the state could stand
to benefit with that flexibility."
COMMISSIONER CONDON stated Representative Green is correct in that
an LNG plan would be built around long-term contracts so that there
wouldn't be a lot of flexibility. In a GTL plan there wouldn't be
long-term contracts. It would be marketed differently, even if it
was blended with crude oil.
Number 491
CO-CHAIRMAN OGAN said, "We take--the way it's gonna--if detail
happens, we have a refinery up there on the North Slope. It
refines this product. It's a relatively pure product. We mix it
in with the oil, get it all dirty again and mixed up with all the
oil. I guess, the only advantage might be that we keep more
liquids going through the pipeline in the long-term because there's
probably capacity there cause were not running at full capacity
anyway. But, then it has to be--the whole soup has to be refined
on the other end anyway. Correct?"
COMMISSIONER CONDON replied if it is blended together that is
correct.
CO-CHAIRMAN OGAN said, "If you send it down the pipeline un-blended
you'd have to put in a pig, you'd have to have storage facilities
built on--for the oil, you'd have to have storage facilities built
for the GTL, put in a pig and ship it down that way."
COMMISSIONER CONDON replied that is correct. Storage facilities
would have to be at both ends in order not to shut in the oil field
while shipping the GTLs.
CO-CHAIRMAN OGAN stated oil fields don't shut in very easily.
COMMISSIONER CONDON stated they aren't hard to shut in, but "your
not happy about it when you cash the checks at the end of the
month."
Number 510
JOHN SHIVELY, Commissioner, Department of Natural Resources, stated
the pipeline has run at about 2.2 million barrels a day. It is
running at 1.3 million barrels a day now. There was storage
capacity at Valdez for 2.2 million barrels when it was running at
that capacity, but they probably will have to be a redesigned. "My
opinion is that if they do this most likely they will ship it in
slugs. I mean that--it doesn't make a lot of sense to make a
basically pure product then mix it back in with crude, but the
technology to shipping slugs is not new. I mean it's done in other
places."
Number 518
REPRESENTATIVE GREEN said, "Would it be your--in your discussions
or maybe we should talk to one of the operators. would it be
significant enough through put if GTLs seem to be reasonable that
you could keep the slugging that you could go beyond whatever the
(indisc.--sneezing) number is and we've heard anything from two to
three (indisc.--coughing) barrels a day before the existing
pipeline just is not efficient enough to keep running, that by
batching you could run that down to a significantly lower oil
throughput thereby keeping the fields that are producing there
longer." Would batching allow us to extend the lives of the
fields? he asked.
COMMISSIONER SHIVELY replied, "Basically it's our feeling that in
order to have a project that would be economic, if the technology
changes, you'd process about two billion cubic feet a day which
would translate into about 200,000 barrels under current technology
and people don't know when the pipeline might shut down, the
300,000-barrels-a-day figure has--what has been used. So, yeah, it
could make a difference and as you know right now we're producing
up there about six to seven million cubic feet a day. It's about
two billion a day also for the LNG so, I mean, there is even under
existing resources plenty of resource to do both. And that doesn't
take into account the fact that I think most people believe that if
there were an outlet for the gas there's a lot of opportunity to
look for additional gas on the North Slope."
Number 547
REPRESENTATIVE BILL WILLIAMS asked Commissioner Condon whether the
bill is to create options to find out how to get the gas to the
marketplace economically.
COMMISSIONER CONDON replied, "Correct."
REPRESENTATIVE WILLIAMS asked Commissioner Condon whether somebody
in the administration follows the marketplace.
COMMISSIONER CONDON replied, "We certainly do."
REPRESENTATIVE WILLIAMS asked Commissioner Condon whether the
people who follow the marketplace always agree.
COMMISSIONER CONDON replied, "No."
REPRESENTATIVE WILLIAMS asked Commissioner Condon whether the state
would want to force itself into the marketplace if it wasn't
economical.
COMMISSIONER CONDON replied, "I don't think we would want to.
That's not to say we couldn't do it, but I think we'd have to spend
our own money. And I would hope that we wouldn't do that."
REPRESENTATIVE WILLIAMS asked Commissioner Condon whether the state
would want to close any options off, such as GTL or anything else,
in order to maximize the economics.
COMMISSIONER CONDON replied the purpose of the legislation is to
require the administration to come before the legislature with a
proposal to make stranded gas economical.
REPRESENTATIVE WILLIAMS asked Commissioner Condon how far out in
the future would the state know that the marketplace is ready for
GTL.
COMMISSIONER CONDON replied when there are deals in place to build
a project.
REPRESENTATIVE WILLIAMS asked Commissioner Condon to give a good
reason why the bill should have a sunset date.
COMMISSIONER CONDON replied the argument for a sunset date is to
create an incentive for people to make up their minds in regards to
the opportunities that may face the state right now.
REPRESENTATIVE WILLIAMS asked Commissioner Condon whether part of
an incentive today would be tax breaks.
COMMISSIONER CONDON replied there aren't any tax breaks now. The
bill calls for proposals and fiscal systems to be authorized by the
legislature. The argument for a cutoff date is to get people to
step forward and take advantage of the opportunity or to not take
advantage of the opportunity. If an opportunity is open ended
people may wait.
REPRESENTATIVE WILLIAMS asked Commissioner Condon whether the
market dictates whether an opportunity is open ended.
COMMISSIONER CONDON replied it is a judgement call.
REPRESENTATIVE WILLIAMS stated he realizes that the state wants to
get the gas to the market, show the industry that it is willing to
work with them, and make arrangements to be partners. He is
concerned about the sunset clause in the bill forcing private
industry into the marketplace, however.
Number 653
REPRESENTATIVE BARNES stated, if GTL is left in the bill, the state
will wait for a long-time for the major oil companies to step
forward to get the gas to the market. She asked Commissioner
Condon whether GTL would be economical, if all the state revenues
were given up - taxes, royalties, and etc.
COMMISSIONER CONDON replied, "I do not believe that."
REPRESENTATIVE BARNES asked Commissioner Condon why the language
should be included in the bill.
COMMISSIONER CONDON replied because, "I know that I don't know
everything."
REPRESENTATIVE BARNES said, "I'd like to say to you Commissioner
that none of us know everything. But a lot of times after dealing
with people over a long period of time, you get a real gut feeling
about what's going on, especially after you hear them tell stories
in two different perspectives depending on which side of the
comments that you're on, and then you begin to have this feeling
that all is not right in the world. You understand what I mean?"
COMMISSIONER CONDON replied, "I certainly do."
REPRESENTATIVE BARNES asked Commissioner Condon whether he would
have any real heartburn if GTL came out of the bill.
COMMISSIONER CONDON replied if GTL came out of the bill it would
not give him heartburn. The wise decision would be to leave it in,
however.
REPRESENTATIVE BARNES asked Commissioner Shively whether he would
have any real heartburn if GTL came out of the bill.
COMMISSIONER SHIVELY replied, "No." He said, "One of the reasons
that it is in here--even if it is not economic today that there is
a lot going on looking at technology which could change that. And,
you know it is a chance to market."
REPRESENTATIVE BARNES asked whether the administration could always
come back to the legislature for a new bill if GTL became viable.
COMMISSIONER SHIVELY replied, "Correct."
CO-CHAIRMAN OGAN announced the arrival of Representative Nicholia.
CO-CHAIRMAN HUDSON stated he has heard enough to believe that when
GTL is feasible and economical that the legislature would jump to
the opportunity. But, because of the unknown now, he would favor
removing it from the bill.
TAPE 98-41, SIDE B
Number 002
CO-CHAIRMAN HUDSON made a motion and asked unanimous consent to
insert a period after the word "tankers" on page 2, line 20; and
delete all the language after "tankers" on page 2, lines 20-25.
REPRESENTATIVE BARNES suggested taking out any reference to GTL in
the bill.
COMMISSIONER SHIVELY pointed out that a semicolon would go after
the word "tankers" not a period.
CO-CHAIRMAN HUDSON agreed with Commissioner Shively.
REPRESENTATIVE WILLIAMS objected. The bill is enabling
legislation. All options need to be looked at.
CO-CHAIRMAN OGAN stated that by amending language referring to GTL
out of the bill, he hopes that the industry doesn't see it as a
signal to looking into GTL. Certainly, LNG is a priority in the
short-term. If the sunset date remains in the bill, it is a moot
point anyway.
CO-CHAIRMAN OGAN announced the arrival of Representative Joule.
CO-CHAIRMAN OGAN explained the motion is to insert a semicolon
after the word "tankers" on page 2, line 20; and delete all the
language after "tankers" on page 2, lines 20-25.
CO-CHAIRMAN OGAN called for a roll call vote. Representatives
Barnes, Joule, Nicholia, and Williams voted against the motion.
Representatives Barnes, Masek and Hudson voted in favor of the
motion. Representative Ogan did not vote and called for a brief at
ease. Representatives Dyson and Green were not present to vote.
CO-CHAIRMAN OGAN called the meeting back to order.
CO-CHAIRMAN OGAN called for a second roll call vote.
Representatives Barnes, Dyson, Masek, Hudson and Ogan voted in
favor of the motion. Representatives Green, Joule, Nicholia and
Williams voted against the motion. The motion carried.
Number 175
REPRESENTATIVE BARNES stated Commissioners Condon and Shively have
answered her questions regarding the loss of GTL as it is converted
and the taxing regimes to her satisfaction.
Number 190
REPRESENTATIVE BARNES made a motion and asked unanimous consent to
move the proposed committee substitute for HB 393, version 0-
GH2006\Q, Glover, 4/1/98, as amended, from the committee with
individual recommendations and the attached fiscal note(s). There
being no objection, CSHB 393(RES) moved from the House Resources
Standing Committee.
ADJOURNMENT
Number 196
CO-CHAIRMAN OGAN adjourned the House Resources Standing Committee
meeting at 3:27 p.m.
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