Legislature(2007 - 2008)BUTROVICH 205
03/14/2007 03:30 PM Senate RESOURCES
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| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| * | SB 104 | ||
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
March 14, 2007
3:39 p.m.
MEMBERS PRESENT
Senator Charlie Huggins, Chair
Senator Bert Stedman, Vice Chair
Senator Lyda Green
Senator Gary Stevens
Senator Lesil McGuire
Senator Bill Wielechowski
Senator Thomas Wagoner
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Senator Hollis French
COMMITTEE CALENDAR
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."
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 104
SHORT TITLE: NATURAL GAS PIPELINE PROJECT
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
03/05/07 (S) READ THE FIRST TIME - REFERRALS
03/05/07 (S) RES, JUD, FIN
03/14/07 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
Patrick Galvin, Commissioner
Department of Revenue
Juneau, AK
POSITION STATEMENT: Presented SB 104.
Kurt Gibson, Acting Deputy Director
Division of Oil and Gas
Department of Natural Resources
Juneau AK
POSITION STATEMENT: Commented on SB 104.
Dr. Antony Scott, Commercial Analyst
Division of Oil and Gas
Department of Natural Resources
Juneau AK
POSITION STATEMENT: Commented on SB 104.
Kevin Banks, Acting Director
Division of Oil and Gas
Department of Natural Resources
Juneau AK
POSITION STATEMENT: Commented on SB 104.
ACTION NARRATIVE
CHAIR CHARLIE HUGGINS called the Senate Resources Standing
Committee meeting to order at 3:39:27 PM. All members were
present at the call to order.
SB 104-NATURAL GAS PIPELINE PROJECT
CHAIR HUGGINS announced SB 104 to be up for consideration.
PATRICK GALVIN, Commissioner, Department of Revenue, explained
that he would discuss why the Alaska Gasline Inducement Act
(AGIA) is needed, and what the state will get in return for the
$500 million in incentives it offers; he then introduced the
presenters who accompanied him to the meeting, and assured Chair
Huggins that that an overview of contract criteria would take
place later that week.
3:45:28 PM
He said that the AGIA project needs to be moved along in order
to meet the nation's demand for natural gas, and the state needs
to maximize its value in the project. One of the primary
purposes of AGIA is to move the project forward sooner than
would otherwise happen. The North Slope basin needs to be opened
to exploration and development, and the pipeline needs to be
designed to emphasize the probability of expansion. The process
for a contract needs to be open and competitive; AGIA allows for
all project hopefuls to compare their applications fairly
through a public process.
3:48:38 PM
COMMISSIONER GALVIN explained that the state's value of the
project will be driven by low tariffs. The value comes from the
netback value at the wellhead, in terms of royalties and tax
bases; establishing a low tariff is essential. Alaskans need the
gas and the jobs created by the pipeline project; a training
program will be geared to maximize in-state hiring, and
licensees receiving a contract will be required to do so.
3:50:39 PM
He explained that reducing uncertainties for the producers is
essential to the project; the low tariff structure is essential
as well, and values for the producers will be tied to the open
season.
3:53:08 PM
CHAIR HUGGINS asked if Commissioner Galvin would be going over
the variables important to getting the pipeline built quickly.
COMMISSIONER GALVIN said that he would be talking about that, as
well as the application process and the ultimate value of the
project.
CHAIR HUGGINS said that the financial wherewithal of a pipeline
company could affect the timeline. The timeline will also have
an effect on the tariff.
COMMISSIONER GALVIN said that he would explain the $500 million
in incentives provided by the state in exchange for certain
actions, and how rolled-in rates will be beneficial to the
state.
3:53:36 PM
KURT GIBSON, Acting Deputy Director, Division of Oil and Gas,
Department of Natural Resources (DNR), said that there is an
important interest in moving the project forward, and the
legislation recognizes this. The oil industry might not have the
same timing in terms of declining oil production and getting the
line built.
3:55:08 PM
COMMISSIONER GALVIN added that the state don't know what the
exact parameters of the project will be; there are many
necessary assumptions.
3:55:34 PM
CHAIR HUGGINS asked if Commissioner Galvin anticipated a spur
line being part of a proposal.
COMMISSIONER GALVIN replied that no such project has come
forward yet; the state is offering incentives that will make
everyone realize that gas off-takes are economical, but a spur
line isn't necessarily included.
He said that the economics of AGIA were built around a prototype
project similar to the Stranded Gas Act. Today, the project
would cost $20.5 billion; the number is built on a 70/30 debt
equity ratio, and assumes the current PPT tax rate would apply
to gas.
3:58:48 PM
CHAIR HUGGINS asked if he is assuming that the current tax rate
is accurate.
COMMISSIONER GALVIN replied yes.
SENATOR STEDMAN commented that the PPT has a progressivity
feature.
3:59:48 PM
CHAIR HUGGINS asked to know the assumptions about the rates.
DR. ANTONY SCOTT, Commercial Analyst, Division of Oil and Gas,
Department of Natural Resources (DNR), replied he would get that
information for the committee; the oil to gas ratio would not be
six to one as previously stated.
4:01:07 PM
SENATOR STEDMAN stated that a 22.5 percent tax would be embedded
in the PPT.
DR. SCOTT concurred, and said that the rate is based on a 30-
year project.
SENATOR STEDMAN asked if the first gas will be produced in 10
years.
DR. SCOTT answered that first gas production could occur as
early as 2016.
4:02:57 PM
MR. GIBSON clarified that in today's market pricing, the ratio
for oil and gas contracts is nine to one. He added that the
assumptions in the modeling don't assume what is an appropriate
project, or that the proper tax is today's PPT; they are just
assumptions their model is based on.
4:04:08 PM
He presented a graph showing the cost of delay and the value of
accelerating the project. In terms of the $500 million
contribution, a single year of acceleration could earn the state
$1.8 billion at present value. Three years acceleration would
earn $5 billion.
CHAIR HUGGINS asked if a delay would mean completion in 2019.
COMMISSIONER GALVIN replied yes.
4:05:32 PM
SENATOR WAGONER asked how conservative the $3.50 gas rate
estimate is.
MR. GIBSON replied that it is very conservative, and explained
that the timing of the project affects the rate very much.
4:06:46 PM
SENATOR WIELECHOWSKI asked if Commissioner Galvin is assuming
that the incentives will speed up the pipeline process.
COMMISSIONER GALVIN replied that the idea of the incentives is
to garner the state money that would be lost by a delay.
SENATOR WIELECHOWSKI asked if there's any proof that the
incentives will help speed up the project.
COMMISSIONER GALVIN replied that the proof will be in a company
accepting the money and committing to a timeline.
CHAIR HUGGINS asked him to share a couple of other techniques of
how to use the $500 million.
COMMISSIONER GALVIN replied that the figure is based on
statements that getting the FERC certificate would cost $1
billion. There isn't yet a model showing where money will be
spent once it's awarded, and there aren't any project ideas
being debated.
4:11:34 PM
CHAIR HUGGINS asked what weight the $500 million incentive
carries.
COMMISSIONER GALVIN replied that the extent to which a company
doesn't need the money will put it at an advantage.
SENATOR WIELECHOWSKI opined that rigorous analysis as to why the
$500 million will work is needed; he is skeptical of its
efficacy.
COMMISSIONER GALVIN replied that there are numbers available
today on how the $500 million will affect the tariff; the state
needs to get people in the door to participate in the process.
He spoke about the negative appearance of the state as wanting
without giving; it needs to put money into the project to make
it happen and inspire confidence.
4:15:33 PM
SENATOR STEDMAN said that if gas is valued at $6.50, a one-year
delay could cost $2.3 billion.
COMMISSIONER GALVIN said that the figure would represent the net
present value, discounted by five percent.
SENATOR STEDMAN asked what a delay would cost the industry.
COMMISSIONER GALVIN replied that the dynamic changes; the
industry can find income somewhere else.
SENATOR STEDMAN repeated that there is clearly a cost in
delaying.
COMMISSIONER GALVIN said that there's no loss to the industry if
they have projects elsewhere; it's not the same dynamic the
state of Alaska faces.
4:18:31 PM
MR. GIBSON said that if the state was perfectly aligned with the
producers, the cost of delay would effectively be the same.
4:19:20 PM
CHAIR HUGGINS said that it's important to understand the
junctures where delays are expected, and what those delays will
mean for initial production.
COMMISSIONER GALVIN said that the state recognizes that once the
project gets a FERC certificate...
CHAIR HUGGINS interrupted to ask Mr. Galvin to talk about open
season because that might be the first point of delay.
MR. GIBSON responded that the state had a timeline that it would
present to the committee later, and there may be other sources
of delay. The state wants an obligation for someone to take
action.
CHAIR HUGGINS said that the Stranded Gas Act is in the past, and
AGIA is the vehicle for success.
4:22:01 PM
SENATOR MCGUIRE mentioned the strict confidentiality provisions
in the Stranded Gas Act, and said that while transparency and
openness should be practiced by the committee, the state's
negotiating position shouldn't be given away.
MR. GIBSON said that he appreciated that sensitivity. He pointed
out a timeline for the AGIA bill, with the award of a license as
year zero, and corrected a mislabeling. The timeline shows the
country what it can expect from gas development in the US, and
accounts for alternative energy sources in case the pipeline is
delayed substantially.
4:24:09 PM
COMMISSIONER GALVIN said the state doesn't want the project to
stall; the aggressiveness of the schedule will carry weight in
value to the state. The more work that's done before open
season, the less will have to be done in order to get the FERC
application. Some companies want at least two field seasons
before holding an open season in order to prepare better; the
timeline accommodates that but doesn't allow for ultimate delay.
Aggressiveness of schedule is an important factor to the state.
4:26:45 PM
CHAIR HUGGINS asked what unfulfilled expectations for an open
season would do to the timeline.
COMMISSIONER GALVIN replied that AGIA would move forward anyhow
and a plan could still be submitted to the FERC. The underlying
premise is that even a project with a failed open season
provides a greater level of certainty.
4:28:10 PM
CHAIR HUGGINS asked what an unsuccessful season would do to the
risk profile of AGIA.
COMMISSIONER GALVIN replied that after the open season, the
applicants will have to provide their proposals to the state
before getting FERC certification. The object is to ensure the
certainty of getting the FERC certificate. He said that he would
be happy to continue answering questions but would prefer to do
more presentation.
4:29:57 PM
SENATOR STEDMAN asked what involvement or influence the FERC
would have if there were a failed open season.
MR. GIBSON replied that first it's important to understand what
a failed open season is. Some people imagine that means that a
pipeline ends up being only 50 percent or 75 percent subscribed;
he envisions less than 100 percent subscribed as a possibility.
SENATOR STEDMAN gave two scenarios for a failed open season,
including a no-show of producers or missing the target of gas
transported each day.
COMMISSIONER GALVIN said that AGIA is letting the market provide
different paths of development for the line. It's unknown what
the FERC's commercial reaction will be, but under federal law it
doesn't require FT commitments in order for there to be a need
for the project.
4:33:11 PM
MR. GIBSON showed a slide of declining North Slope oil
production and projected demand, and said that by encouraging
gas exploration additional crude oil will be discovered and
revenues will go up. He showed another slide of the supply
profile for the United States, which is just an educated guess
from 2006 forward. Liquefied natural gas (LNG) is becoming an
increasingly important part of American energy, but the market
won't wait for more production.
4:36:43 PM
COMMISSIONER GALVIN said that the presenters would talk about
the lower tariff values built in to the AGIA process.
MR. GIBSON showed a slide to illustrate the difference in market
prices and netback values. The importance of Alaska's
contribution is a grant, not an equity position, so it has a
positive impact on transportation to market. By contributing
$500 million outside the rate base of a project, the tariff is
reduced by up to six cents.
CHAIR HUGGINS asked what would change if a company didn't accept
the $500 million.
MR. GIBSON replied that not accepting the $500 million wouldn't
necessarily give an advantage; there is real value to the state
and producers in making a capital contribution. Not accepting
the incentives might not be appropriate.
4:41:35 PM
COMMISSIONER GALVIN said that whoever refused the incentives
wouldn't have a reduction in the tariff; it's a trade-off.
4:42:23 PM
CHAIR HUGGINS said that another technique could be to put the
$500 million in an escrow account as a later reward for meeting
performance criteria.
SENATOR WAGONER said the exact opposite would happen if the
money was put into their rate base.
COMMISSIONER GALVIN responded that the comparison is based on
the state not making the contribution and using it for debt
equity.
SENATOR WAGONER clarified his comment.
4:43:59 PM
MR. GIBSON referenced a slide on the time value of money, and
explained how the $500 million would turn into $900 million in
reduction of the rate base. He said that the capital
contribution will take the form of a $900 million reduction in
the rate base by the time first gas flows, because of an
allowance for funds used during construction.
COMMISSIONER GALVIN said that, in reference to Chair Huggins'
question, there could be an effect on the tariff.
CHAIR HUGGINS said it would to the state's advantage if there
was a stipulation that there couldn't be rolled-in loan rates if
the $500 million wasn't accepted.
MR. GIBSON replied that the issue is related to FERC rate-
making, and he would find an answer for the committee.
COMMISSIONER GALVIN said the presenters would talk about the
effect of the tariff on the 70/30 debt equity ratio.
4:47:48 PM
DR. SCOTT said the 70/30 structure ensures that the tariff will
be low. It's a reasonable requirement that provides protection
for the state's interests. Eight of fifteen recent major
pipeline projects had a 70/30 structure, and three projects had
much higher equity percentages. The pipeline will be financed
with both debt and equity and debt is much less expensive. If
the payments are lower, the tariff is ultimately lower.
He then showed a table listing the effects of different capital
structures on tariffs of a hypothetical project; he said that
the FERC wouldn't consider a 50/50 structure unreasonable.
4:52:31 PM
CHAIR HUGGINS asked about the size of the project.
DR. SCOTT replied they had prepared a number of project
parameters, and emphasized that while there are no Lower 48
pipelines of this scope the project is still viable. The federal
loan guarantees up to 80 percent debt but they didn't want to
use the full amount because the project is so risky.
4:54:47 PM
CHAIR HUGGINS asked for detail on the two or three larger
projects not on the list.
SENATOR WIELECHOWSKI remarked that if someone were to want to
spend $20 billion on the project, under current terms they would
be rejected.
COMMISSIONER GALVIN explained that that would be a non-
conforming bid.
SENATOR WIELECHOWSKI asked if there's a risk in having such a
high debt ratio.
COMMISSIONER GALVIN clarified that the 70/30 rate is the capital
recovery rate. It doesn't mandate that a company has to take on
that amount of debt; they can choose how to finance it, but in
order to recover the investment it has to be based upon the
70/30 ratio rate of return.
MR. GIBSON said that even if an entity declares 100 percent
equity, the equity would be recovered in tariffs over a multi-
decade period. If an entity told the FERC it wanted tariffs
determined on a 100 percent equity basis, the FERC would deem it
unreasonable and assign a structure.
He explained that a lower tariff benefits the state and any
shipper, and it certainly benefits future explorers.
CHAIR HUGGINS asked if there would be a more in-depth discussion
of tariffs at a later point.
COMMISSIONER GALVIN said that there would be discussion on
rolled-in rate tariffs.
4:59:23 PM
KEVIN BANKS, Acting Director for the Division of Oil and Gas,
Department of Natural Resources (DNR), said that expansion is
the future of the North Slope and will be threatened without the
provisions in AGIA. He cited statistics on the size of gas
deposits, and said that initial open season will occur in three
years. At that point, few explorers will be able to nominate
pipeline capacity. AGIA proposes assessing the market demand for
additional capacity every two years.
5:01:58 PM
He showed a slide about the problems and costs associated with
delays. The FERC assumes a sufficient market for pipeline
capacity, and the typical pipeline owner has the incentive to
grow by tendering for new gas capacity on a regular basis. The
pipeline act treats the Alaskan situation as unique, and
requires mandatory expansion. Conditions include shippers being
required to have gas reserves and takeaway capacity before
requesting expansion. In each situation, the applicant bears the
burden for new capacity. The pipeline act has not been through a
judicial review and is therefore untested; the first orders
related to the pipeline act are already under litigation before
the FERC. Even with the expedition required by the pipeline act,
the litigation has already reached two years' length. The
investment in seismic programs is fairly serious; ensuring
getting expansion at the end of it would cost the explorer a lot
of money, and the threat of delay could kill a project.
He said that if an a explorer can anticipate putting gas in the
line whenever they want to, they can make a profit, but even a
one-year delay would send the value of their project below zero.
5:07:16 PM
COMMISSIONER GALVIN said that after the break they would change
the focus of the economic models before the committee, and look
at investment opportunities from explorers' perspectives.
5:08:10 PM
CHAIR HUGGINS called a recess.
5:20:30 PM
CHAIR HUGGINS called the meeting back to order.
COMMISSIONER GALVIN said that rolled-in rates are part of the
expansion provisions in AGIA. One of the requirements is that
explorers use a rolled-in rate base for establishing the tariff
on the line expansion.
DR. SCOTT explained that AGIA requires rolled-in rate treatment
on expansions so long as the resulting rates do not exceed 15
percent of the initial in-service tariffs. He then gave an
example of how rolled-in rate treatment would work.
CHAIR HUGGINS asked if rolled-in rates are a special provision
for the Alaska pipeline.
DR. SCOTT replied that the rates are a provision of AGIA. In the
Lower 48, the rate treatment on expansions is handled on a
rolled-in basis if doing so lowers the tariffs for everybody,
and on an incremental basis if it would cause rates for existing
shippers to rise. The rationale is that in the Lower 48 there
are frequently multiple pipelines serving the same production
basin and rolled-in rates are a safeguard to prevent less-
efficient pipeline expansion. The Alaska pipeline is different;
it's a natural monopoly, so the FERC adopted a rebuttable
presumption in favor of rolled-in rate treatment for expansions.
He added that when addressing the presumption, the FERC will
look to the initial government subsidies provided, and consider
them in making the determination as to whether the presumption
should be rebutted or not. Rolled-in rates foster exploration
and development because shippers pay lower rates and decrease
cost factors. They also ensure that all shippers pay the same
rate, which is the norm in the economy as a whole. Incremental
rate treatment results in uneven payments from shippers.
5:29:08 PM
He then showed a slide to demonstrate how rolled-in rates work
in case of expansion, and how incremental rates give uneven
tariffs to initial and expansion shippers. Rolled-in rates make
prospects economically feasible, and increase the scope of gas
that can be recovered. He clarified that a prospective site is a
land position where there may be hydrocarbons; however there is
a considerable likelihood that the drilling site won't be
profitable. A positive prospect value means a company will want
to drill, whereas a negative prospect value site won't be
drilled and expansion won't occur. Rolled-in rate treatment
encourages expansion because expansion capacity is cheaper, and
it means more prospects are of positive value. Looping expansion
is an expensive way to add capacity, but on a rolled-in basis
will still result in positive prospects; with incremental rates,
the prospect value is negative.
He then referenced another slide showing fuel demand
consequences for different rate scenarios.
5:36:04 PM
COMMISSIONER GALVIN said the last two slides further explained
the value of expansion to the state.
MR. BANKS explained that the final slides illustrated different
scenarios for expansion, and how the state will earn more
revenue by doing so. If the tariff goes up for all shippers,
including the existing ones, the royalty netback will decrease.
He then explained how taxes would increase in the case of a
looping expansion.
5:38:31 PM
COMMISSIONER GALVIN said that the next presentation would
explain in-state use and upstream inducements.
5:39:04 PM
CHAIR HUGGINS asked the committee members for questions, and
asked the presenters if there will not being any PPT adjustments
before FERC certification.
COMMISSIONER GALVIN said the economic numbers used in the
presentation were based on the current PPT rate.
CHAIR HUGGINS asked when the presenters would address adjusting
tax rates.
COMMISSIONER GALVIN replied that it's not an issue for AGIA.
However, freezing the production tax rate at the right time is
important. The intent of the bill is to keep the tax rate at the
open-season level.
CHAIR HUGGINS asked Commissioner Galvin if he anticipated the
legislature adjusting the tax rate during the project, or making
any amendments.
COMMISSIONER GALVIN replied that he didn't.
CHAIR HUGGINS said he would like to hear insight on financing
timing in AGIA, and said that there should be further
conversation about the timeline and its risks.
He thanked the presenters and said that the committee has high
hopes for the bill.
COMMISSIONER GALVIN said that the presenters feel the same.
There being no further business to come before the committee,
Chair Huggins adjourned the meeting at 5:43:33 PM.
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