Legislature(2023 - 2024)BARNES 124
04/03/2024 01:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| HB394 | |
| HB393 | |
| HB388 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 393 | TELECONFERENCED | |
| *+ | HB 394 | TELECONFERENCED | |
| += | HB 388 | TELECONFERENCED | |
| += | HB 359 | TELECONFERENCED | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
April 3, 2024
1:03 p.m.
DRAFT
MEMBERS PRESENT
Representative Tom McKay, Chair
Representative George Rauscher, Vice Chair
Representative Thomas Baker
Representative Kevin McCabe
Representative Dan Saddler
Representative Stanley Wright
Representative Jennie Armstrong
Representative Donna Mears
Representative Maxine Dibert
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE BILL NO. 394
"An Act relating to the Regulatory Commission of Alaska and
regulation of the service of natural gas storage and liquefied
natural gas import facilities; relating to records of the
Regulatory Commission of Alaska; relating to rates established
by the Regulatory Commission of Alaska; and providing for an
effective date."
- HEARD & HELD
HOUSE BILL NO. 393
"An Act relating to oil and gas leases and royalty shares; and
providing for an effective date."
- HEARD & HELD
HOUSE BILL NO. 388
"An Act relating to state loans for oil and gas projects in the
Cook Inlet sedimentary basin; relating to the Alaska Energy
Authority; relating to the Alaska Industrial Development and
Export Authority; and providing for an effective date."
- HEARD & HELD
HOUSE BILL NO. 359
"An Act relating to the permanent fund dividend and a one-time
permanent fund dividend payment and land voucher; and providing
for an effective date."
- SCHEDULED BUT NOT HEARD
PREVIOUS COMMITTEE ACTION
BILL: HB 394
SHORT TITLE: RCA REGULATE NATURAL GAS STORAGE FACILITY
SPONSOR(s): RESOURCES
03/20/24 (H) READ THE FIRST TIME - REFERRALS
03/20/24 (H) RES, L&C
04/01/24 (H) RES AT 1:00 PM BARNES 124
04/01/24 (H) <Bill Hearing Rescheduled to 04/03/24>
04/03/24 (H) RES AT 1:00 PM BARNES 124
BILL: HB 393
SHORT TITLE: COOK INLET/MIDDLE EARTH GAS ROYALTIES
SPONSOR(s): RESOURCES
03/18/24 (H) READ THE FIRST TIME - REFERRALS
03/18/24 (H) RES, FIN
04/01/24 (H) RES AT 1:00 PM BARNES 124
04/01/24 (H) <Bill Hearing Rescheduled to 04/03/24>
04/03/24 (H) RES AT 1:00 PM BARNES 124
BILL: HB 388
SHORT TITLE: COOK INLET RESERVE-BASED LENDING
SPONSOR(s): RESOURCES
02/26/24 (H) READ THE FIRST TIME - REFERRALS
02/26/24 (H) RES, ENE, FIN
02/28/24 (H) ENE REFERRAL REMOVED
03/06/24 (H) RES AT 1:00 PM BARNES 124
03/06/24 (H) <Bill Hearing Rescheduled to 03/11/24>
03/08/24 (H) RES AT 1:00 PM BARNES 124
03/08/24 (H) <Bill Hearing Canceled>
03/11/24 (H) RES AT 1:00 PM BARNES 124
03/11/24 (H) <Bill Hearing Canceled>
03/20/24 (H) RES AT 1:00 PM BARNES 124
03/20/24 (H) <Bill Hearing Canceled>
03/22/24 (H) RES AT 1:00 PM BARNES 124
03/22/24 (H) Heard & Held
03/22/24 (H) MINUTE(RES)
03/27/24 (H) RES AT 1:00 PM BARNES 124
03/27/24 (H) <Bill Hearing Canceled>
04/03/24 (H) RES AT 1:00 PM BARNES 124
WITNESS REGISTER
TREVOR JEPSEN, Staff
Representative Tom McKay
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: On behalf of the sponsor, the House
Resources Standing Committee, of which Representative McKay
served as chair, presented HB 394; introduced HB 393 with a
PowerPoint presentation; and presented the committee substitute
for HB 388.
BECKY ALVEY, Manager
Advisory Section
Regulatory Commission of Alaska
Anchorage, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation, titled
"House Bill 394: RCA Regulation of Gas Storage Facilities."
ROBERT DOYLE, Chair
Regulatory Commission of Alaska
Anchorage, Alaska
POSITION STATEMENT: Answered questions during the hearing on HB
394.
JOHN SIMS, President
Enstar Natural Gas
Anchorage, Alaska
POSITION STATEMENT: Answered questions during the hearing on HB
394.
DEREK NOTTINGHAM, Director
Division of Oil and Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Answered questions during the hearing on HB
394.
BRETT HUBER, Commissioner
Alaska Oil and Gas Conservation Commission
Anchorage, Alaska
POSITION STATEMENT: Made comments during the hearing on HB 394.
RANDY RUARO, Executive Director
Alaska Industrial Development and Export Authority
Anchorage, Alaska
POSITION STATEMENT: Answered questions on HB 393 and HB 388.
MARK DAVIS, Special Counsel
Alaska Industrial Development and Export Authority
Anchorage, Alaska
POSITION STATEMENT: Answered questions during the hearing on HB
388.
ACTION NARRATIVE
1:03:14 PM
CHAIR MCKAY called the House Resources Standing Committee
meeting to order at 1:03 p.m. Representatives Mears, Armstrong,
McCabe, Saddler, Dibert, Wright, Baker, Rauscher, and McCay were
present at the call to order.
HB 394-RCA REGULATE NATURAL GAS STORAGE FACILITY
1:04:36 PM
CHAIR MCKAY announced that the first order of business would be
HOUSE BILL NO. 394, "An Act relating to the Regulatory
Commission of Alaska and regulation of the service of natural
gas storage and liquefied natural gas import facilities;
relating to records of the Regulatory Commission of Alaska;
relating to rates established by the Regulatory Commission of
Alaska; and providing for an effective date."
1:05:08 PM
CHAIR MCKAY, on behalf of the sponsor, the House Resources
Standing Committee, on which he served as chair, presented the
sponsor statement for HB 394 [copy included in the committee
packet] which read as follows [original punctuation provided]:
HB 394 is aimed at enhancing the energy security of
Southcentral Alaska by providing a clear regulatory
framework for third-party natural gas storage. This
bill was designed to establish a regulatory framework
that not only encourages the expansion of natural gas
and liquefied natural gas (LNG) storage facilities but
also ensures these critical pieces of energy
infrastructure operate efficiently and remain
economically viable.
HB 394 provides for the Regulatory Commission of
Alaska (RCA) to have clear oversight authority over
natural gas and LNG storage facilities, which will
bring stability and predictability to the sector and
make it more attractive to operators and investors. HB
394 defines principles for the determination of just
and reasonable rates, ensuring that operation costs,
tax incentives, and the fair market value of storage
assets are all considered. This approach aims to
foster fair pricing practices that benefit both
consumers and businesses.
This bill also introduces measures to protect
sensitive financial information, mandating
confidentiality for certain records. This move strikes
a balance between protecting commercial sensitivities
and fulfilling the need for regulatory transparency.
Additionally, the bill recognizes the complexities of
state and federal regulations by exempting LNG import
facilities that are already regulated by the federal
government from state oversight.
HB 394 is a necessary piece of legislation if the
state of Alaska wants to see third-party gas storage
from the private sector. I urge my colleagues of the
33rd legislature to join me in supporting this bill
which represents a decisive step towards reinforcing
Southcentral Alaska's energy infrastructure and
ensuring the well-being of our state.
1:08:30 PM
TREVOR JEPSEN, Staff, Representative Tom McKay, Alaska State
Legislature, on behalf of the sponsor, the House Resources
Standing Committee, of which Representative McKay served as
chair, presented HB 394 via a PowerPoint presentation [hard copy
included in the committee packet]. He began on slide 2, stating
that HB 394 would address the regulations for the storage of
liquefied natural gas (LNG) and the Regulatory Commission of
Alaska (RCA). Considering the projected gas production
shortage, he stated that the proposed legislation was created to
encourage third-party gas storage in Cook Inlet. He stated that
currently Cook Inlet Natural Gas Storage Alaska (CINGSA) is the
only gas storage facility in Cook Inlet, of which Southcentral
Alaska is dependent. In order to increase storage volume, he
argued that the state needs to capitalize on the depleted
reservoirs in Cook Inlet for storage, and this storage would
need to be regulated in a manner to attract the private sector.
He noted the gas production issues CINGSA had during the winter,
as this brought attention to the need for more gas storage.
1:10:03 PM
MR. JEPSEN discussed the four depleted reservoirs in the state,
which are currently acting as active gas storage facilities, as
seen on slide 3. He listed the following: CINGSA, Kenai Gas
Pool 6, Pretty Creek, and Swanson River.
MR. JEPSEN moved to slide 4 and directed attention to the
graphic to explain gas storage in depleted reservoirs. He
defined the types of gas stored, as follows: cushion or pad gas,
working gas, and inventory gas. In an example, he pointed out
the amounts of each type of gas CINGSA maintains in a reservoir.
MR. JEPSEN moved to slide 5, which delineated the duties between
the three state organizations that engage in gas storage
activities. The organizations listed were Alaska Oil and Gas
Conservation Commission (AOGCC), Department of Natural Resources
(DNR), and RCA.
1:13:22 PM
MR. JEPSEN moved to slide 6, titled "HB 394 Overview," which
read as follows [original punctuation provided]:
• Clarifies the regulation of natural gas storage
operations liquified natural gas storage to the RCA
under Chapter 5 of Title 42
• Exempts LNG import facilities already regulated by
the Federal Energy Regulatory Commission (FERC)
• Clarifies that fair market value (FMV) costs related
to gas storage operations will be considered when
determining a just and reasonable rate under 42.05
• Creates confidentiality requirements related to
financial statements of entities providing gas storage
operations
1:15:04 PM
BECKY ALVEY, Manager, Advisory Section, Regulatory Commission of
Alaska, provided a PowerPoint presentation, titled "House Bill
394: RCA Regulation of Gas Storage Facilities," [hard copy
included in the committee packet]. On slide 2 through slide 4,
she discussed the changes that HB 394 would present to RCA. She
stated that the proposed legislation would require RCA to
regulate natural gas storage and LNG storage, including those
that are connected to a facility by a pipeline. The legislation
would also address the rates and costs of storing gas, classify
records as confidential, exempt some requirements concerning
pipeline facilities, and exempt LNG facilities that are under
the Federal Energy Regulatory Commission (FERC). She noted that
HB 394 would also amend some definitions.
MS. ALVEY moved to slide 5 and slide 6 and addressed the
potential impacts of the proposed legislation on RCA, which
include that RCA would need to process applications for instate
pipeline carriers with storage facilities, review and approve
tariff filings for these carriers, and implement terms and rates
for natural gas service. She continued that RCA would also need
to review and approve tariff filings for natural gas and
electric utilities that request cost recovery for using storage
facilities. She stated that application forms and regulations
may need to be revised and additional regulations may need to be
implemented on the cost recovery provisions. She added that new
regulations may be needed to address the confidentiality of
records.
1:19:31 PM
CHAIR MCKAY asked whether RCA is in support of HB 394.
1:19:56 PM
ROBERT DOYLE, Chair, Regulatory Commission of Alaska, answered
questions on HB 394. He expressed support for the proposed
legislation on behalf of himself. He added that RCA has not yet
voted on this; therefore, he is not speaking for the commission.
1:20:08 PM
REPRESENTATIVE SADDLER questioned how the role of the fair
market value of oil and gas fields would affect the setting of
rates.
COMMISSIONER DOYLE expressed the understanding that there would
need to be a level-playing field among all the storage
facilities, and to do this all the investments and depreciation
would need to be considered, as these are pieces of revenue
requirements. In terms of gas contracts that utilities are
signing, he said, RCA does not negotiate these; however, RCA
would review and approve them. He stated that the wellhead
price of natural gas would not be regulated, so the negotiations
would address this.
REPRESENTATIVE SADDLER questioned how the value of the gas
fields would be determined when they are contributing to
recoverable costs.
COMMISSIONER DOYLE provided an example with CINCA's two new
wells. He pointed out that there would need to be a reasonable
return on CINCA's investment, depreciation would need to be
determined, and the overall operating cost of the field would
need to be considered. He stated that this would all go through
a hearing process. He added that this would also depend on the
statute and regulations enacted from the proposed legislation.
REPRESENTATIVE SADDLER expressed the understanding that only
injection wells were used with the CINGSA example. He
questioned whether the proposed legislation would concern gas
fields currently producing gas, with the potential for storage
in a facility.
COMMISSIONER DOYLE expressed the understanding that BRU [Beluga
River Unit] is operated in a partnership, and it is an operating
field that is being considered for gas storage. He deferred to
DNR on whether an operating oil and gas field could be
segregated out for storage.
1:23:36 PM
CHAIR MCKAY clarified that BRU stands for "Beluga River Unit,"
and the two CINGSA wells in the example are producer wells, not
injector wells.
1:23:55 PM
REPRESENTATIVE MEARS pointed out the confidentiality part of HB
394 and the fact that RCA already deals with the financial
details of utilities throughout the state. She questioned how
this would be different from the confidentiality that already
exists within RCA.
COMMISSIONER DOYLE answered that RCA deals with confidentiality
issues frequently, but the proposed legislation would make this
a specific piece of the statute.
1:25:12 PM
MS. ALVEY added that the current statutes provide
confidentiality upon request. She stated that the proposed
legislation would make the pipeline records confidential
immediately. Otherwise, currently RCA's regulations provide
that records are public.
REPRESENTATIVE MEARS questioned whether having blanket
confidentiality for an entire regulated service would be
unusual.
MS. ALVEY stated that in regulation some items are already
deemed confidential; however, she expressed uncertainty on any
specifics. She expressed the understanding that having these
records confidential from the beginning would be different.
1:27:03 PM
REPRESENTATIVE BAKER questioned whether the proposed legislation
would affect any operations at Point Thomson, where gas
condensate is collected.
MR. JEPSEN responded that it would not affect Point Thomson, as
this area would still be regulated under the Trans-Alaska
Pipeline Authorization Act.
1:27:52 PM
REPRESENTATIVE SADDLER referenced slide 2 of RCA's presentation
and questioned the language concerning storage furnished by
facilities that are operated by pipeline carriers.
MR. JEPSEN responded that the proposed legislation would use the
same language as the Trans-Alaska Pipeline Authorization Act.
He explained that, per the proposed legislation, storage
facilities that are now regulated under this Act, including
those related to pipeline carriers would be regulated under RCA.
1:29:54 PM
REPRESENTATIVE MEARS expressed the understanding that FERC would
not be setting rates; therefore, there would not be an overlap
between RCA and FERC on imported LNG. She requested a
conversation on this. She questioned how the fair market rate
would be determined in a constrained market place.
COMMISSIONER DOYLE answered that, regardless of whether
production is coming from current fields or BRU, the negotiating
parties would set the negotiated agreements for LNG and the fair
market price, with a review by RCA. He reiterated that RCA's
role is not to negotiate; rather, it is to approve the final
rates charged by the utilities to the customers.
1:32:04 PM
JOHN SIMS, President, Enstar Natural Gas, answered questions
during the hearing on HB 394. He expressed the opinion that
what the entities would regulate is a good question. He
expressed the belief that the utility companies currently do not
know whether they would own the infrastructure, or the gas would
be bought at a determined rate. If it is a utility-type asset
where the services are purchased, he expressed the support for
RCA to be the regulatory body, and this is because of
transparency purposes; however, he expressed the opinion that it
would be too early to make a determination which entity should
regulate this.
1:33:54 PM
MR. JEPSEN addressed why the FERC regulation would be necessary.
He stated that FERC regulates plants participating in interstate
commerce with LNG. He stated that the carveout was put in the
proposed regulation because without it these plants would also
be regulated by RCA. He noted that double regulation is not
being sought.
1:35:09 PM
REPRESENTATIVE RAUSCHER pointed out that the bill would
"encourage" third-party gas storage. He questioned whether the
intention of the proposed bill would be to provide a framework
for utilities, as they understand that future gas storage would
be needed.
MR. JEPSEN expressed confusion by the question. However, per
the addressed language, he explained that the word "encourage"
was used so private sector companies would allow their storage
to be used for third-party gas storage. He added that if
legislation does not address this, private storage might not be
opened for use by utilities.
1:36:44 PM
CHAIR MCKAY expressed the understanding that HB 394 was not
written to impact CINGSA; rather, it would be asking the private
sector in Cook Inlet to provide additional storage so any future
shortages would be addressed.
1:37:18 PM
REPRESENTATIVE SADDLER questioned whether the proposed
legislation was written so storage facilities could accept
imported gas.
MR. JEPSEN responded that HB 394 would apply to local and
imported gas.
CHAIR MCKAY pointed out that this is important because the year
2030 would be the earliest that LNG could be imported;
therefore, the proposed bill looks to the future.
1:38:52 PM
MR. JEPSEN gave the sectional analysis for HB 394 [copy included
in the committee packet], which read as follows [original
punctuation provided]:
Sec. 1 Adds new subsections to AS 42.05.141 to include
the regulation of natural gas storage and liquefied
natural gas storage under the jurisdiction of the
Regulatory Commission of Alaska (RCA), including
storage facilities operated by a pipeline carrier or
part of a pipeline facility.
Sec. 2 Amends AS 42.05.381(k) to further specify cost
considerations for storing gas in a gas storage
facility or liquefied natural gas in a liquefied
natural gas storage facility in determining just and
reasonable rates.
Sec. 3 Provides a definition of "gas storage
facility".
Sec. 4 Adds a new section to AS 42.05 to address the
confidentiality of records related to the finances of
gas storage facilities, liquefied natural gas storage
facilities, or public utilities providing natural gas
storage services.
Sec. 5 Amends AS 42.05.711(q) to limit the exemption
from RCA gas storage regulatory authority to gas
storage associated with a North Slope natural gas
pipeline facility operated by a North Slope natural
gas pipeline carrier.
Sec. 6 Adds a new subsection to AS 42.05.711 to
specify an exemption from RCA gas storage regulatory
authority for liquefied natural gas import facilities
under the jurisdiction of the Federal Energy
Regulatory Commission (FERC).
Sec. 7 Adds new subsections to AS 42.06.140 to clarify
RCA regulation of natural gas and liquefied natural
gas storage under 42.05, including storage facilities
operated by a pipeline carrier or part of a pipeline
facility.
Sec. 8 Conforming language which adds a new subsection
to AS 42.06.370 to specify cost considerations related
to pipeline carriers in determining just and
reasonable rates.
Sec. 9 Amends AS 42.06.445(a) by adding the new
subsection (g) to the exceptions related to the public
inspection of records in the possession of the
commission.
Sec. 10 Adds a new subsection (g) to AS 42.06.445
which specifies the confidentiality of records held by
the commission related to the finances of pipeline
carriers.
Sec. 11 Conforming change repealing AS
42.05.990(10)(B) and AS 42.05.990(11)(B) which exempt
natural gas and liquefied natural gas storage which is
incidental to the production or sale of natural gas to
third-party customers from 42.05.
Sec. 12 Provides for an immediate effective date.
1:42:34 PM
REPRESENTATIVE MCCABE questioned whether the proposed
legislation would apply to carbon sequestration storage.
MR. JEPSEN expressed uncertainty, and he deferred the question
to DNR. He expressed the understanding that the storage would
need to be separated into natural gas or carbon sequestration.
REPRESENTATIVE MCCABE clarified that his question concerned
whether the incentives would be the same.
CHAIR MCKAY expressed the opinion that this would be impractical
because carbon dioxide is considered a waste product.
1:43:54 PM
DEREK NOTTINGHAM, Director, Division of Oil and Gas, Department
of Natural Resources, expressed the understanding that carbon
capture and sequestration would be separate, handled under
different regulatory authorities.
CHAIR MCKAY expressed agreement that carbon dioxide cannot be
stored in a natural gas well.
REPRESENTATIVE MCCABE interjected that he was not speaking about
putting carbon dioxide in a natural gas reservoir. He
questioned whether the natural gas sector would be given the
same incentives as companies storing carbon dioxide.
MR. JEPSEN explained that carbon sequestration would not be
economical without the federal government tax subsidy. He
stated that because third-party gas storage would be regulated
by RCA, with a fair market value, it would be economical. He
continued that carbon sequestration and gas storage would be
done by different processes, and he expressed uncertainty
concerning the comparative economics.
1:46:29 PM
CHAIR MCKAY stated that HB 394 would be setting up the
regulatory framework so gas can be stored on a temporary basis
for use during winter conditions. He stated that the only
economic component would be the sell of the gas. He pointed out
that there would be no tax breaks or discounts.
MR. SIMS concurred with Chair McKay.
1:48:14 PM
REPRESENTATIVE SADDLER questioned the difference between a
pipeline carrier and a pipeline facility.
MS. ALVEY answered that "pipeline facilities" is defined in
statute as all the facilities of the total system, while
pipeline carriers would reference the owners, including any
corporations.
1:51:02 PM
REPRESENTATIVE MEARS expressed support for HB 394 and spoke to
the importance of gas storage.
1:52:03 PM
MR. JEPSEN clarified that under HB 394 third-party gas storage
would be available to any utility company that wanted to
purchase the storage, not just Enstar Natural Gas.
1:52:39 PM
MR. SIMS reiterated the importance of having short-term, medium-
term, and long-term storage planning for utilities. He noted
that most of the language in the proposed legislation would be a
policy call.
1:53:11 PM
BRETT HUBER, Commissioner, Alaska Oil and Gas Conservation
Commission, stated that the commission currently regulates the
wells, whether producers or injectors. He expressed the
understanding that under HB 394 the commission would continue to
do this.
1:54:00 PM
CHAIR MCKAY stressed that this would create a tool for immediate
action that the legislature and the state government could take
to protect the Railbelt during the winter.
1:54:39 PM
CHAIR MCKAY opened public testimony on HB 394. After
ascertaining there was no one who wished to testify, he closed
public testimony.
CHAIR MCKAY announced that HB 394 was held over.
1:55:18 PM
The committee took an at-ease from 1:55 p.m. to 1:57 p.m.
HB 393-COOK INLET/MIDDLE EARTH GAS ROYALTIES
1:57:17 PM
CHAIR MCKAY announced that the next order of business would be
HOUSE BILL NO. 393, "An Act relating to oil and gas leases and
royalty shares; and providing for an effective date.
CHAIR MCKAY, on behalf of the sponsor, the House Resources
Standing Committee, of which he served as chair, presented the
sponsor statement for HB 393 [copy included in the committee
packet] which read as follows [original punctuation provided]:
In the coming years, Southcentral Alaska faces a
critical challenge: a projected shortage and ever-
increasing decline in Cook Inlet gas production. This
looming shortage poses a significant threat to the
energy security of our state, with the potential to
lead to drastic increases in energy prices for the
residents and businesses of Southcentral Alaska. The
prospect of diminishing in-state gas supplies and a
reliance on liquefied natural gas (LNG) imports not
only threatens our economic stability but also our way
of life.
Due to the nature of this issue, bold and decisive
action is required. HB 393 makes a significant change
to the Cook Inlet royalty structure based on the idea
that the Inlet is not attracting enough investment
dollars and activity for development and exploration
drilling. At this critical juncture, royalties on Cook
Inlet gas which decrease drilling activity, increase
the cost of gas, or lead to costly LNG imports
represent a tax on southcentral ratepayers in addition
to jeopardizing the energy security of our state.
This legislation seeks to address the anticipated gas
production shortfall by decreasing royalty rates on
new wells for gas used by Alaskans to 0%, with the
goal of fostering an environment which will lead to
increased drilling and exploration activities in the
Cook Inlet region. This bill also reduces the base
royalty on wells currently producing to 5%, which will
extend the life of those wells leading to more gas
production. HB 393 extends incentives to "middle
earth" and allows drilling and development costs to be
deducted against royalty burdens. The rationale behind
HB 393 is straightforward: by enhancing project
economics, we can attract more investment into natural
gas exploration and production. This increased
investment will not only mitigate the risk of a gas
shortage but also has the potential to stabilize
energy prices for Southcentral Alaskans.
HB 393 is an acknowledgment of the critical role that
affordable and reliable energy plays in our lives and
a recognition of the need for immediate action to
secure our energy future. I urge my colleagues in the
33rd Alaska State Legislature to join me in supporting
HB 393.
2:01:12 PM
TREVOR JEPSEN, Staff, Representative Tom McKay, Alaska State
Legislature, on behalf of the sponsor, the House Resources
Standing Committee, of which Representative McKay served as
chair, introduced HB 393 with a PowerPoint presentation, titled
HB 393 - Cook Inlet/Middle Earth Gas Royalties [hard copy
included in the committee packet]. He pointed out that the
graph on slide 2 shows the projected decline of gas production
in Cook Inlet in the coming decades. He noted that when this
low-cost gas supply disappears, the cost would be felt across
the entire state, not just Southcentral Alaska. He added that
this would take over 15 to 20 years to happen but could cause
such effects as the loss of population and higher government
costs. He expressed the opinion that royalty modifications
would be the most impactful tool, so it is crucial for the
legislature to pass the proposed legislation this session.
MR. JEPSEN moved to slide 3 and pointed out the results of
polls, which show there is a high level of Southcentral support
for the state to utilize incentives to private companies and
utilities for the purpose of identifying and pursuing projects,
as this would ensure energy deliverability. He added that this
would be gas produced in Alaska for Alaskans. He pointed out
that there is also support to create incentives for oil and gas
companies to find and produce more Cook Inlet gas, and there is
a high percentage of the population opposed to importing natural
gas.
MR. JEPSEN moved to slide 4, which provided background on Cook
Inlet gas reserves. He pointed out that the slide shows a
hypothetical to help understand gas volume and production prices
going forward. He stated that the graph shows that easily
accessible gas reserves are the least expensive, with cost
rising incrementally on the graph to undiscovered gas. He noted
that the cost of undiscovered gas would be comparable to the
cost of LNG imports. He argued that the proposed royalty
changes would lower the cost to the producers, which would in
turn lower consumer costs.
2:06:36 PM
MR. JEPSEN moved to slide 5 and stated that in evaluating energy
policy, the state should consider three factors. The first
factor is whether the policy should be short term or long term.
The second factor is the level of risk the state would take, as
importing LNG would be a higher cost with a lower risk. He
noted that forgoing royalties on new gas wells, as in the
proposed legislation, would be a higher risk option. He added
that this would be aimed at lower energy costs for residents.
The final consideration would be how policies interact and
complement each other. He expressed the opinion that HB 393
would work in conjunction with other committee bills to further
increase project economics, making investment in Cook Inlet more
attractive.
MR. JEPSEN moved to slide 6, which reviewed the potential fiscal
impacts of the proposed legislation to Alaskans. He pointed out
that the chart compares the cost resulting from the decrease of
Cook Inlet royalties with the cost increase to ratepayers from
LNG imports. He noted that even if there is no change to
royalty relief, there is a projected decrease in Cook Inlet
royalties over the next few decades. He noted that the
Southcentral utility revenues represent ratepayers' costs. He
argued that if LNG is imported, there would be a large increase
to the ratepayers.
2:10:15 PM
MR. JEPSEN moved to slide 7 and discussed the royalty structure
modifications. Based on the current lack of interest in the
Cook Inlet sedimentary basin, he suggested that the market is
sending a message that the current tax and royalty structure is
not ideal. He stated that the rate of return on gas is much
lower than oil. He maintained that if royalties are reduced,
rates of return and the economics of projects would be boosted,
making projects more viable. He continued to address the
effects of reducing royalties in new and producing wells. He
stated that HB 393 would also not allow the assessment of
royalties until payout, which is the recuperation of costs for
oil and gas development in Cook Inlet in middle earth. He
suggested that this would allow costs to be recouped quicker,
and he acknowledged the time value of money.
MR. JEPSEN moved to slide 8 and provided an overview of HB 393.
The slide read as follows [original punctuation provided]:
•Changes royalty structure for Cook Inlet:
• 0% for gas produced from new wells drilled
starting in FY25
• 5% for oil produced from new wells drilled
starting FY25
• 5% on oil and gas produced from wells drilled
prior to FY25
•Capital expenditures associated with development of
oil or gas can be deducted from royalty burden;
Excludes North Slope
•Requires commissioner to enter into lease
negotiations to comply with these terms
2:13:32 PM
MR. JEPSEN moved to slide 9 and provided the sectional analysis
for HB 393, which read as follows [original punctuation
provided]:
Sec. 1 Amends AS 38.05.180(f) to allow an exception
for the new subsection (mm). Changes royalty structure
for Cook Inlet leases to 0% on gas and 5% on oil for
wells drilled after July 1st, 2024, and 5% on oil and
gas for wells drilled prior to July 1st, 2024.
2:13:42 PM
REPRESENTATIVE SADDLER questioned what the exception would be in
Section 1.
MR. JEPSEN responded that this has to do with the terms of the
oil and gas leases. It would require the commissioner to issue
oil and gas leases according to the subsection which changes the
lease terms.
REPRESENTATIVE SADDLER reiterated the question.
CHAIR MCKAY deferred the question until after the sectional
analysis.
2:15:11 PM
MR. JEPSEN continued with the sectional analysis, which read as
follows [original punctuation provided]:
Sec. 2 Adds a new subsection (mm) to AS 38.05.180,
stating that for leases issued for property in the
state excluding land north of 68 degrees North
latitude, the royalty share reserved to the state may
not exceed zero if the lessee is recovering costs
associated with development of oil or gas produced
from a well drilled on or after July 1, 2024.
Sec. 3 Adds uncodified law regarding transition to
comply with the changes in royalty rates which
requires the commissioner of natural resources to
enter into lease negotiations with a lessee holding a
lease issued before the effective date of this Act in
the Cook Inlet sedimentary basin to modify the lease
to meet the royalty rates required by AS
38.05.180(f)(7) and (mm).
Sec. 4 Provides for an effective date of July 1, 2024.
2:16:21 PM
DEREK NOTTINGHAM, Director, Division of Oil and Gas, Department
of Natural Resources (DNR), responded to Representative
Saddler's question. He expressed the belief that the exception
would be for new leases, as they would be exempted from the
minimum royalty of 12.5 percent.
2:17:04 PM
REPRESENTATIVE MEARS expressed the belief that HB 393 would be a
giveaway by the state, with no accountability or no promises of
new gas. She argued that there needs to be a justification on
how this would save consumers in utility rates, as this has not
been discussed.
CHAIR MCKAY expressed disagreement, stating, "I would not say
that we could ever promise anything." He continued that
legislation is often put forward to incentivize the private
sector, but what the private sector will do is not guaranteed.
He asked Mr. Jepsen to discuss what could possibly happen if
energy rates were to double or triple at the raw material end of
the supply chain.
2:18:54 PM
MR. JEPSEN stated that the example on [slide 6] is a rough
calculation using the information on royalty revenues to the
state and revenues to Southcentral utilities. He suggested that
if there is a doubling in price for utility gas heat and
electricity, this would be a straight pass to the consumer
rates, which would then likely double. He expressed agreement
that there would be no guarantees and there would be risks. He
stated that currently there is little interest in [developing
gas] in Cook Inlet and changing the royalty would be an effort
to bring in new gas producers. He maintained that this is an
idea and a tool the state has, but there would be no guarantees.
2:20:22 PM
REPRESENTATIVE SADDLER referenced past legislation that had "no
promises" for Cook Inlet, but it had worked. He discussed how
lowering the royalty share would make investment in Cook Inlet
more advantageous. He stated that this would be a policy call
"to see if we think the give is worth the get."
2:21:04 PM
CHAIR MCKAY expressed the opinion that Representative Mears's
question was "excellent." He stated that the conversation is
important because the free market has not been responding. He
pointed out that low-cost energy is essential for Alaska. He
discussed how there has been no interest in developing oil and
gas in Cook Inlet. He opined that the free market in Alaska is
unlike the Lower 48, as it is isolated. He stated that the oil
and gas field in Cook Inlet is very mature and "barely hanging
on." He reminded the committee of the projection that Alaska
would not be importing LNG for six more years. He reiterated
that the state is isolated and not connected to a real market.
He discussed the issue of the limited market for gas in the
Railbelt and urged the committee that the state should not wait
for the free market to take care of the situation, as the state
has very few levers, and addressing royalties is one of these
levers.
2:25:14 PM
The committee took an at-ease from 2:25 p.m. to 2:26 p.m.
2:26:42 PM
REPRESENTATIVE SADDLER pointed out that the fiscal note is
indeterminate, and he questioned whether there would be
additional [staff needed] for analysis and accounting functions.
2:27:34 PM
MR. NOTTINGHAM expressed the belief that DNR already has the
staff to do the accounting functions. He added that these
functions would be similar to other duties that staff already
performs. He stated that the indeterminate fiscal note has
nothing to do with staff, rather; it is more to do with the
uncertain outcomes of the proposed legislation.
2:28:42 PM
REPRESENTATIVE MEARS, referencing her previous question, stated
that there are many unanswered questions on the potential
impacts to utility companies. She argued that a rough estimate
[on the effects of cutting royalties] is insufficient when
discussing the potential impacts to consumers.
CHAIR MCKAY countered that there would be a significant impact
if energy prices increased dramatically.
REPRESENTATIVE MCCABE opined that the free market is not present
in the state because of taxes and the government. He suggested
that taking away the taxes could possibly increase the
availability of gas. He said, "Gas is going away, that's a
fact." He suggested that the proposed legislation's impact
would be the availability of gas, even if there is an increase
in price, but this would be up to economics and gas as a finite
resource. He argued that HB 393 would incentivize the gas
industry to come to Alaska, so consumers would not be effected,
as the consumers will be effected [with higher rates] soon.
2:30:52 PM
CHAIR MCKAY opened public testimony on HB 393. After
ascertaining there was no one who wished to testify, he closed
public testimony.
2:31:16 PM
MR. JEPSEN followed-up on Representative Mear's concern on "give
aways," arguing that with the projections, there would be no
Cook Inlet royalty money within 10 to 15 years.
2:31:42 PM
REPRESENTATIVE SADDLER questioned whether there has been any
research on how production is effected by a change in royalties.
MR. NOTTINGHAM expressed uncertainty on any studies. He stated
that there is literature that suggests royalty reduction would
incentive new activity and new oil and gas production. He
stated that he would follow up on this with the committee.
2:33:22 PM
CHAIR MCKAY announced that HB 393 was held over.
HB 388-COOK INLET RESERVE-BASED LENDING
[Contains discussion of HB 393.]
2:33:27 PM
CHAIR MCKAY announced that the final order of business would be
HOUSE BILL NO. 388, "An Act relating to state loans for oil and
gas projects in the Cook Inlet sedimentary basin; relating to
the Alaska Energy Authority; relating to the Alaska Industrial
Development and Export Authority; and providing for an effective
date." [Before the committee, adopted on 3/22/24, was the
proposed committee substitute (CS) for HB 388.]
2:33:42 PM
The committee took a brief at-ease.
2:34:26 PM
REPRESENTATIVE RAUSCHER made a motion and corrected the motion
following the upcoming at-ease.
2:35:03 PM
The committee took a brief at-ease.
2:35:57 PM
REPRESENTATIVE RAUSCHER moved to adopt the proposed CS for HB
388, Version 33-LS1237\R, Nauman, 3/30/24, ("Version R") as a
working document. There being no objection, Version R was
before the committee.
2:36:41 PM
TREVOR JEPSEN, Staff, Representative Tom McKay, Alaska State
Legislature, on behalf of the sponsor, the House Resources
Standing Committee, on which Representative McKay served as
chair, presented the summary of changes for Version R of HB 388
[copy included in the committee packet], which read as follows
[original punctuation provided]:
Sec. 1 New section which conforms the Cook Inlet
reserve-based lending fund to current AIDEA dividend
policy.
Sec. 2 New section which allows the creation of
subsidiaries under AIDEA to handle reserve-based
lending projects.
Sec. 3 Amends section 1 of 33-LS1237\U to remove the
projected rate of return and AIDEA recommendation on
whether to pursue projects from the reporting
requirements associated with reserve-based lending
projects identified by AIDEA. Adds a reporting
requirement on the amount necessary to be appropriated
by the legislature for projects.
Sec. 4 Amends section 2 of 33-LS1237\U to conform
44.88.850(a) with other AIDEA investment funds,
allowing flexibility regarding the transfer of funds
into and out of the account instead of designating the
fund consist solely of appropriations made by the
legislature. Adds an additional subsection (c) which
requires the authority to set the interest rate for
reserve-based loans and allows them to be less than
the cost of funds to the authority. Provides for a
definition of "cost of funds".
Sec. 5 Same as section 3 in 33-LS1237\U
Sec. 6 Same as section 4 in 33-LS1237\U
2:39:38 PM
CHAIR MCKAY stated that the proposed legislation would set up a
fund within the Alaska Industrial Development and Export
Authority (AIDEA) to invest in oil and gas development projects,
of which the legislature could incentivize.
MR. JEPSEN, in response to Chair McKay, stated that the intent
of HB 388 would be to set up a designated fund for Cook Inlet
reserve-based lending. He stated that the loans would be based
on the gas reserves in Cook Inlet, with the value of a specific
loan based on the size of the reservoir. He explained this in
more detail, stating that the high costs associated with big
development projects, along with the fact the gas cannot be sold
as needed, has hampered projects economically. He stated that
the proposed legislation was designed to set up the fund under
AIDEA to allow it to invest in Cook Inlet gas projects. He
further discussed the economics of the proposed legislation.
CHAIR MCKAY added that Version R would not direct the state to
appropriate money; it would only set up the regulatory framework
for this to happen if the legislature decides to proceed with
projects. He stated that AIDEA would then be allowed to manage
the investment.
MR. JEPSEN concurred. He added that there is a reporting
requirement on the bill, so AIDEA would report back to the
legislature on prospective projects.
2:42:58 PM
RANDY RUARO, Executive Director, Alaska Industrial Development
and Export Authority, answered questions during the hearing on
HB 388. In response to a question from Representative McCabe,
he estimated that there are 200 billion cubic feet (BCF) of
crude reserves in [the Cosmopolitan Oil and Gas Field].
REPRESENTATIVE MCCABE questioned the amount of proven reserves
in Cook Inlet.
MR. JEPSEN responded that, per the Department of Natural
Resources (DNR), there are 800 BCF of proven reserves in Cook
Inlet, which equals around 10 years of supply.
REPRESENTATIVE MCCABE suggested that HB 388 and [HB 393] would
create tools to go forward. He stated that [HB 393] would
provide an incentive for investors, while HB 388 would create a
loan program. He suggested that these pieces of legislation
would incentivize the free market to find more gas for the
energy needs in Southcentral.
MR. JEPSEN concurred that these House Resources Standing
Committee Bills would work together to provide an alternate
pathway and improve project economics.
CHAIR MCKAY interjected that HB 388 would not create a tax
credit, but companies would pay back AIDEA. He requested that
Mr. Ruaro comment on this.
2:46:33 PM
MR. RUARO explained that AIDEA has broad authority. He
explained that previous legislation has been passed giving AIDEA
specific authority to provide investments and loans. He stated
that AIDEA supports Version R, as it would provide a tool to do
this.
REPRESENTATIVE SADDLER questioned the contradiction in funding
between the Alaska Energy Authority (AEA) and AIDEA in the two
fiscal notes.
MR. RUARO answered that the fund would be established in AIDEA.
REPRESENTATIVE SADDLER suggested that the fiscal note provided
by AEA be changed.
MR. JEPSEN interjected that this fiscal note would be removed
once Version R passes from committee.
2:48:35 PM
REPRESENTATIVE SADDLER expressed the understanding that Version
R would first create a reserve-based lending fund in AIDEA, and
then the legislature would capitalize this with an
appropriation. He continued that AIDEA would then lend the
money to finance production. He questioned whether oil and gas
reserves would be the collateral for the loans.
MR. RUARO answered that this would be a form of credit AIDEA
could take; however, Version R would not limit AIDEA to only
this collateral. In response to a follow-up question, he stated
that 25 percent of the fund would pay the AIDEA dividend. He
explained that this would conform with other AIDEA programs. He
clarified that this would be from the net income of the fund,
not the net value of the fund.
2:50:59 PM
REPRESENTATIVE SADDLER requested an explanation on the
collateral and loan process.
2:51:08 PM
MARK DAVIS, Special Counsel, Alaska Industrial Development and
Export Authority, explained that this reserve-based lending
would be based on the reserve value of the well, which can be
monetized. In response to a follow-up question, he stated that
there would be other collateral taken, such as equipment a
company may own. He added that there would need to be assurance
that AIDEA would be paid back.
2:52:26 PM
REPRESENTATIVE MEARS pointed out that these loans may be
significantly larger than other loans AIDEA has provided, adding
that these loans would be less expensive. She questioned how
this would affect AIDEA's other projects in the state.
MR. RUARO expressed the understanding that Version R would not
require a below market interest rate; rather, this would be at
the discretion of AIDEA. He continued that individual decisions
on each application would be made.
2:53:32 PM
MR. DAVIS explained Interior Natural Gas Utility (IGU) loans, as
defined in the uncodified section of House Bill 105 [passed
during the Twenty-Ninth Alaska State Legislature]. In this
instance, the legislature directed AIDEA to make the loan lower
than the market rate, with some conditions; however, Version R
would not do this. He stated that the proposed legislation
would allow AIDEA to see the reserves as collateral rather than
only using the cash flow. He noted that in startup situations
often the cash flow is less than the value of the company, so
the proposed legislature would allow the reserves to hold the
value to secure the loan.
2:54:42 PM
REPRESENTATIVE MCCABE questioned whether AIDEA had paid back $11
million to the state general fund last year.
MR. RUARO responded in the affirmative.
2:54:59 PM
REPRESENTATIVE SADDLER questioned the size and scope of the
proposed loans.
MR. RUARO expressed uncertainty whether there would be a minimum
or maximum amount of the loans, as there are large and small
producers in Cook Inlet. In response to a follow-up question
concerning the largest investment AIDEA has made, he gave the
example of a $90 million loan and a $40 million loan.
2:56:16 PM
MR. DAVIS stated that another way of looking at this would be
the cost of drilling a well in Cook Inlet, and the last time
AIDEA provided a loan was for the Endeavor rig, which cost an
estimated $20 million.
2:56:52 PM
MR. JEPSEN provided the example that a new platform in Cook
Inlet would be $500 million. He expressed the opinion that
AIDEA would not be the sole funder of this.
MR. RUARO added that AIDEA is often not the only financing
entity involved.
MR. DAVIS interjected that a few years ago the Endeavor had cost
$144 million, with AIDEA's investment being $23 million, so
there were other partners.
2:57:44 PM
REPRESENTATIVE MCCABE referenced the $11 million that AIDEA paid
to the general fund and suggested that AIDEA is like a "state
bank," and the state is earning money from this.
MR. RUARO responded in the affirmative. He stated that AIDEA
has provided dividends to the state of around $500 million. He
noted that this is just a part of the net income.
2:58:44 PM
CHAIR MCKAY commented that, other than making a state-run oil
company, all avenues are being looked at to help Cook Inlet. He
pointed out that using the private sector is a benefit because
it "knows how to do this work."
2:59:29 PM
REPRESENTATIVE MEARS questioned whether the uniqueness of the
proposed program prohibits these types of loans to be issued
through existing programs in AIDEA.
MR. RUARO answered that AIDEA has a very broad discretion, but
the details and specificity helps "sharpen the tool in the
toolbox." He stated that it is not uncommon for the legislature
to provide specific tools. He expressed the opinion that AIDEA
could do this without the proposed legislation; however, having
specific definitions and details would be helpful.
3:00:44 PM
CHAIR MCKAY announced that HB 388 was held over.
3:00:54 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at [3:01]
p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB0394A.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 394 |
| HB 394 Sponsor Statement ver. A.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 394 |
| HB 394 Sectional Analysis ver. A.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 394 |
| HB 394 Presentation ver. A.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 394 |
| HB 394 Fiscal Note DCCED-RCA.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 394 |
| HB 394 RCA Presentation to HRES 4.3.24.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 394 |
| HB0393A.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 393 |
| HB 393 Sponsor Statement Version A.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 393 |
| HB 393 Sectional Analysis Version A.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 393 |
| HB 393 Presentation Version A.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 393 |
| HB 393 Fiscal Note #1 DNR-DOG.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 393 |
| HB 393 Fiscal Note #2 DOR-TAX.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 393 |
| CSHB 388(RES) LS-1237R Summary of Changes.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 388 |
| CSHB 388(RES) LS-1237R.pdf |
HRES 4/3/2024 1:00:00 PM |
HB 388 |