Legislature(2007 - 2008)Anch LIO, Rm 220
06/25/2008 09:00 AM Senate JUDICIARY
| Audio | Topic |
|---|---|
| Start | |
| Agia Issues | |
| In-state Demand and Agia's 500 Mmcf/d ‘competing Project' Limit | |
| Agia Project Assurances - Treble Damages | |
| In-state Demand and Agia's 500 Mmcf/d ‘competing Project' Limit | |
| Agia Project Assurances - Treble Damages | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
SENATE JUDICIARY STANDING COMMITTEE
ANCHORAGE LIO
June 25, 2008
9:06 a.m.
MEMBERS PRESENT
Senator Hollis French, Chair
Senator Charlie Huggins, Vice Chair
Senator Bill Wielechowski
Senator Gene Therriault
MEMBERS ABSENT
Senator Lesil McGuire
OTHER LEGISLATORS PRESENT
Senator Kim Elton
Senator Tom Wagoner
Representative Jay Ramras
Representative Bob Lynn
Representative Lindsey Holmes
Representative Mike Kelly - via teleconference
COMMITTEE CALENDAR
AGIA Issues
PREVIOUS COMMITTEE ACTION
No previous action to record.
WITNESS REGISTER
DONALD M. BULLOCK JR., Attorney
Legislative Legal and Research Services
Legislative Affairs Agency
Juneau, AK
POSITION STATEMENT: Provided information related to treble
damages provision in AGIA license.
PATRICK GALVIN, Commissioner
Department of Revenue
Juneau, AK
POSITION STATEMENT: Delivered a PowerPoint presentation.
ANTONY SCOTT, PhD, Commercial Analyst
Division of Oil and Gas
Department of Natural Resources
Juneau, AK
POSITION STATEMENT: Delivered a PowerPoint presentation.
ACTION NARRATIVE
CHAIR HOLLIS FRENCH called the Senate Judiciary Standing
Committee meeting to order at 9:06:17 AM. Present at the call to
order were Senator Huggins, Senator Wielechowski, and Chair
French. Senator Therriault arrived soon thereafter and Senator
McGuire arrived during the course of the meeting. Other
legislators present when the hearing began included Senator
Elton, Representative Holmes, and Representative Coghill. All
legislators had been invited to attend.
^AGIA ISSUES
CHAIR FRENCH said the hearing today is about in-state gas and
treble damages. The reason for the hearing is that as
legislators began to explore the AGIA license, questions arose
about what they could and could not do with respect to state
assistance for in-state gas use. Given that there won't be any
gas flowing in the big pipe for 10 years or more, it seems very
important to address the issue because between now and then
there will be a great deal of pressure exerted on legislators to
do something. "And I believe we should do something as far as
encouraging and implementing the use of in-state gas - probably
from the North Slope." He studied the statute for some time this
morning and he wants to hear from legislative legal and the
administration and then ask Trans Canada to comment when the
time comes. That way we'll find out if we're all on the same
page, he said.
CHAIR FRENCH noted that Representative Ramras had joined the
hearing.
9:08:22 AM
CHAIR FRENCH highlighted the documents before the committee:
· Legal Services opinion dated June 24, 2008 by Mr. Bullock.
· Memorandum by Bonnie Harris and Lesa Weissler.
· Three opinions about treble damages and competing projects.
· Legal opinion about the constitutionality of a lower tax
rate for in-state gas.
CHAIR FRENCH said he'd like Mr. Bullock to walk through the memo
he prepared on 6/24/08. He's done excellent work laying out a
logical and clear analysis of AS 43.94.40 and other related
statutes, he added.
SENATOR Therriault joined the hearing.
DON BULLOCK, Attorney, Legislative Legal and Research Services,
Legislative Affairs Agency, explained that his approach was to
break the statute down into the elements and comment on each.
The statute begs several questions. The first asks how big the
project is and the second asks what the state is doing to
provide inducements for the project.
9:11:12 AM
MR. BULLOCK, referring to his memo, clarified that part of the
text that's not in the boxes is the statute itself and his
comments and other references are inside the boxes.
MR. BULLOCK said that the first phrase, "Except as otherwise
provided in this chapter," refers to whether there are other
exceptions to the assurances in the chapter. He said he didn't
find any. It seems that the only exceptions are within the
particular statutory section itself.
The next phrase says, "The state grants the licensee assurances
that the licensee has exclusive enjoyment of the inducements
provided under this chapter before the commencement of
commercial operations." The assurances are that this is part of
the consideration the state will give in return for a licensee
to come forward. "It's saying that I'm marrying you and I'm not
going to give some of the benefits to the mistress that comes
along." In AGIA those assurances generally are the $500 million
and the benefits of the gasline coordinator. The commencement of
commercial operations is the key date and it's defined in
statute. It means the first flow of gas in the project that
generates revenue to the owners. That's key because the
prohibition is against providing benefits before the other
pipeline goes into commercial operation. The approach is that
through AGIA the state is making a commitment to the licensee.
As will be seen later, the state can continue to consider
permits and other authorizations for a competing pipeline, but
the inducements can't be the same so as to encourage the second
project.
9:13:09 AM
MR. BULLOCK said the next phrase says, "If before the
commencement of commercial operations, the state extends to
another person preferential royalty or tax treatment." He opined
that this could be broader than just gives the treatment. In
other words, if the state were to advertize for another AGIA
kind of license for an in-state pipeline, could that be
interpreted as extending the benefits to another pipeline? It's
not clear and I don't know, he said. Also, the preferential
royalty or tax treatment is interesting because it goes to the
producers that commit during the first binding open season to
the licensee. The straightforward reading is that there's
preferential royalty or tax treatment that would be offered to
producers in exchange for committing to a new competing project.
But it could also be read broadly enough that the tax treatment
could go to the pipeline owner because pipelines are subject to
the oil and gas property tax. If there were a tax break under
the property tax to a competing gasline, that also could be
subject to interpretation to trigger the treble damages
provision.
9:15:11 AM
MR. BULLOCK said the next phrase says, "Or grant of state
money." Under AGIA the state is offering $500,000 as inducement
to the licensee. That phrase isn't defined so there's a question
as to how much money the state would have to dedicate to the
project. Also there's an issue of how much money would be used
to study the possible development of the project. Overall, he
suggested thinking of the damage provision in terms of this
being a contract the state has entered into with the licensee.
The state is offering $500,000 million for the consideration and
promises that it will be faithful to the licensee.
The next phrase is "For the purpose of facilitating the
construction." Whatever incentive or inducement is offered has
to be consistent with the purpose of facilitating the
construction. He suggested looking at what is given and the
purpose behind it. Determining the purpose of an inducement
presents an interesting burden of proof issue that he hasn't
resolved in his own mind. To avoid the penalty the state could
have the burden of proving that what was given wasn't for the
purpose of facilitating construction. It was for some other
purpose. Alternatively, to be entitled to the penalty the
licensee would have the burden of showing that the purpose of
whatever the state did was for the purpose of facilitating
construction. He said he isn't sure what the outcome of that
would be.
9:17:02 AM
CHAIR FRENCH noted that Representative Bob Lynn had joined the
hearing.
REPRESENTATIVE RAMRAS outlined the various potential needs for
in-state gas and asked if it would trigger treble damages if the
Governor or her representatives were to go to FERC or the U.S.
Department of Energy to get an expansion of the state's export
license.
CHAIR FRENCH noted that Senator McGuire had joined the hearing.
9:19:50 AM
MR. BULLOCK replied it relates to a competing natural gas
pipeline project, which is defined as having a throughput of
more than 500 MMcf/d of North Slope gas and the end of the
pipeline is in some market. The first issue is whether the
increased gas use amounts to 500 MMcf/d. If it doesn't the state
could do as it pleased. If the gas does add up to more that 500
MMcf/d, he said he doesn't think anything in the treble damages
provisions would thwart the state from setting alternatives.
That's what's happening in the AGIA review process, he said. The
Legislature is considering testimony from the Port Authority and
the Alaska Natural Gasline Development Authority about in-state
use. There isn't a license yet and he thinks it would be
possible for the state to continue to study alternatives. The
damage provision doesn't say do not have a pipeline and do not
give an inducement and money. It says don't do it unless you're
prepared to pay the price, which is treble damages. That's
ultimately a cost the state has to consider as it explores the
different alternatives.
REPRESENTATIVE RAMRAS asked if he's saying that the state would
be sacrificing some of its sovereign rights. If the consortium
of Anadarko, CIRI, ASRC and ENSTAR said it only makes economic
sense to have a pipeline that generates 600 MMcf/d, he asked if
the state would be disallowed from pursuing an expansion of the
export license to meet that demand without subjecting itself to
treble damages.
MR. BULLOCK replied it ultimately comes down to the cost of
different alternatives. Assuming that the throughput of the
competing project is more than 500 MMcf/d, the treble damages
provision would be triggered because it's a competing project.
The statute is limited with respect to what the state is giving,
but it's money and the benefit of a pipeline coordinator. The
pipeline coordinator job is to grease the skids for the favored
project so if a proposed licensee's application is to be
considered as well as a competing project, the coordinator could
say to work on the licensee's application first as a matter of
policy.
As far as soliciting support for an in-state project, that
raises the issue of whether there is going to be a violation of
the assurances in the future, he said. But until the competing
project is extended the actual inducement, the issue of treble
damages wouldn't arise.
CHAIR FRENCH highlighted that he did make an issue of the point
of whether the extension means the offer of help or the grant of
help.
MR. BULLOCK said the offer of help wouldn't arise until there
was a request for a proposal application where the state
outlined what it was extending if the applicant responded with
an acceptable project.
9:24:52 AM
SENATOR ELTON disagreed that this relinquishes sovereignty. The
contract provides that the state can exercise sovereignty, but
there's a cost. Referring to the bottom of page 1, he asked what
"extension" really means. For example, can the state offer help
to a statutorily competing line as soon as commercial operations
start on TransCanada?
MR. BULLOCK replied it's not clear but arguably there is a risk.
The form and substance issue, which arises particularly with
royalty and tax inducements, has to do with who is going to put
gas in competing pipelines. If the state does something that
causes a potential shipper to pause because there might be a
better project down the road, that is hindering what it intended
to do with the licensee, which is to encourage the licensee to
build the pipeline and shippers to put gas in that pipeline.
SENATOR ELTON asked if it would be an example of extending
assistance if a future governor were to say to a competing
pipeline that the state would do whatever it could to help. Or
would that be a comment with no meaning until a proposal is
presented to the Legislature, he asked.
MR. BULLOCK replied you'd first need to consider what assurances
are extended. It would become an issue of what has happened and
whether there has been an extension of assurances that complies
with the statutes. It's not black and white, not even the money.
The state gives up to $500 million to the licensee, but the
statute isn't clear whether or not giving $1 million to a
competing project to study would trigger the treble damages.
Also, if this is litigated the statute may be a guideline but
there may be some flexibility should the licensee want to give
up some of the damage receipts in exchange for some other
incentive. The TransCanada application did suggest they could
exercise the opportunity of providing larger capacity to Delta
Junction for feeding in-state use. That might imply that they
would be open to work with the state on giving more than 500
MMcf/day to in-state markets, he said.
9:28:52 AM
SENATOR McGUIRE how many places in the law he's seen treble
damages.
MR. BULLOCK acknowledged that it isn't common. The legislative
history of the provision indicates that the Legislature
approached this cautiously. The first bill that the Governor
introduced allowed reasonable costs to be the basis for treble
damages. As the legislation moved it became related to qualified
expenditures. It was offered as an assurance for a licensee to
come forward without having to worry that the state would change
its mind.
SENATOR McGUIRE asked if he sees anyplace where treble damages
would extend into personal liability. For example, if a
particular person within the government made extensions or
offers to help.
MR. BULLOCK said probably not, but it would depend on what the
person that makes the offer does and the power of that person to
obligate the state. Under AGIA the commissioners of revenue and
natural resources do have the power to act on behalf of the
state with regard to the licensee in the process. If they were
to act together and offer assurances that could trigger
liability for treble damages.
SENATOR McGUIRE asked what would happen in an instance where the
Legislature disagreed with the Governor and decided to put
forward a package itself. She asked if the Legislature would be
authorized to put forward something similar to the old China Gas
Development Act, for example.
MR. BULLOCK said the separation of powers issue would arise.
Under the Stranded Gas Act the Legislature authorized the
contracts that provided for payment of the tax, but the
administration actually has to carry it out. The focus would be
on executive action rather than legislative action because to
trigger the damages, the inducements and incentives have to be
offered for the purpose of facilitating the competing project.
Legislation itself wouldn't trigger the damages, he said.
9:32:33 AM
SENATOR McGUIRE said then she doesn't have to worry that if this
exclusive license is granted to TransCanada, that she would be
subjecting herself or the state to treble damages if she files a
bill next December that offers a package of inducements or
benefits under something similar to the old Stranded Gas
Development Act that might, for example, spur development on an
in-state gas pipeline
MR. BULLOCK replied he doesn't believe so. This is an assurance
with a penalty if the assurance is violated so there's a cost
attached to whatever you do. If the state actually offers the
inducements, the assurance has been violated. The damages would
be paid and the competing project could conceivably go forward.
Assuming TransCanada is awarded the license, they would get the
treble damages and then decide whether they wanted to pursue the
project or not.
MR. BULLOCK added that the first key date is during the first
binding open season when there's a commitment by the shippers.
At that point it's conceivably possible to avoid the issue of
shippers holding back from the licensee and waiting to see what
happens with a competing project. The second date would be
between the end of the first binding open season and the start
of commercial operations. That is the date when the state can do
whatever it wants to encourage a competing pipeline.
CHAIR FRENCH referred to his statement that upon payment of
treble damages TransCanada could decide if it wanted to
continue. He noted that page 4 of Mr. Bullock's analysis says
that upon payment of the treble damages, the licensee shall turn
back to the state basically everything it's done. He asked if
the payment of treble damages ends the project or if it simply
says that the data is transferred to the state making it a full-
information partner with TransCanada.
MR. BULLOCK clarified that his outline later on describes how
similar the provision for transfer of information under
abandonment of the project is to the treble damages provision.
The statute isn't clear as to whether they would continue, but
the implication is that they would no longer be bound by any
"must haves" in the AGIA license. Probably the best
interpretation is that this would end the AGIA license, but it
wouldn't preclude any entity from pursuing a pipeline project,
he said.
SENATOR WIELECHOWSKI asked when the treble damages would kick in
if there was inducement extended to build a 500 MMcf/d gas
pipeline project that had expansion capabilities.
MR. BULLOCK replied part of it depends on how you define a gas
pipeline project - whether it's defined by its initial capacity
or its expanded capacity. The answer isn't clear in this
section, he said. The state could offer inducements to a 490
MMcf/d pipeline that's expanded three years later. Looking back
the question is whether the state actually encouraged a larger
pipeline. The better resolution would be to look at the project
as initially proposed. Under the AGIA license we looked at the
initial capacity although there are terms providing for later
expansion. Now the proposal is treated as the size that
TransCanada is offering, he said.
9:38:11 AM
SENATOR WIELECHOWSKI asked, assuming that there were treble
damages, if the Legislature would have to appropriate them or if
TransCanada would automatically be entitled to them.
MR. BULLOCK explained that, as specifically addressed in AS
43.90.440, the Legislature has to appropriate them.
SENATOR WIELECHOWSKI questioned what would happen if the
Legislature refused to appropriate the treble damages.
MR. BULLOCK responded that's happened in the past in other court
cases. A lot of litigation is involved and at some time there's
a court order. Then the separation of powers issue arises
related to whether the Court can order the Legislature to
perform the legislative function of appropriating money.
SENATOR WIELECHOWSKI noted that Supreme Court case law in
employment arbitration cases has said that if the Legislature
doesn't appropriate the money, you don't get it. He assumes that
would be the same in this case.
MR. BULLOCK replied that's correct according to the language in
the statute.
REPRESENTATIVE HOLMES referred to the bottom of page 1 that
talks about extending to another person preferential royalty or
tax treatment. She asked if it would trigger the treble damages
clause if the Legislature were to amend some of the state's tax
structure related to gas and the changes applied equally to a
TransCanada line and a Denali line, for example.
MR. BULLOCK asked if she's asking about production taxes.
REPRESENTATIVE HOLMES replied that would be one area.
MR. BULLOCK explained that production taxes apply universally to
production regardless of where it ends up. If the tax rate was
adjusted for natural gas produced on the North Slope that would
apply to all the producers. There is a provision under ACES that
says that if there's some in-state use, then there's a tax
break. The problem with AGIA is that as written the inducement
is to provide royalty inducements and the tax benefits to
encourage commitment to a particular gasline. So if a
distinction was made in the production taxes to offer a similar
break from the nominal tax rate to commit gas to an in-state
project, then that becomes an inducement that violates the
assurances. A general affect of the tax change wouldn't affect
the licensee and it wouldn't affect an alternative project, but
if it specifically benefited the alternative competitive
project, that could be viewed as an inducement and would trigger
the damages.
REPRESENTATIVE HOLMES said then the changes would not be
precluded so long as it's even-handed.
MR. BULLOCK agreed. The burden of the production tax is on the
producers and it may be a factor when they're looking at
potential tariffs. Setting the tax rate is a policy decision,
but it could be the straw that kills the field if there's no
residual wellhead value.
9:42:37 AM
REPRESENTATIVE HOLMES noted that the Legislature did make
changes in ACES, including benefiting in-state gas, after AGIA
passed but before acceptance of the contract for the proposal.
She asked if he sees any problems for the state because those
changes were made after AGIA passed.
MR. BULLOCK said no, except to the extent that it affects the
general economics of gas production on the North Slope. It
doesn't relate directly to the license versus a competing
project, he said. The tax affect relates to the economics of the
production - what the tariff will be and whether there's
something at the wellhead after paying to get the gas to market.
If the producers don't own the pipeline, they're in a similar
position to the state - there has to be wellhead value to have
benefit. There's the possibility that the producers have
additional profit from a marketing outlet at the other end of
the pipeline, but the state can only get it at the wellhead, he
said. That's why there's interest in a low tariff, he added.
9:43:59 AM
CHAIR FRENCH referred to Mr. Bullock's legal opinion dated June
17, 2008 that suggests that a reduced tax on the production of
gas used in the state probably would be found to violate the
interstate commerce clause and likely would be struck down in
the future. Noting that most of the gas in this pipeline will
flow out of state, he said that will bring before the
Legislature the question of how to adjust taxation of in-state
gas. If the tax is adjusted subsequent to the award of a
licensee, he asked what implication that would have with respect
to having extended to another person preferential royalty or tax
treatment.
MR. BULLOCK clarified that the preferential benefit of selling
gas in-state goes to the producers and not to the pipeline. It
may affect the capacity of the pipelines because the producer
may want to deliver its gas into a market where it has a lower
production tax. It doesn't really affect the pipelines, but it
comes back to that hesitation of a shipper to commit to a
project. On the interstate commerce issue, he said that the flip
side of looking at a discount for in-state gas is that there's a
relatively higher tax imposed on gas production sent out of
state. That's where the interstate commerce issue is triggered,
he said.
CHAIR FRENCH agreed and added that the opinion suggests that the
tax rates for out-of-state gas and in-state gas will be set at
the same rate to satisfy requirements under the U.S.
Constitution.
MR. BULLOCK said that's likely to happen. In a number of cases
states have unacceptably attempted to impose lower tax rates on
commodities within the state compared to those in interstate
commerce. The Supreme Court made one exception, but the case was
tied to the state's internal financing and the options it could
exercise in that regard; it wasn't in a commercial situation.
9:47:11 AM
REPRESENTATIVE RAMRAS asked what the State of Alaska would be
precluded from doing with regard to assisting other entities
such as Denali or a small diameter pipeline, and what remedy
those entities would have if they thought they were being "slow
rolled" in the permitting process because they weren't getting
equal treatment and a fair equal allocation of resources
compared to the "favored project."
MR. BULLOCK cited AS 43.90.440(b) as follows:
(b) The review, processing, or facilitation of a
permit, right-of-way, or authorization by a state
agency in connection with a competing natural gas
pipeline project does not create an obligation on the
part of the state under this section.
Under this provision the normal application process would
continue to be available without triggering the treble damages,
he said. The problem is that one of the benefits to the licensee
is that the gasline coordinator is specifically tasked with
following the administrative process and expediting it. That
could be interpreted to mean that the licensee would have
priority if two competing applications were on the table for
natural resources for a particular permit, he said. Another
project has options to pursue under the Administrative
Procedures Act to encourage state action, but there is the issue
of whether there are enough resources within the permitting
agencies to handle both projects simultaneously. It might be a
fiscal note issue and the Legislature might respond by
increasing staffing at the agency. Thus the licensee would enjoy
an expedited process under AGIA and other applicants would have
access to the resources of the agency to facilitate processing
their applications. He identified that as an administrative law
question.
9:51:10 AM
REPRESENTATIVE RAMRAS noted that Commissioner Irwin admitted
that DNR is far behind in processing applications for land
disbursements to Alaskans. That raises the issue of what human
resources will be available within DNR to address permitting
issues and to offer assistance in the AGIA process. He asked
what kind of "choke hold" there will be on human resources
available for permitting for small diameter pipelines, the
Denali project, and the AGIA project and if competing lines
would go through the AGIA coordinator or directly to DNR.
9:53:27 AM
CHAIR FRENCH noted that Senator Olson and Representative Johnson
had joined the hearing.
PATRICK GALVIN, Commissioner, Department of Revenue, said the
question of allocation of resources to make sure there's
adequate staff is associated with any project that's going
forward.
REPRESENTATIVE RAMRAS asked if he's talking about the allocation
of resources within DNR.
COMMISSIONER GALVIN clarified that he's talking about the
allocation of resources for the entire state permitting process.
It's a question that goes across lines because the slowest
permit will always be the one that slows the project. He
explained that on a large project the normal course of business
is to execute a reimbursable services agreement (RSA) with the
state. That is the most direct vehicle for a project to ensure
that resources are available within the agencies to assure
expedited consideration of their permits. This is something
that's done all the time and discussions are already underway to
execute an RSA for the Denali project. Depending on the nature
of the agreement, there could be a coordinator position that
would be funded by the applicant to act as a coordinator of the
state permitting processes and also as a liaison with the
federal permitting process. Through that process the applicant
would be able to fund positions within any of the departments
that required permits and to secure sufficient capacity to
expedite the process as quickly as the agency could allocate. To
the extent that the RSA doesn't cover it, the agencies are able
to ask the Legislature for additional resources and target the
particular projects or permits that need additional funding.
9:56:51 AM
REPRESENTATIVE COGHILL asked for clarification that a competing
project could go to the department and get the resources
available, and the state is providing that coordinator for the
selected licensee.
CHAIR FRENCH noted for the record that Commissioner Galvin
nodded his head in an affirmative fashion.
SENATOR McGUIRE remarked that it's being represented that the
treble damages clause isn't a big deal. She referred to a chart
showing that damages could rise to $877 million and noted that
AGIA says that the damages payment would be in full satisfaction
of all claims the licensee may bring related to the events that
gave rise to the payment. She asked Mr. Bullock if he thinks
it's that simple or if a court would deem TransCanada to have
some other rights should they choose to pursue them. We're
assuming they'd be happy to walk away with treble damages after
they've given the state all their data and hard work and I don't
see it that way, she said. She asked Mr. Bullock his view and
why she might be wrong.
10:00:10 AM
MR. BULLOCK said that both AS 43.90.240 and AS 43.90.440 are
means for the licensee and the state to terminate a project and
walk away because it could be that after going through the
entire process it's just not economic. He suggested thinking of
it in terms of a contract because the AGIA provisions and the
statute are incorporated in the contract of the license. They
were there when the request for proposals went out and they'll
be there if the license is awarded. It's not unlike the
provision in which the potential license holders and applicants
agreed not to contest the award of the license to somebody else
or that no license is awarded, he said. TransCanada came forward
with those terms in place so contractually they would have to
abide by the provision that says that the litigation ends at
that point. But that doesn't preclude litigation related to due
process or some other constitutional right that the licensee
enjoys that's outside the contract and this provision, he said.
SENATOR McGUIRE asked if equitable principles, such as an
injunction, are allowed. I doubt we'll have trouble with
economics, but it may be possible that all the parties can't get
together. "That has been my concern all along," she said.
There's gas, there are people that want to sell their gas, there
are people that build pipelines, and there are millions of
Canadians and Americans looking for jobs; but whether we can
bring them together under this proposal is unclear. She asked
about an injunction and the idea that TransCanada would ask the
court to enjoin the state and keep it from assisting another
project.
10:03:23 AM
MR. BULLOCK said that would be a contractual issue. Under good
faith and fair dealing the argument could be made that the state
hasn't operated in good faith in dealing with the licensee. Just
like any other contract, this could be litigated.
SENATOR McGUIRE said it's a risky path to hope that everyone
will be okay and that litigation won't ensue. "I hope we're
right."
CHAIR FRENCH asked Mr. Bullock to proceed.
MR. BULLOCK said page 2 is talking about a competing natural gas
pipeline - the size and the route, which is key. For example, a
600 MMcf/d pipeline that has gas that's produced south of 68
degrees wouldn't be a competing project because the route isn't
from the North Slope to a market.
MR. BULLOCK said when he looked back at committee minutes he
found where Marcia Davis explained how they came up with the 500
MMcf/d threshold. She explained that the definition for a
competing natural gas pipeline was developed with the
understanding that in-state gas usage would perhaps be 400
MMcf/d over the next 20 years. It was designed to capture
pipeline pieces that wouldn't be competitive with a 3.5 to 4.5
bcf project so bullet and spur lines coming off a main pipeline
were reviewed. He doesn't know if those estimates have been
updated, but that was the basis for determining the volume of
the pipeline.
MR. BULLOCK said a lot comes back to the tariff and how much gas
will be left to go through a long pipeline. The tariff is
figured by dividing the cost by the volume to get a cost per
unit or tariff. If the long pipeline is deprived of gas because
it's going into a competing pipeline, the tariff would have to
rise. One of the bases for determining the size of the pipeline
is that it would have enough gas left to pay for the long
pipeline.
10:07:13 AM
SENATOR THERRIAULT referred to an earlier discussion and pointed
out that another way to affect the tariff is to pay down the
debt on the pipeline. With that in mind he asked if the state
would run afoul of the competing pipeline provision if, in order
to keep the pipeline capacity under 500 million, the state paid
down the construction costs so that the tariff was low enough to
make the gas affordable for usage in the state. "Or because we
have taken steps to keep the capacity under 500 million, it
doesn't matter?"
MR. BULLOCK replied the threshold question asks the size of the
pipeline. However it happens, if the competing project doesn't
have a designed capacity of 500 million, the state could do
whatever it wanted.
10:08:27 AM
CHAIR FRENCH noted that Representative Gara had joined the
hearing.
MR. BULLOCK referred to the discussion about the possibility of
an expansion of the pipeline and said it would be a factual
issue, but the likelihood of an expansion would be addressed as
well. If it was very likely that a 490 MMcf/d pipeline was going
to be expanded, that would be in favor of imposing the damages
since it would be fact specific, he said.
The next phrase says, "If the licensee is in compliance with the
requirements of the license, and the requirements of state and
federal statutes and regulations relative to the project." What
he discussed here is that the licensee has to satisfy the
requirements of the license. That includes keeping current with
requirements in state and federal law. If they don't, that not
only voids eligibility for receiving the treble damages it also
raises the issue of whether the license should be revoked
because they would be in violation of the license. Then there's
the issue of relevant to the project versus a material violation
of state and federal law. "That's sort of litigation bait if we
get to that point," he said.
The next phrase says, "The licensee is entitled to payment from
the state of an amount equal to three times the total amount of
the expenditures incurred and paid by the licensee that are
qualified expenditures for the purposes of AS 43.90.110 and that
the licensee incurred in developing the licensee's project." The
phrase "incurred in developing the licensee's project" is
redundant because the expenses on which the damages are based
have to be qualified expenditures and they're defined
specifically.
The other issue that's addressed is "incurred and paid." If a
licensee incurred a $1 million expenditure and the state paid
$500,000, the question is whether the licensee incurred and paid
$1 million or $500,000 after the reimbursement. Although the
legislative history is a bit weak on the specific aspect, the
"incurred and paid" language was put in the bill early on to
make sure it was an actual expense of the licensee. Also, the
legislative intent demonstrated that reasonable costs would be
the basis. Narrowing that to only the qualified expenditures
demonstrates the legislative intent that the expenditures should
be strictly construed in favor of the state and against the
licensee when determining the amount of damages. Thus "incurred
and paid" would be looking at the end of time after the expenses
were incurred and the reimbursement was paid and figuring out
the net amount that was paid by the licensee.
10:12:05 AM
CHAIR FRENCH noted that Representative Roses had joined the
hearing.
CHAIR FRENCH observed that should there be a dispute about
whether they paid $1 million or $500,000, the backstop is
subject to appropriation and the Legislature may come to an
independent judgment about what the number is.
He thanked Mr. Bullock for quoting Ms. Davis on the subject of
treble damages at the bottom of page 3. She said that "In the
totality of it, we thought that the 300 percent had the zing and
had the oomph that we needed to make sure that the independents
came forward." He doesn't know if they're legal terms, but they
said a lot to him.
MR. BULLOCK added that he very much enjoyed working with Marcia
Davis during the AGIA process.
The next phrase raises the issue Senator Wielechowski brought up
about the amount of the damages being subject to appropriation.
The next section says that the licensee shall, at no additional
cost, give all the engineering design contracts, permits, and
other data. The litany list is repeated in the abandonment
provision, he said.
The next section says that treble damage is to be the only
remedy available to the licensee if the state breaches the
assurances. Page 5 says that the application processes continue
for any pipeline, not just the licensee. The issue is whether
the pipeline coordinator is greasing the skids of another
project. AS 43.90.260 talks about expedited review and action by
state agencies. That section talks about the coordinator's
responsibility to move things along and prevent unnecessary
delays or additional conditions on the permit or license that
would hinder development of the project. Finally, subsection (c)
on page 5 contains definitions that are used within the section.
10:15:20 AM
CHAIR FRENCH thanked Mr. Bullock and said the committee would
next hear from the administration.
^In-State Demand and AGIA's 500 MMcf/d 'Competing Project' Limit
ANTONY SCOTT, PhD, Commercial Analyst, Division of Oil and Gas,
Department of Natural Resources, said he would talk about
reasonable expectations of in-state demand over time to make
sure that the notion of limiting a competing project doesn't
hinder the state's ability to take care of Alaskans. He would
review historical actual in-state demand, look at projections
for future gas consumption for electricity and heating within
the state, and point out that the North Slope isn't the only
place in the state with gas. In fact, he said, most of the gas
that's produced comes from Cook Inlet and that will continue
during the relevant timeframe.
The information on slides 3 and 4 is derived from the DNR 2007
annual report. The graph indicates that thru 2006 the total
production of gas from Cook Inlet has been less than 500 MMcf/d.
Most of that has been used for industrial use and export. Slide
4 shows actual use of Cook Inlet gas for electrical generation
and space heating. Although use has been increasing for some
time, when tracked with the population increase it's apparent
that the rate of growth is slow. Current use, as an annualized
average, is a little more than 220 MMcf/d.
CHAIR FRENCH clarified that he's actually talking about Cook
Inlet gas when he talks about historical in-state gas use.
MR. SCOTT said yes; currently there's a small amount of gas use
in Fairbanks and the source is Cook Inlet. The figures reflect
that use.
CHAIR FRENCH clarified that from Ketchikan to Kotzebue, the rest
of the state isn't using any amount of natural gas.
MR. SCOTT said to his knowledge that's correct.
CHAIR FRENCH asked if any amount is used in Barrow.
MR. SCOTT said not to his knowledge, but he understands that
there is or will be gas use in Nuiqsut from the Alpine field.
CHAIR FRENCH noted that committee members think that Barrow has
gas coming from wells drilled in the vicinity, but that usage is
small.
MR. SCOTT said he isn't familiar with that, but he's sure that
usage wouldn't show on the indicated chart.
10:19:22 AM
The chart on slide 5 - Projected In-State Gas Use -is an
assessment from SAIC [Science Applications International
Corporation]. That 2006 assessment indicated that by 2025 the
statewide demand for gas for residential and commercial as well
as power usage would be on the order of 265 MMcf/d. He noted
that Harold Heinze from ANGDA recently testified that future in-
state demand might be as high as 300 MMcf/d.
SENATOR WIELECHOWSKI asked if he agrees with Mr. Heinze's
testimony that Alaska has the capacity for up to 1.2 bcf/d for
in-state use and shipping outside the state.
MR. SCOTT, acknowledging that he hadn't seen that presentation,
said the state's capacity to export gas is potentially
unbounded. "So I would respectfully suggest that it's
considerably, potentially, much larger than 1.2 [bcf] a day if
you're including LNG exports."
SENATOR WIELECHOWSKI recalled that when Mr. Heinze analyzed peak
in-state use, he said that to do the pipeline economically he
was projecting up to 1.2 bcf/d.
MR. SCOTT added that in other presentations Mr. Heinze has shown
considerable volumes of in-state petrochemical use, some
augmented LNG export, as well as in-state LPG usage to build up
to the 1.2 bcf/d capacity. That number presumes a very large
diameter pipeline for offtake and use of the liquids in-state.
He said he doesn't believe those volumes are attendant upon 1.2
bcf/d as a bullet line, for example. He clarified that that's
not what he's talking abut. "When I talk about in-state use I'm
talking about consumption needs within the state for heat and
power - not describing all potential industrial uses that one
could imagine to make use of gas within the state for subsequent
export."
10:23:38 AM
SENATOR WIELECHOWSKI recalled that ANGDA said that you get
economies of scale if you do up to 1.2 bcf/d. The tariff is
dramatically lower than the tariff on a 500 MMcf/d pipeline,
which is so high it's not economical to build the line. He asked
if Mr. Scott would agree with that.
MR. SCOTT replied that the issue of what is economic is fairly
unclear. What the sellers of gas demand in terms of value at the
wellhead could, for example, be a certain price plus the
transportation costs, but that's not necessarily the case. "So
the issue of what the tariff ultimately is may or may not have
any bearing on what the price the consumers ultimately pay."
SENATOR WIELECHOWSKI asked if it's economic for a bullet line to
supply up to 500 MMcf/d for in-state gas use under AGIA
MR. SCOTT said the issue is the state providing incentive for
another project. "I do not agree that you can say … absent
incentives from the state, the tariffs will be 'X' and therefore
since it's not economic it's a problem for us." What we're
describing is the state's ability to provide incentives, he
said. For example, suppose that a bullet line of 500 MMcf/d or
less cost $8 billion and the state decided to spend $X billion
underwriting the cost of the project. The tariff is a function
of the level of state investment. The more the state invests in
the project, the lower the tariff. If the state were to
underwrite the entire project, the tariff would be zero.
SENATOR WIELECHOWSKI pointed out the exposure to treble damages.
MR. SCOTT said that's right. The hypothetical was that the
project needed to be a certain size to get a low tariff. "My
response to that is no. You can have as low a tariff as you want
with a 500 million a day line. It's just a function of how much
the state wants to kick in."
SENATOR WIELECHOWSKI, assuming the license is granted to
TransCanada, asked if he sees an in-state gasline ahead of the
TransCanada line, which is 10-15 years down the road.
10:28:31 AM
MR. SCOTT replied it may well happen. ENSTAR is looking at a 480
MMcf/d line without any state assistance. It's a function of
markets. You need a market for the gas if you want a certain
level of throughput. Also keep in mind that there will still be
production from Cook Inlet to meet certain in-state needs, he
said.
CHAIR FRENCH commented that the administration has repeatedly
said that the bigger the pipe the better the economics, but it's
becoming clear that we're going to have to spend a lot for 500
MMcf/d. The conundrum is that while a 1.2 bcf/d line may be more
economic, we'd be bumping against that 500 MMcf/d ceiling should
we try to make it happen.
SENATOR ELTON noted that Marcia Davis seems to define competing
pipelines as those that start and end in the same location. Her
previous testimony said, "Because we have a comfort level, the
major projects are looking to go out of state. We don't see
spurs or bullet lines being competitive and affecting the
economic considerations of the big projects." Noting that the
current presentation backs out the export products such as
ammonia, urea, and LNG, he asked if he can infer that the state
could have a 700 MMcf/d pipeline as long as the additional
capacity in the line was going to noncompeting markets - for
example, shipping ammonia, urea, and LNG to Asia.
10:31:24 AM
MR. SCOTT suggested that he's asking for a legal interpretation
of competing project. His interpretation is that a 700 MMcf/d
project that goes into service before the commencement of an
AGIA licensed project would be a competing project if it runs
from the North Slope to a market.
COMMISSIONER GALVIN offered to stay at the table to respond to
legal questions as they arise. Chair French agreed.
SENATOR THERRIAULT summarized the discussion on the state
underwriting part of the cost of a project to make the tariffs
affordable and pointed out that that is nothing new for the
state to consider. It underwrote a portion of the cost of the
electrical intertie to the Interior and 50 percent of the
spinning capacity on the Kenai. But the capacity for consumption
within the state isn't large enough to get the unit costs down.
When he asked ENSTAR whether they needed anything from the
state, they said not now. They have lots to things to look at
before they can determine what the tariff might be and whether
they might need assistance, he said.
10:34:16 AM
REPRESENTATIVE RAMRAS questioned what would happen if ENSTAR
said it needed 600 MMcf/d to execute a minimally economic
pipeline. "What does that do to the state if that happens in 4
or 5 years time?"
MR. SCOTT replied a project that is minimally economic at 600
MMcf/d wouldn't appear to require state assistance so it
wouldn't be a competing project.
SENATOR McGUIRE said she agrees with that point, but what she
worries about are the current tax incentives for the Cook Inlet
and Nenana basins. Suppose you had an 800 MMcf/d line that
didn't need state assistance per se, but they did want preserve
the current tax incentives and the state agreed. "Would
TransCanada have a claim in that scenario to say that the state
is, in fact, assisting with a competing line?"
COMMISSIONER GALVIN said the first question is whether it's a
benefit. The second asks if it's extended for the purpose of
encouraging the line that's greater than 500 MMcf/d. If the
answer is yes it's a benefit and yes it's for the purpose of
advancing that project, that's a technical breach of the
provision. When that kind of option is presented, there are a
number of things to consider. There's the question of whether
there's a different way to address the issue. If larger capacity
is what's needed to bring the tariff down, then the state is
probably economically better off providing direct subsidy to the
project to make it economic at a threshold below 500 MMcf/d.
That's a better deal for the state than risking the loss of the
big project. Part of the discussion to keep in context is the
fact that the state is putting itself in this position because
of the benefits that will be provided under the AGIA pipeline.
The value that's being provided in the context of AGIA is in the
billions of dollars. If the state has to preserve that right by
underwriting a project for a couple of billion dollars, that's a
fair economic exchange the state is making. Given the size of
the markets, it's not unprecedented for the state to undertake
that type of role, he said.
10:40:27 AM
SENATOR McGUIRE remarked that that supports her thought that an
independent pipe builder has something to bring to the table.
She said her concern today, and she's brought it up before, is
that some pitfalls are unforeseen. The previous example shows
the convoluted analysis that state workers have to work through
to figure out how to stay below the subsidy level, bring the
best benefit to the state, and stay out of legal sticky wickets.
Previously when she suggested inviting some folks to the table
whose worldwide business is to do this sort of negotiating, the
commissioner said the administration didn't want closed-door
negotiations. "I'm not proposing anything that is closed to the
public that isn't unprecedented." That said, sometimes business
negotiations have to be done behind closed doors because of
proprietary information. Inviting these folks to the table can
at the very least lead to a better understanding of the
challenges for all the parties so legislators will have a better
chance in deciding before voting. Alaskans support the Governor
and this gasline, but this is making a lot of people nervous.
"This is as high stakes as I've ever seen." If we end up in a
protracted fight and lose the opportunity, it's our kids'
opportunity for decades. "And you can't get it back."
10:43:54 AM
COMMISSIONER GALVIN said when we talked about mediation before
the issue of closed doors was a side issue. "My direct answer to
the question was in order for there to be a relative opportunity
for a discussion and mediation we have to establish the
positions of the parties." He reminded her that the discussion
went back to a philosophical discussion about the structure of
the government. To a certain extent the administration can speak
on behalf the state, but the Legislature also has a tremendous
role in that regard. The purpose of AGIA was to establish the
state's position and speak with one voice in terms of
expectations and parameters for what's on the table. Until you
have executed this license and made that decision, the
Legislature hasn't spoken in that voice. Mediators will ask what
the parameters are; what is in the acceptable range. "We'd be
speaking blindly … because the Legislature hasn't spoken yet on
that particular issue."
SENATOR McGUIRE countered that this Legislature and this
Governor have spoken very well on a variety of things. There's a
very clear statement that we want in-state access and we want a
pipeline that's different than has been done in the past. "I
don't think that granting an exclusive license per se has to be
the sum of all of that."
10:46:04 AM
COMMISSIONER GALVIN said we began a process by passing the law.
We've engaged industry - pipeline and producers - in a
discussion and we've established the expectation that we're
going to take things in steps. "When you identify this sense of
risk of legal morass, … I haven't seen that kind of advice
coming back from our legal experts" For example, legislative
legal advisors have written an opinion saying that the treble
damages issue is clear and unambiguous and designed to avoid
legal maelstroms. The risks associated with moving forward with
this license are very calculated to get all the players together
and a pipeline moving forward. We have to take things in steps
and make decisions in sequence to state our position, provide
opportunity for the parties to identify the ground for striking
a deal, and then create the opportunity to strike that deal. "We
believe that there's tremendous opportunity, once the license is
issued, to bring the parties together and to identify that deal
in the context of moving the gasline forward." Until we reach
that point, the foundation for the discussion isn't solid enough
to engage in meaningful negotiation. "We don't see the value of
doing that at this particular point in time."
10:49:00 AM
COMMISSIONER GALVIN said when this started a year ago there was
talk about moving quickly and we don't want to lose that sense
of forward movement. TransCanada made an offer under AGIA that's
basically good. If that's set aside we lose that momentum and
the sense that the project is advancing. "We have done what we
need to do in order to create the atmosphere for resolution and
we need to hit that home by having the Legislature make a
decision on this."
SENATOR McGUIRE said we all want to keep TransCanada at the
table, but the treble damages and the exclusivity are
troublesome. "Philosophically and legally you are asking 60
people … to take a step that in my opinion could be against our
constitutional obligations." She asked him to consider how
mediation could or couldn't help. "It wouldn't be the idea that
TransCanada just goes away; but it might be the idea of keeping
them at the table with a way that's not so high stakes."
10:51:59 AM
CHAIR FRENCH noted that Representative Mike Kelly had joined the
hearing via teleconference.
REPRESENTATIVE HOLMES mentioned in-state supply and demand and
noted that slide 3 shows that at times disposition of Cook Inlet
gas has been more than 500 MMcf/d. She assumes that the recent
precipitous drop is tied to the scale-down and subsequent
closure of Agrium.
MR. SCOTT said that's correct.
REPRESENTATIVE HOLMES highlighted the ANGDA projections for in-
state gas in slide 6 showing that in 2006 the average use was
about 465 MMcf/d, not including Fairbanks use. The projected
future in-state demand is 300 MMcf/d not including industrial
use.
MR. SCOTT said that's correct; "that industrial use at 250 is
the LNG export and at that point still some Agrium production or
use."
REPRESENTATIVE HOLMES calculated the ANGDA projections going
forward and the existing industrial use and noted that that's
bumping against if not already over the 500 MMcf/d.
MR. SCOTT agreed.
10:54:15 AM
REPRESENTATIVE HOLMES reviewed in-state demand going forward
including the projected decline for Cook Inlet and asked what
the real supply and demand needs are for the state.
MR. SCOTT clarified that when he uses the phrase "in-state
demand" he is referring to Alaska's end-use needs for gas namely
for electricity generation and space heating. The point is that
with the 500 MMcf/d limit and the continued existence of Cook
Inlet production, there will still be sufficient room for
industrial uses without worrying about bumping up against that
limit. As Senator Wielechowski point out, economies of scale are
better with a larger pipeline. The tariff drops so you can
imagine circumstances where a project is minimally economic at
600 MMcf/d. Presumably that project wouldn't need state
assistance but you can imagine cases that are "on the bubble."
They're asking a little help for a 550 MMcf/d line. In those
fine cases, presumably the state would say it wouldn't subsidize
the export of Alaskan resources as LNG. Instead it would play it
safe and provide assistance to that pipeline and keep it under
500 MMcf/d.
10:57:50 AM
REPRESENTATIVE HOLMES asked if the projections for in-state use
include further expansion in Fairbanks.
MR. SCOTT said yes.
REPRESENTATIVE HOLMES asked about gas to liquids for export to
communities off the rail belt.
MR. SCOTT replied he doesn't believe the ANGDA projections
include gas to liquids uses.
REPRESENTATIVE HOLMES asked if he has any idea how including
that would affect the 300 MMcf/d projected in-state demand.
MR. SCOTT replied, "I have no idea what the demand for clean
diesel produced by gas to liquids technology might be within the
state."
10:58:55 AM
CHAIR FRENCH asked about the demand for liquid propane delivery
down the Yukon River. He added that he thought that was the
thrust of Representative Holmes' question.
MR. SCOTT replied the top-end estimates he's seen are on the
order of 10,000 gallons per day, but that quantity of propane
would require a large diameter pipeline. A spur line of the type
that's been discussed wouldn't generate the massive volumes of
propane to supply those energy needs up and down the Yukon
River.
CHAIR FRENCH commented that if the state paid for a 450 MMcf/d
bullet line from the North Slope to Southcentral, it looks as
though that would supply Fairbanks and Anchorage, and there
would be enough to ship propane down the Yukon River.
MR. SCOTT replied, "If there was sufficient propane within the
gas, absolutely."
SENATOR WIELECHOWSKI observed that there's a lot of heartburn
over two major issues - the $500 million and the treble damages.
"Those have caught my attention and the public's attention."
With respect to treble damages he said we can't support a line
with a capacity of more than 500 MMcf/d. Although there was a
reason for selecting that volume, it now seems to be somewhat
arbitrary. That 500 MMcf/d was probably trying to get at two
issues. The first is competition for the licensee and the second
issue is offtake. He said competition doesn't seem to be a big
issue. This line is going to Canada so any excess gas will go to
either the West Coast or Asia, neither of which are in
competition with this line. Also it'll be used at Agrium, but
that's probably not in competition with this line. Offtake seems
to be more of a concern and the question is whether we have the
ability to offtake more than 500 MMcf/d. With that in mind, he
asked what the problem would be with amending AGIA or getting
TransCanada to agree that the state can offtake more than 500
MMcf/d without damaging its ability to get gas. "That's really
what the crux of this issue is about for TransCanada - their
ability to get gas." If the state can do 1 bcf/d without hurting
TransCanada's offtake, what would be the problem? That would
solve a lot of heartburn and potentially get an in-state gasline
more quickly.
11:02:36 AM
COMMISSIONER GALVIN replied the question goes to something that
isn't known at this point. At the point in time that they're
looking for customers and looking for gas, how much gas will be
committed and is the big project going to be "on the bubble." At
this time certainly there are scenarios in which changing from
500 MMcf/d to 750 MMcf/d could make the difference in the big
project going forward or not. Inherent in this decision is the
goal we're trying to accomplish, which is to make sure that we
can get gas to Alaskans at a reasonable price in a shorter
period of time. Considering the demand and the available gas
right now it's clear that we can have a pipeline that delivers
sufficient gas to meet Alaska's needs within the bounds of the
AGIA requirements.
The next question asks about the economics and if the state will
be in a position where it would prefer to increase the
throughput in order to make it economic or increase its
participation in order to make it economic. When we talk about
increasing the throughput, we create the risk of losing the big
project so the 500 MMcf/d isn't completely arbitrary. That is
the threshold that was identified that satisfies both needs - to
make sure that sufficient gas is available for the big project
while also ensuring that the state can do what it wants to do in
order to make sure that gas gets to Alaskans.
Referring to a comment Senator McGuire made about the risk of
getting into a convoluted situation of balancing a 1.2 bcf/d
economic project versus providing state subsidy to a smaller
line, he said it's only as convoluted as we want to make it. In
the end it's a fairly straightforward analysis of whether
there's somebody willing to build a pipeline that doesn't need
state participation because the project itself is sufficient to
drive the economics. There's no worry there, but if the state
does have to participate in order to make the project economic,
then the state has the opportunity to do so and meet the needs
of Alaskans. We have that opportunity very clearly through AGIA,
he said. Over the next several months to a year the state will
make a fairly substantial decision on whether or not it's going
to take that plunge and undertake that.
COMMISSIONER GALVIN noted that ENSTAR is currently doing work
itself in order to do the analysis and identify whether it's
going to be a private sector project. Right now their economics
indicate that their project would be below the threshold and
they need to ask for state money. That provides two
opportunities, he said. If they need state participation, we can
do it at that level and if they don't then it can go through as
a private sector project. Boiled down to the essence it's clear
that we have the opportunity to meet Alaska's needs to get gas
in the near term if we choose to do so. It doesn't have to be
more complicated than that.
11:07:02 AM
SENATOR McGUIRE said what led to that discussion was not the
outright subsidy scenario, but the idea that the state has
incentivized certain basins. On the record that's been done with
the specific intent of incentivizing development of Alaska gas
in the Nenana and Cook Inlet basins. In Alberta it's been shown
that the tax breaks to the oil and gas industry aren't
necessarily needed but it has resulted in growth. She's talking
about whether the state wants to give those incentives.
COMMISSIONER GALVIN said there are already tremendous incentives
in the tax system, not only in-state but also the 40 percent
capital credit for all exploration and development. Resolving
the issue of in-state gas has many different opportunities
including taking gas from Cook Inlet to Fairbanks without
limitation and supporting a Nenana project to deliver gas to
Fairbanks without limitation. Those aren't competing projects
because it's not North Slope gas. "We have a number of
opportunities to meet the basic goal of getting gas to Alaskans
within the context of AGIA." We imagine different scenarios but
we really have to keep our eye on the ultimate goal, which is
getting gas to Alaskans, getting it sooner, and making sure that
it's as economic as possible. The state has the opportunity to
do that, he said.
CHAIR FRENCH announced a break from 11:09:30 AM to 11:26:37 AM.
REPRESENTATIVE RAMRAS commented that in his view the FERC press
release about approving the Denali pre-filing is a ray of
sunlight from the private sector.
SENATOR WIELECHOWSKI asked if the state would be exposed to
treble damages if ANGDA builds a gas pipeline that exceeds 500
MMcf/d.
COMMISSIONER GALVIN said probably yes, given that ANGDA is
basically an entity of the state.
SENATOR WIELECHOWSKI asked if he sees a conflict between the two
laws, given that the citizens of Alaska voted to create ANGDA to
build an in-state gas pipeline.
CHAIR FRENCH asked the commissioner if he'd like to qualify his
answer to the first question with the information about ANGDA
building the pipeline with state money.
COMMISSIONER GALVIN said given that ANGDA only gets funding from
the state, the assumption is that it would be using state money
to build a pipeline. If ANGDA were to build the line, more than
likely it would be built for in-state purposes and at a capacity
to meet in-state demand. "That would be clearly within the
parameters of AGIA and would not be in conflict."
Responding to the second question about an inherent conflict
between the ANGDA law and the AGIA law, he said there wouldn't
be a conflict. The language in the ANGDA law says to build or
cause to be built a gasline. As an entity ANGDA has devoted its
efforts to providing for in-state gas opportunities rather than
actually building the line from the North Slope to market. In
fact, their AGIA application was for a spur off the main
pipeline. A spur line off the main pipeline isn't competing for
any capacity because it's a customer of the main pipeline and
not a competing project. ANGDA has identified a purpose within
its statutory obligations that it is pursuing now and that is
very much in concert with AGIA. It's very consistent with the
ultimate goal of getting gas to Alaskans.
CHAIR FRENCH asked Mr. Scott to continue with the presentation.
MR. SCOTT displayed slide 7 showing historic and projected
natural gas production in Cook Inlet. Going forward it shows an
exponential decline in Cook Inlet production. He noted that
previous DNR annual reports regularly show the cliff.
REPRESENTATIVE RAMRAS asked when the state would have to
contemplate reversing the LNG facility to import gas. If this
slide is accurate, notwithstanding the Conoco export it looks
like we won't be able to meet in-state needs, he said.
MR. SCOTT said the state will solve how to meet its energy needs
as it gets there. He said he'd get to the issue of whether the
slide is accurate. "We see decline curve in the future and I
would submit that this is extremely unlikely to be realized and
I'd like to explain why in just a moment."
REPRESENTATIVE RAMRAS said, "Id like to know when we should
anticipate that we don't have enough gas in the Cook Inlet and
what is the solution if this slide is accurate and for how many
years will we have to consider an alternate supply of gas for
Southcentral and for the Interior."
MR. SCOTT replied it'll be around 2015 or 2016.
REPRESENTATIVE RAMRAS asked, "What would be the solution, if
this slide is accurate."
MR. SCOTT explained that there are several things the state
could do. It can enhance prospects for further exploration and
development in Cook Inlet; it can bring on alternative sources
of supply including coal bed methane, it can bring gas from
Nenana; it can bring on a natural gas spur line from the North
Slope; or it can import LNG. "Finally, the state can both reduce
its energy consumption through increased efficiency means and
diversify its energy sources."
11:36:37 AM
MR. SCOTT displayed slide 8 and highlighted that the dismal
decline curve represents a very conservative view of the future
versus an accurate picture of the future. The assumptions about
how those fields will produce in the future are very
conservative and assumptions about new prospects being developed
are similarly conservative. "In general we look at things that
are being actively pursued." If you were to look at the decline
curve in the 2002 annual report compared to 2007, you'd see that
the pattern is clear. "In each and every single year that curve
steps out to the right." The 2007 forecast shows a cumulative
production of about 320 bcf of "new gas" between now and 2020.
New gas is from fields that are not currently producing within
Cook Inlet, he said. "Even so, there will still be, by 2020,
about a hundred million a day being produced out of Cook Inlet."
Slide 9 provides a different view of Cook Inlet gas in the
future. The USDOE sponsored a study of the resource potential in
Cook Inlet suggested there was an additional 15 tcf of
undiscovered gas in Cook Inlet. Given the modest size of the
Cook Inlet market, it's reasonable to expect perhaps 1.4 tcf of
reserves growth between 2006 and 2025. "It's a considerable
multiple of the figure I gave you on the previous slide that's
embedded in the DNR annual report." Thus under reasonably
favorable market conditions Cook Inlet could easily supply
energy needs in Southcentral and Fairbanks well past 2020. The
blue line on the graph represents the DOE study assessment of
reserves growth and potential production from the reserves
growth. It's well above the assessment of consumption or demand
indicated in green and red.
11:40:13 AM
REPRESENTATIVE RAMRAS noted the slide is dated 9/20/06 so it
probably predates ACES and credits passed for Cook Inlet. Given
all the inducements and undiscovered conventional reserves, he
asked how much has been discovered and been added to the
reserves since that date. "My impression is that we haven't
found any gas in the Cook Inlet since 9/20/06."
MR. SCOTT said he didn't have a figure in his head.
MR. SCOTT said it appears that 300 MMcf/d is a fairly high
figure for in-state energy needs through 2025. Cook Inlet
production will continue and even under pessimistic projections,
he would expect it to average about 100 MMcf/d. Given
appropriate market conditions and regulatory signals, Cook Inlet
production should be more than sufficient to meet heating and
power needs as well as significant industrial use. The 500
MMcf/d limit under AGIA along with continued Cook Inlet
production should meet in-state needs as well as significant
industrial use.
11:42:20 AM
^AGIA Project Assurances - Treble Damages
COMMISSIONER GALVIN said that the primary question is whether
the treble damages provision within AGIA would be triggered if
the state were to provide financial assistance to a bullet or
spur line to meet in-state gas demand. The quick answer is no if
it's an in-state bullet line that has a design capacity at any
time prior to the start of commercial operations of the AGIA
line that is no more than 500 MMcf/d. Also, any spur off the
main line will be considered a customer and not a competitor.
"There is be no restriction … associated with a spur line that's
going to come off of the main line that would limit the state's
ability to support or provide financial assistance to such a
line."
REPRESENTATIVE HOLMES asked about the event of a spur line off a
line other than the AGIA main line.
COMMISSIONER GALVIN said it would likely be considered a
competing project.
REPRESENTATIVE HOLMES asked if that would be regardless of
whether it was under the 500 MMcf/d.
COMMISSIONER GALVIN explained that a line that is less than 500
MMcf/d, regardless of destination, is by definition not
competing. There hasn't been a legal answer about a spur line
that is larger than 500 MMcf/d coming off a separate project,
but he believes it will come down to: 1) whether it's a line
that connects the North Slope to a market or 2) if it's designed
to advance a competing project. If the answer is yes to either
of those questions it would violate the treble damages
provision. It goes back to the purpose. Is the purpose to make
the main line economic and to advance it or is it to be there
for anybody's use. If ANGDA wants to advance a line that goes
from Beluga to Glennallen to Delta, having the state assist that
line isn't going to cause a problem in and of itself because
it's not actually advancing a competing project. It's there for
whatever project happens to come past that point. If the line is
specifically tied to and giving advantage to a competing project
and is not available to the TransCanada Alaska project, then
that would be problematic.
REPRESENTATIVE HOLMES asked, if the state's goal is to get gas
from the Interior to Southcentral and the ANGDA goal is to build
the spur line, would the treble damages provision become an
issue the moment the spur line actually ties into the long line,
whichever it is.
COMMISSIONER GALVIN suggested she think about the timeline. By
the time a competing project is actually built, the term of the
AGIA license will be long past, so the question wouldn't be
relevant.
CHAIR FRENCH remarked that he thought he was going to say "long
after the commencement of commercial operations."
COMMISSIONER GALVEN responded that her question was whether it
would be a violation of the terms if a state-supported spur line
is in place and waiting and it ultimately ties into the Denali
line, for example. His point is that the actual timeframe for
this license would be past by that time. This license will end
upon abandonment of the project or when the FERC certificate has
been issued. The timing of that is such that it will be long
before the Denali project could come to fruition.
REPRESENTATIVE HOLMES observed that it's an important point that
the license ends upon receipt of a FERC certificate.
COMMISSIONER GALVIN clarified that when the FERC certificate is
issued the licensee has two years in which to sanction the
project. At that time the license would end. "The timeframes are
such that it's fairly infeasible that you're going to get to
that point where you're going to have a crossover of those two
events."
COMMISSIONER GALVIN noted that the statute [AS 43.90.440(c)(1)]
says that a competing project is one that accommodates
throughput of more than 500 MMcf/d of North Slope gas to market.
To be competing, the project has to take gas from somewhere
north of 68 degrees. Something that's hooked up to Nenana and
something that's hooked into the Cook Inlet is not going to be a
competing project for the purpose of the treble damage provision
of AGIA. With respect to when capacity is calculated, he
acknowledged that some have asked whether the provisions of AGIA
are inherently violated if a pipeline that is initially designed
for 400 MMcf/d can be expanded at any time to be greater than
500 MMcf/d. We've looked at that closely and talked with the
Department of Law, he said. Any pipeline could be expanded to be
a line with greater capacity than 500 MMcf/d. To give meaning to
the AGIA provision you have to consider that it's not intended
to be the potential opportunity to expand. It's something that
connects the state's actual assistance at the time of the
framing of the competition that is to be avoided. It can't be
greater than 500 MMcf/d so you're talking about both the initial
design and the timeframe up until commencement of commercial
operations of the AGIA project. After commencement of commercial
operations of the AGIA line, the limitations are off and a
project can expand and there is no limitation on the state
assisting in those expansions or the original assistance by the
state.
11:53:45 AM
SENATOR ELTON posed a hypothetical scenario of the state
assisting in a 450 MMcf/d line. Before commencement of
commercial operation of the project, that line is compressed and
expanded to 550 MMcf/d. He questioned how that would be handled
because the provisions of AGIA haven't been violated by
assisting with the 450 MMcf/d line even though it was expanded
prior to commercial operation of the big line.
COMMISSIONER GALVIN replied that does raise a legal question. At
the point that the line expands, it raises the risk that
somebody can claim that the state supported the line and prior
to commencement of commercial operations of the licensed project
that line was greater than 500 MMcf/d. "For that reason, we
believe that the state would want to ensure that any financial
assistance that it provides to any line that it's conditioned
upon the understanding that the line is not going to expand to
greater than 500 MMcf/d prior to commencement of commercial
operations of the other line."
CHAIR FRENCH asked what portion of that 500 MMcf/d line the
state can provide assistance to. It wouldn't be a violation for
the state to pay for 100 MMcf/d, but it would be a violation for
the state to provide assistance to expand a 450 MMcf/d line to
550 MMcf/d. That would assist a project designed to accommodate
throughput of more than 500 MMcf/d. "It isn't as if the state
has to provide that entire assistance. It's if we push it past
500 million in any form, I think we'd put ourselves at risk for
treble damages."
COMMISSIONER GALVIN said when the language was put into the
statute there was no intention to be tricky or to put the state
in a position where it could slice and dice. "Our position is
you look at the pipeline project itself. If the pipeline project
is designed to have a throughput of over 500 MMcf/d, the state
cannot provide assistance to that project period."
10:57:10 AM
CHAIR FRENCH said he agrees. The state can't provide assistance
to any project or segment of a project that ultimately delivers
more than 500 MMcf/d.
COMMISSIONER GALVIN added that, along the lines of slide 8,
that's the reason that if the state provided aid, it would want
to prohibit any throughput greater than 500 MMcf/d.
CHAIR FRENCH restated that if the state decided to pay for a
bullet line, part of the conditions would be that the bullet
line operator couldn't push the throughput above 500 MMcf/d.
COMMISSIONER GALVIN said yes.
REPRESENTATIVE RAMRAS commented that when he hears the
commissioner say there is no intention to be tricky he would
remind the committee that the semantics of these hearings are
hard on some members' nerves. For example, we see a slide that
says "the former Pt. Thomson unit" and when we hear "unlicensed
line" it means the Denali line.
COMMISSIONER GALVIN assured him there is no intention to play
semantic games; he's trying to be accurate and precise in his
depiction of things. If he were to call a non-licensed line the
Denali project and that project ended up being scrubbed a year
from now and an all three producers come forward with a new
project, somebody could come back and say there was no talk
about this new other project. "I apologize if it comes across as
trying to be precise in my language. I'm not trying to do
anything other than that."
REPRESENTATIVE RAMRAS said the point is made, and he would point
out that the license the commissioner is referring to is the
FERC license and not the AGIA license. "So if we're going to say
an unlicensed line, let's make sure that we qualify that whether
we're talking about an AGIA license or a FERC license."
COMMISSIONER GALVIN clarified that he was, in fact, talking
about an AGIA licensed project and not a FERC license. "To be
clear, when we're talking about a licensed project in the
context of treble damages, we're talking about an AGIA licensed
project. That being the one that would queue this particular
result."
SENATOR WIELECHOWSKI summarized that if ANGDA did a 500 MMcf/d
line, there would be no problem with state assistance. But under
that scenario, private industry couldn't expand that line 250
MMcf/d 5 years later so someone could build a new Agrium.
12:00:18 PM
COMMISSIONER GALVIN said that's correct if the state provides
assistance on the initial line. Cautioning that scenarios should
be realistic, he said that a line coming from the North Slope
would already be burdened by the cost of the gas at the North
Slope plus the transportation costs. And so, getting gas out of
the Cook Inlet separately would be an opportunity for them to
consider under the previous scenario.
SENATOR WIELECHOWSKI asked if it would be a violation of the
treble damages provision if AGPA, built a line with throughput
of more than 500 MMcf/d.
COMMISSIONER GALVIN said he didn't think it would be a violation
for the port authority to do that as long as the state wasn't
providing any additional financial assistance to the project.
COMMISSIONER GALVIN displayed slide 9 and said, "A spur line off
of the licensed project is not going to be limited either in
terms of what state assistance we've provided or the size of
that line." If we're talking about ANGDA in particular, their
participation in building a spur line is unlimited in terms of
the state's participation in ANGDA's operation or intent.
12:02:54 PM
CHAIR FRENCH said that's become a concern today. He recalled an
explicit reference in their license application to perhaps build
a line to Valdez if that's where the market drives it.
COMMISSIONER GALVIN agreed; Mr. Palmer has publicly stated that
at the initial open season for the AGIA licensed project, the
opportunity will be there for people to commit gas that would go
within the state, to an LNG terminal, or all the way to Alberta.
Basically it's open for any of those projects to come forward
and TransCanada will build to whatever destination is offered in
the open season where qualified commitments have been made.
CHAIR FRENCH said his concern relates to the transferability of
the license. Assuming that this Legislature votes to grant the
license to TransCanada and the commissioners sign it, the state
is suddenly bound by the AGIA statutes, the RFA, and their
application. That will in essence become the contract. His
concern is that once that transferable license is granted to
TransCanada, what if somebody steps in and buys TransCanada and
that successor doesn't view a spur line as benignly as
TransCanada does. "I guess the answer…is that we're protected by
their explicit reference in their application to a spur line."
What if Exxon bought TransCanada? "The idea that Exxon now owns
this license and decides that their project goes to Alberta is
precluded, you would say, because of the words in the
application."
12:06:11 PM
COMMISSIONER GALVIN replied it's precluded by the combination of
the words in the application and the statements in Mr. Palmer's
clarification.
SENATOR WIELECHOWSKI said considering how important the ability
to expand is, isn't giving the license to TransCanada
essentially the death knell to an ANGDA bullet line.
COMMISSIONER GALVIN replied he would say no. The limitation on
expansion is only until the commencement of commercial
operations of the larger line so it's not a lifelong limitation
on the pipeline. There will be two different drivers. The
primary drive to expand the line is economics to bring the cost
down and the state can address that through additional
participation. The issue of expanding for other reasons draws
into question whether between now and the expected commencement
of commercial operations, it's reasonable to expect demand to be
that great other than having an LNG export. "Basically we're
saying we want the first slug of gas that's going to be exported
to be through a large line either as a line into Canada or a
spur line off of that to be the LNG vehicle for getting North
Slope gas into an LNG tanker. Not through a bullet line that
expands modestly to address some LNG component." Economically,
the tradeoff is significant to the state. If we end up with a
1.5 bcf/d LNG project, we could end up causing a chokehold on
the ability to get a larger capacity line ultimately to anywhere
- whether it's LNG or to North America. Economically, the
tradeoff is so significant that it is in the state's interest to
preserve the opportunity for that large line and meet the
state's in-state demand by providing direct state participation
instead of having the economies of scale drive it to a 1.5 bcf/d
line and forego the opportunity for a large line. "We get so
much additional value by having the large line that we're better
off providing…that small capacity line that will feed Alaska's
needs in the near term."
12:10:11 PM
CHAIR FRENCH noted that Senator Tom Wagoner had joined the
hearing.
COMMISSIONER GALVIN said the final point is to identify how the
treble damage issue is calculated and how it isn't imposed
immediately on day one. It builds up over time and isn't
intended to be a limitation on the state's sovereign ability.
It's simply the price of getting out of the contract. That price
is tied to what we put on the table to draw in our AGIA
applicant. The price builds over time as expenditures are made
moving toward first open season and FERC certification. It's
bounded by the amount that's ultimately spent.
COMMISSIONER GALVIN concluded the presentation and again made
the point that AGIA provides the state with the ability to meet
in-state demand. "We have every opportunity to pursue lines that
will provide gas for Alaskans and the state can provide the
economic support to make that affordable."
CHAIR FRENCH thanked the legislators for attending.
12:12:22 PM
REPRESENTATIVE KELLY said he appreciates the invitation to the
hearing and the discussion was helpful. He made the point that
semantics and meaning and fine-tuning can be expected to take
place when there are thousands of pages of documentation and
with the team of experts that is working on this. "Probably when
you have a 12-page PowerPoint that says, 'Trust us' you probably
don't have many of those fine-tuning discussions." He
appreciates the commissioner hanging in there and making sense
out of some very good questions. It advances the ball.
There being no further business to come before the committee,
Chair French adjourned the meeting at 12:13:37 PM.
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