Legislature(2007 - 2008)SENATE FINANCE 532
04/23/2007 02:00 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB104 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 104 | TELECONFERENCED | |
| + | TELECONFERENCED |
MINUTES
SENATE FINANCE COMMITTEE
April 23, 2007
2:12 p.m.
CALL TO ORDER
Co-Chair Bert Stedman convened the meeting at approximately
2:12:55 PM.
PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice Chair
Senator Kim Elton
Senator Joe Thomas
Senator Fred Dyson
Senator Donny Olson
Also Attending: SENATOR GARY STEVENS; TOM IRWIN, Commissioner,
Department of Natural Resources; PAT GALVIN, Commissioner,
Department of Revenue; ANTONY SCOTT, Commercial Analyst,
Division of Oil and Gas, Department of Natural Resources.
Attending via Teleconference: There were no teleconference
participants.
SUMMARY INFORMATION
SB 104-NATURAL GAS PIPELINE PROJECT
The Committee heard a presentation from the Palin-Parnell
Administration. The bill was held in Committee.
2:13:08 PM
SENATE BILL NO. 104
"An Act relating to the Alaska Gasline Inducement Act;
establishing the Alaska Gasline Inducement Act matching
contribution fund; providing for an Alaska Gasline
Inducement Act coordinator; making conforming amendments;
and providing for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
2:13:17 PM
Co-Chair Stedman announced that the Committee would begin its
hearings on the Alaska Gasline Inducement Act (AGIA).
2:13:36 PM
TOM IRWIN, Commissioner, Department of Natural Resources
recognized and appreciated the efforts expended by the
Legislature thus far on AGIA.
Mr. Irwin stated that AGIA was "all about business", and
utilized a common practice in business. The bill defined what
the State would offer as inducements, and what would be required
of oil and gas producers who opted to participate in the
construction of a natural gas pipeline.
2:16:33 PM
Mr. Irwin informed that the Department of Natural Resources
estimated the identified gas reserves at approximately 250 to
260 trillion cubic feet. He voiced that the producers were not
in Alaska because they loved the State, but rather for business
and profit. He likened the oil and gas companies' responsibility
to their shareholders to the Administration's responsibility to
protect the interests of the people of Alaska. He stressed the
importance of access to gas reserves as a "must have" in the
AGIA process.
Mr. Irwin stated that the contract negotiated by former Governor
Murkowski resulted in the State being placed in a "highly
leveraged position". Mr. Irwin referenced comments made by
producers that indicated lack of support and motivation to
construct the gasline in a timely fashion. The previous contract
would have positioned the State in an "untenable" arrangement,
and the legislature appropriately refused to ratify the
contract.
2:19:26 PM
Mr. Irwin furthered that the rejected contract was incomplete.
The State should not be forced to concede its judicial,
legislative and administrative rights in exchange for a
commitment from producers to build a gasline, as the previous
contract proposed.
2:20:20 PM
Mr. Irwin discussed the methods by which the State could
progress on the construction of a gasline. He rejected the
notion that the State should modify the contract negotiated by
the Murkowski Administration, stating that the contract was "not
tweakable". Thus, the Palin Administration opted for the common
business practice of investing in its own project.
2:22:08 PM
Mr. Irwin continued that the $500 million offered as incentives
in AGIA represented the State's investment in the gasline. That
investment could potentially generate hundreds of billions of
dollars. He cautioned that the State should not advance a
closed, isolated basin. AGIA would provide Alaska with a fair,
open process.
2:23:45 PM
Mr. Irwin asserted that the State was not respected or trusted
by the oil and gas companies that were party to the previous
negotiations, which was another factor in the necessity of State
investment in the gasline project. He commented that little risk
was associated with AGIA, as it was a dollar-for-dollar
investment, and if a producer withdrew from the project the
State would retain the monies invested. The Request for Proposal
(RFP) process would allow business to compete fairly and
equitably.
2:25:23 PM
Mr. Irwin shared that companies trust in the Palin
Administration's commitment to a fair and open process. AGIA
would allow oil and gas companies to do business in a "safe
American environment", and he expected continued support of the
bill.
2:26:48 PM
Co-Chair Stedman requested the aforementioned quotes attributed
to oil and gas producers indicating their reluctance to build a
gasline.
Mr. Irwin would provide the documentation.
2:27:19 PM
PAT GALVIN, Commissioner, Department of Revenue, indicated he
would provide a "condensed summary" of SB 104 utilizing an
overhead and handout titled "The Palin-Parnell Administration
presents AGIA: The Alaska Gasline Inducement Act, Senate
Finance, 4/23/2007" [copy on file].
2:27:59 PM
Page 2
AGIA Overview
· Is a commercial vehicle that creates a competitive playing
field
· Provides a pipeline on Alaska's terms
· Is a transparent process, with transparent inducements.
Mr. Galvin summarized the page, noting that AGIA would allow gas
companies to make individual determinations of what was in their
organization's best interest.
2:29:26 PM
Page 3
Commercial Vehicle
· AGIA uses competitive bidding, not negotiation
· Successful bidding process requires AGIA's inducements
o Without inducements, no third-party bidders
o Without third-party bidders, state has no ability to
get a pipeline on its desired terms
Mr. Galvin overviewed this page.
2:30:35 PM
Page 4
Commercial Vehicle
AGIA's inducements:
· Midstream inducement of $500 million:
o Reduces licensee's project development risks,
especially an independent pipeline licensee
· Upstream tax and Royalty inducements:
o Coupled to the licensed midstream project to make
license more valuable, by
· Encouraging open season participation
· Ensuring that State will stick with its
licensed partner
· Requirement to obtain pipeline certificate reduces
overall project risks, improves state's strategic
position
Mr. Galvin highlighted the page, explaining that applications
from producers would include the portion of the $500 million
maximum that they were applying to receive. The upstream
incentives, including a ten-year tax "commitment" by the State,
were designed to encourage participation in a successful open
season.
2:34:29 PM
Page 5
A project on the State's Terms
· By creating a more competitive playing field, state can
specify some "must haves"
· State's "must haves" focus on its future:
o A pipeline sooner
o A competitive and vibrant oil and gas industry
o Jobs and careers, not only from the pipeline
itself, but also from a competitive oil patch
o Gas for Alaskans
Mr. Galvin spoke to the State's "must haves" under AGIA.
2:36:31 PM
Page 6
A project on the State's Terms
· State's "must haves" all obtained through pipeline tariff
and access terms that ensure a competitive oil and gas
industry
o Competitive oil and gas industry can flower if
pipeline ownership gives no upstream competitive
advantage
o Jobs and careers for Alaskans will be maximized by
ensuring a competitive upstream industry
o Cheap gas for Alaskans will be enjoyed if pipeline
regularly expands
Mr. Galvin summarized the page.
2:37:04 PM
Page 7
A project on the State's Terms
· A pipeline sooner
· Required minimum 70/30 debt/equity ratio ensures reasonable
base tariffs
· Expansion requirements ensure that gas found by any party
can access the pipeline
· Rolled-in rate requirements ensure that all parties have an
economic incentive to explore for gas, competition for oil
and gas, and all of Alaska's gas can get into the pipeline
Mr. Galvin reviewed the page, indicating that one of the primary
means for the State to receive revenue from the project was
through the "net-back" value on gas in the form of leases and
production taxes. This revenue stream depended on the market
price of gas, as well as the tariff levied on the gasline. The
tariff rate was dependent on the debt to equity ratio.
2:41:22 PM
ANTONY SCOTT, Commercial Analyst, Division of Oil and Gas,
Department of Natural Resources informed that he had been
involved in the development of a natural gas pipeline since
2003.
2:42:11 PM
Page 8
Gets a Pipeline Sooner
Losses to State for Each Year Delay
Discounted at 5% per Year
[Line graph depicting delays of one year, two years, and
three years in billions of dollars at sustained gas prices
between $3.50 and $10.50.]
Mr. Scott explained that there existed "real values" to the
State if the gasline progressed quickly, and conversely, there
would be losses due to delays. He exampled a benefit to the
State of $1.8 billion if a pipeline was completed one year
earlier than projected, at gas prices of $5.50.
2:44:03 PM
Page 9
Tariff and State Revenue Effects of Debt-Equity Structure
[Chart depicting the following:
Debt %: 80%
Equity %: 20%
Tariff: $1.47
Present Value State Revenue $ Billions: 37.4
Debt %: 75%
Equity %: 25%
Tariff: $1.56
Present Value State Revenue $ Billions: 36.9
Debt %: 70%
Equity %: 30%
Tariff: $1.65
Present Value State Revenue $ Billions: 36.3
Debt %: 65%
Equity %: 35%
Tariff: $1.74
Present Value State Revenue $ Billions: 35.7
Debt %: 60%
Equity %: 40%
Tariff: $1.84
Present Value State Revenue $ Billions: 35.1
Debt %: 55%
Equity %: 45%
Tariff: $1.95
Present Value State Revenue $ Billions: 34.5
Debt %: 50%
Equity %: 50%
Tariff: $2.06
Present Value State Revenue $ Billions: 33.8
Debt %: 45%
Equity %: 55%
Tariff: $2.18
Present Value State Revenue $ Billions: 33.1]
AGIA protects the states interest in low tariffs. It
ensures that no less than 70/30 will be used rather than
50/50, with associated tariff benefits of 41 cents and
state revenue benefits of $2.5 billion.
Mr. Scott spoke to the examples on the page, and communicated
that the debt-to-equity structure was an important factor in the
tariff calculation due to the fact that debt is less expensive
than equity. The proportion of debt to equity would therefore be
a significant consideration in the overall cost of the project.
2:47:38 PM
Page 10
Expansion Provisions Cost-of-Delay to Explorer
Expected Net Present Value (NPV 12)
Generic North Slope Prospect
[Bar graph depicting expected negative net present value in
millions of dollars for each year of delay to first-
production. For example, a two year delay would result in a
net present value of negative $8.7 million. A five year
delay would result in a net present value of negative $23.1
million.]
Mr. Scott noted that AGIA required expansion of the pipeline in
an "engineering increment" as more gas was extracted. The
pipeline capacity would be expanded within the basic design of
the project, by increasing compression or "looping" using the
same pipe size. He set forth that the 2004 enabling federal
legislation for the project provided the Federal Energy
Regulatory Commission (FERC) the unprecedented authority to
order an expansion of the pipeline. The process to request an
expansion through FERC would cost a producer "dozens of millions
of dollars," and would likely result in extended litigation.
2:52:03 PM
Page 11
FERC Lower 48 Expansion rate policy
[Bar graph depicting Lower-48 FERC policy, Original (2016)
Shippers' Rates, Lower-48 FERC policy, 1st Expansion (2018)
Shippers' Rates, Lower-48 FERC policy, 2nd Expansion (2021)
Shippers' Rates, and Lower-48 FERC policy, 3rd Expansion
(2023) Shippers' Rates for the years 2016 through 2026.]
Mr. Scott overviewed the page, detailing the effects of
expansion on shipping rates in the contiguous United States. He
opined that the type of policy exampled would discourage
expansion of the pipeline to full compression.
2:55:03 PM
Page 12
AGIA Expansion rate policy
[Bar graph depicting Lower-48 FERC policy, Original (2016)
Shippers' Rates, Lower-48 FERC policy, 1st Expansion (2018)
Shippers' Rates, Lower-48 FERC policy, 2nd Expansion (2021)
Shippers' Rates, Lower-48 FERC policy, 3rd Expansion (2023)
Shippers' Rates, and AGIA policy for the years 2016 through
2026.]
Mr. Scott contrasted the AGIA policy to the previous FERC
example, commenting that rolled-in rates as provided for in AGIA
would provide more incentive for pipeline expansion.
2:56:11 PM
Page 13
Rolled-in Rates Encourage Exploration
Examples:
Scenario 1:
Add 1 Bcf/day with compression (from 4.5 to 5.5 Bcf/day)
Rolled-in: $6.0 million
Incremental: $6.5 million
Scenario 2:
Add 1 Bcf/day with compression (from 5.5 to 6.5 Bcf/day)
Rolled-in: $4.3 million
Incremental: -$5.4 million
Scenario 3:
Add 700 MMcf/day with looping (from 6.8 to 7.5 Bcf/day)
Rolled-in: $.9 million
Incremental: -$25.5 million
Mr. Scott addressed the comparisons of rolled-in rates and
incremental rates illustrated on this page. He summarized that
rolled-in rates made additional gas prospects more profitable
and thus encouraged exploration.
2:58:38 PM
Page 14
Transparent Public policy
· AGIA creates a competitive process, not a negotiated
process
· Bids will be submitted, commented upon by the public, and
evaluated
· A winner will be chosen by the Commissioners
· The Commissioners' decision will be reviewed by the
Legislature
M. Galvin reviewed the "transparency" of AGIA. The initial
request for applications would be made July 1, 2007 with a due
date of October 1. The public comment period would last 60 days,
and upon completion the commissioners would select a winning
application.
3:01:02 PM
Page 15
Transparent Public policy
· The value of AGIA's inducements are up front and
transparent
· Contrast: AGIA's $500 million versus SGDA contract $10
billion+
o Much of SGDA contract value was hidden and
unquantifiable
o AGIA's benefits are explicit and quantifiable
Mr. Galvin spoke to the information on this page.
3:02:11 PM
Page 16
Summary
· Without competition, and the forward movement that AGIA
provides, Alaskans will have to wait, and watch, until the
Producers do the pipeline on their timeline and on their
terms.
· AGIA changes the playing field.
· AGIA is a commercial vehicle that creates a competitive
playing field, provides a pipeline on Alaska's terms, in a
transparent manner.
Mr. Galvin highlighted this page.
3:04:09 PM
Co-Chair Stedman asked about the "breakdown" of the $10 billion
figure quoted on page 15. He also requested analysis of the
negotiation requirements under the Stranded Gas Act.
Mr. Galvin asked for clarification of the question.
Co-Chair Stedman reiterated his request for the Department's
interpretation of whether negotiations were to be held publicly
or in private under the Stranded Gas Act.
3:05:20 PM
Co-Chair Stedman referred to page 10, and asked for further
explanation regarding the cost of delay. It appeared that a one
year delay would cause the project to produce a negative net
present value, thus discouraging construction.
3:06:57 PM
Mr. Galvin explained that the slide was intended to represent a
generic North Slope prospect, and the impact of delay of
expansion under AGIA. The purpose of the example was to
demonstrate that the expectation of expansion by the explorer
would drive the decision of whether or not to drill an
exploratory well. The expansion provisions of AGIA would provide
assurance to the explorer, therefore encouraging exploration.
3:09:26 PM
Co-Chair Stedman assumed that in the event of a one year delay
an explorer would not continue, as the net present value would
be negative.
Mr. Galvin specified that without the expansion requirements in
AGIA a producer would have to consider the probability that a
FERC ordered expansion would occur, and factor in the likelihood
of a delay in the expansion. He suggested that the "must haves"
within AGIA would reduce that uncertainty, as the bill would
provide assurance that the pipeline would expand if gas was
discovered.
Co-Chair Stedman requested the supporting data used by the
Department to generate this example. He remarked that previous
information differed from the current example, and that he was
not convinced that a one year delay could turn a profitable
project into one with a negative value.
Mr. Galvin would provide the requested information.
3:11:38 PM
Mr. Scott explained that the delays referenced by Co-Chair
Stedman were assumed in the analysis. The representation spoke
to delays due to the FERC expansion process, which included
litigation and other major financial expenses in addition to the
delay.
3:13:43 PM
Co-Chair Stedman again requested the background analysis.
Mr. Scott asserted that the "downward trend was unmistakable,"
and would provide the information requested.
3:14:21 PM
Senator Huggins asked if the 70/30 tariff rate of $1.65 depicted
on page 9 was an actual projected rate.
3:14:57 PM
Mr. Scott responded that the $1.65 projection was based on a
scenario of a $20.5 billion project into Alberta, Canada with
particular financial assumptions.
Senator Huggins asked for the assumptions used in this
projection, as well as a projected tariff rate for a $30 billion
project.
Senator Huggins understood that the gas treatment plant was
excluded from this scenario.
Mr. Scott assumed that to be true, but would provide a
definitive answer.
Senator Huggins requested a projected scenario that included a
gas treatment plant, and asked that other examples in which the
treatment plant was excluded be reconsidered to determine the
impact of a treatment plant.
3:16:28 PM
Co-Chair Stedman repeated Senator Huggins' request.
3:16:53 PM
Senator Huggins referred to pages 11 and 12, and related the
listed dollar amounts to those on page 9. He asked if the
amounts were rounded for illustration.
Mr. Scott communicated that the differences in the projections
were due to the inclusion of a gas treatment plant in one
example but not the other. The consideration of the gas
treatment plant changed the value by approximately 40 cents. The
projection also analyzed construction costs at a level higher
than $20.5 billion, as the example accounted for subsequent
costs of expansion of the pipeline.
3:18:12 PM
Senator Huggins stated that comparisons could be made more
appropriately if the model used the same assumptions and
figures.
3:18:25 PM
Co-Chair Stedman requested "reconstituted" charts and consistent
application of a gas treatment plant inclusion or exclusion.
3:19:21 PM
Mr. Scott was "happy to do that". He reminded that the examples
provided were simply an attempt to illustrate for the committee
possible outcomes under AGIA. He could not predict the exact
final project, and was trying to explain the dynamics in
general.
3:20:23 PM
Co-Chair Stedman asked for symmetry amongst the slides, and told
that disclosure would assist the Committee in understanding the
materials.
3:20:33 PM
Co-Chair Hoffman appreciated acknowledgement of the State's
obligations to the citizens of Alaska. He shared that Governor
Palin intended to "turn dirt" in the summer of 2008, and pointed
to the claim on page 7 that AGIA would produce "a pipeline
sooner". He asked what provisions in the bill would contribute
to achieving those goals. He understood that current loan
guarantees would expire in the near future, and an increase in
the project cost could require a greater guarantee. He asked if
the Administration had requested an extension of the guarantees.
3:22:07 PM
Mr. Galvin replied that AGIA could expedite the erection of a
gas pipeline through the requirement of time commitments and the
establishment of competition. He recognized that the State and
the gas producers had different imperatives regarding the
production of North Slope gas, and expected that the competitive
environment fostered by AGIA could encourage progress on the gas
pipeline.
3:23:47 PM
Mr. Galvin was not aware of an expiration provision in the
federal loan guarantee. He explained that the timeline related
to the federal government's ability to take over the
construction of a pipeline project. He understood that AGIA had
the support of the federal government and would be allowed to
move forward under the auspices of the State. Retraction of the
federal loan guarantees was unlikely, but the value of such
guarantees may need to be amended as cost increases continued.
3:26:24 PM
Co-Chair Stedman asked for further information on the loan
guarantee.
3:26:34 PM
Mr. Irwin recounted a visit he and Mr. Galvin made to
Washington, D.C. to meet with FERC, the U.S. Department of
Energy, and a senior advisor to Vice President Dick Cheney.
During a presentation before FERC explaining the details of
AGIA, a FERC official exhibited great enthusiasm for the
project. Mr. Galvin attended meetings with FERC and reported its
support.
Mr. Irwin continued that he met with representatives of the
Department of Energy during the same visit and requested a
meeting with the Assistant Secretary. He was initially told that
the Assistant Secretary was unavailable on such short notice;
however, after giving the presentation on AGIA, Mr. Irwin was
granted a 15 minute meeting with the Assistant Secretary the
following day. The meeting with the Assistant Secretary lasted
approximately four hours and was characterized by eager support
of AGIA on the federal level.
3:29:26 PM
Co-Chair Hoffman recognized that the oil companies had
opportunities to invest outside of Alaska, but opined that the
tentative agreements negotiated with the previous administration
indicated the producers' willingness to invest in a State
gasline. He asked if Mr. Irwin concurred with that statement.
3:30:52 PM
Mr. Irwin did not agree with that position, citing that the
language governing the creation of a limited liability company
(LLC) had not been complete the previous year, and upon passage
of the Petroleum Profits Tax (PPT), an oil and gas producer
requested an additional one billion dollars before proceeding.
There currently existed an agreement in the form of a State
constitution delineating Alaska's ownership of the gas, and
leases held by the producers requiring them to develop the
product when it was "economic, not most economic".
3:32:33 PM
Co-Chair Hoffman pointed out that changes had occurred since
former Governor Murkowski began negotiations with the oil
companies and the "contentious time" that resulted in the
previous legislature's approval of higher tax rates under the
PPT legislation. He assumed that the higher tax rate rendered
the producers unwilling to commit to the construction of a
gasline, and asked if Mr. Irwin agreed that the oil and gas
companies would have signed a contract at Murkowski's lower
negotiated tax rates.
3:34:41 PM
Mr. Irwin responded that he could not speak for the oil
companies. He observed that the previous negotiation did not
produce a guarantee for an open season, did not result in define
"offtake rates" under the Alaska Oil and Gas Conservation
Commission (AOGCC), and failed to make progress in many other
facets of the project.
Mr. Irwin contended that "real differences" existed between the
oil and gas companies potentially involved in the project. One
company was investing and exploring extensively in Alaska, while
others were not as involved. The previous proposal contained a
"clear and convincing evidence" standard that the State must
meet in demonstrating that an oil company was not advancing the
project, which would have placed too much of a burden on the
State in arbitration proceedings. AGIA would provide the State a
different mechanism for constructing a pipeline by encouraging
investment in the project using common business practices. The
project would not be biased for producers or against the
construction of a pipeline. He expected the oil and gas
producers would object to AGIA due to their experiences with the
former administration.
3:38:15 PM
Senator Elton asked if the process was designed to license only
one entity, or if multiple entities could be licensed.
Mr. Galvin replied that one license would be issued by the State
and would allow the licensee access to the inducements under
AGIA. The Administration anticipated that the licensee could
build alignments or consortiums with other entities based on
mutual interests. Thus, one license would be issued, but
multiple companies could be involved.
3:40:08 PM
Senator Elton asked if additional business arrangements made
after the issuance of the initial license would require the
licensee to return to the State for approval or accommodation of
the arrangement.
Mr. Galvin affirmed, noting that the commissioners would have to
approve any assignment of interests under the license.
Senator Elton assumed that the decision would be made by the
Executive Branch.
Mr. Galvin affirmed.
3:40:58 PM
Senator Thomas described the oil producer-constructed Trans
Alaska Pipeline System (TAPS) as "tremendously profitable", and
pointed out that AGIA would create an opportunity for a party
not invested in oil and gas exploration to compete to build the
gas pipeline. The State was "in a pickle" to identify new
revenue sources due to waning oil production, and the producers
had an incentive to delay construction of a gasline to leverage
the State in negotiations. He asked how AGIA could assist the
State in the erection of a gasline.
3:42:59 PM
Mr. Galvin agreed that time was not "on the side" of the State,
and as time progressed the State would become more exposed
financially, and could be forced to accept less attractive
terms. AGIA recognized the situation and attempted to change
that position.
Mr. Galvin spoke to the second piece of the question, the value
of an integrated project. The business structure associated with
TAPS allowed the oil industry to add value to its investment.
That integrated system was currently involved in litigation
regarding tariffs and other aspects, and had been examined as it
related to the gasline. The alternative to an integrated
pipeline was one that was built by a company that specialized
solely in pipeline construction and was not a producer-shipper
of gas. AGIA addressed both the time constraint concerns and the
integrated ownership concerns.
3:47:16 PM
Co-Chair Stedman assumed that the Department would prepare a
timeline depicting optimistic and pessimistic AGIA outcomes to
overlay with the fiscal position of State to illustrate to
Committee members the potential impact of the proposed
legislation.
Mr. Galvin affirmed.
3:48:03 PM
Mr. Irwin commented that Senator Thomas' and Senator Elton's
questions related to one another. While the State was in a time-
sensitive position, significant gas potential existed within the
State. The State had selected one route, but should not exclude
one route over another in a long-term projection.
3:49:17 PM
Co-Chair Stedman announced that the Committee would begin a
sectional analysis of the bill at the following hearing.
ADJOURNMENT
Co-Chair Bert Stedman adjourned the meeting at 3:50:49 PM
| Document Name | Date/Time | Subjects |
|---|