02/14/2014 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB138 | |
| SJR5 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 138 | TELECONFERENCED | |
| *+ | SJR 5 | TELECONFERENCED | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
February 14, 2014
3:32 p.m.
MEMBERS PRESENT
Senator Cathy Giessel, Chair
Senator Peter Micciche
Senator Click Bishop
Senator Lesil McGuire
Senator Hollis French
MEMBERS ABSENT
Senator Fred Dyson, Vice Chair
Senator Anna Fairclough
COMMITTEE CALENDAR
SENATE BILL NO. 138
"An Act relating to the purposes of the Alaska Gasline
Development Corporation to commissioner of natural resources on
the custody and disposition of gas delivered to the advance to
develop a large-diameter natural gas pipeline project, including
treatment state in kind; relating to the authority of the
commissioner of natural resources to and liquefaction
facilities; establishing the large-diameter natural gas pipeline
project propose modifications to existing state oil and gas
leases; making certain information fund; creating a subsidiary
related to a large-diameter natural gas pipeline project,
provided to the Department of Natural Resources and the
Department of Revenue including treatment and liquefaction
facilities; relating to the authority of the exempt from
inspection as a public record; making certain tax information
related to an commissioner of natural resources to negotiate
contracts related to North Slope natural election to pay the oil
and gas production tax in kind exempt from tax confidentiality
gas projects, to enter into confidentiality agreements in
support of contract negotiations provisions; relating to
establishing under the oil and gas production tax a gross tax
rate and implementation, and to take custody of gas delivered to
the state under an election for gas after 2021; making the
alternate minimum tax on oil and gas produced north of to pay
the oil and gas production tax in kind; relating to the sale,
exchange, or disposal 68 degrees North latitude after 2021 apply
only to oil; relating to apportionment factors of gas delivered
to the state under an election to pay the oil and gas production
tax in of the Alaska Net Income Tax Act; authorizing a
producer's election to pay the oil and kind; relating to the
duties of the commissioner of revenue to direct the disposition
of gas production tax in kind for certain gas and relating to
the authorization; relating to revenues received from gas
delivered to the state in kind and to consult with the monthly
installment payments of the oil and gas production tax; relating
to interest payments on monthly installment payments of the oil
and gas production tax; relating to settlements between
producers and royalty owners for oil and gas production tax;
relating to annual statements by producers and explorers;
relating to annual production tax values; relating to lease
expenditures; amending the definition of gross value at the
'point of production' for gas for purposes of the oil and gas
production tax; adding definitions related to natural gas terms;
clarifying that credit may not be taken against the in-kind levy
of the oil and gas production tax for gas for purposes of the
exploration incentive credit, the oil or gas producer education
credit, and the film production tax credit; making conforming
amendments; and providing for an effective date."
- HEARD & HELD
SENATE JOINT RESOLUTION NO. 5
Urging the United States Congress to provide a means for
consistently sharing with all coastal energy-producing states,
on an ongoing basis, revenue generated from oil and gas
development on the outer continental shelf to ensure that those
states develop, support, and maintain necessary infrastructure
and preserve environmental integrity.
- HEARD & HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 138
SHORT TITLE: GAS PIPELINE; AGDC; OIL & GAS PROD. TAX
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
01/24/14 (S) READ THE FIRST TIME - REFERRALS
01/24/14 (S) RES, FIN
02/07/14 (S) RES AT 3:30 PM BUTROVICH 205
02/07/14 (S) Heard & Held
02/07/14 (S) MINUTE(RES)
02/10/14 (S) RES AT 3:30 PM BUTROVICH 205
02/10/14 (S) Heard & Held
02/10/14 (S) MINUTE(RES)
02/12/14 (S) RES WAIVED PUBLIC HEARING NOTICE, RULE
23
02/12/14 (S) RES AT 3:30 PM BUTROVICH 205
02/12/14 (S) Heard & Held
02/12/14 (S) MINUTE(RES)
02/13/14 (S) RES AT 8:00 AM BUTROVICH 205
02/13/14 (S) Heard & Held
02/13/14 (S) MINUTE(RES)
02/14/14 (S) RES AT 3:30 PM BUTROVICH 205
BILL: SJR 5
SHORT TITLE: OFFSHORE OIL & GAS REVENUE
SPONSOR(s): WIELECHOWSKI
01/25/13 (S) READ THE FIRST TIME - REFERRALS
01/25/13 (S) RES, JUD
02/14/14 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
JANAK MAYER, Partner
Enalytica
Anchorage, Alaska
POSITION STATEMENT: Presented information on the "Gas Pipeline:
AGDC; Oil & Gas; Production Tax.
NIKOS TSAFOS, Partner
Enalytica
Anchorage, Alaska
POSITION STATEMENT: Presented information on the "Gas Pipeline:
AGDC; Oil & Gas; Production Tax.
MICHELLE SYDEMAN, Staff
Senator Bill Wielechowski
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented information on SJR 5 on behalf of
the sponsor.
ADRIAN HERRERA, Coordinator
Arctic Power
Washington, D.C.
POSITION STATEMENT: Testified in support of SJR 5.
ACTION NARRATIVE
3:32:19 PM
CHAIR CATHY GIESSEL called the Senate Resources Standing
Committee meeting to order at 3:32 p.m. Present at the call to
order were Senators French, Micciche, McGuire, Bishop, and Chair
Giessel.
SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX
3:32:56 PM
CHAIR GIESSEL announced that the first order of business would
be SB 138.
JANAK MAYER, Partner, Enalytica, Anchorage, Alaska, presented
information on the "Gas Pipeline: AGDC; Oil & Gas; Production
Tax." He shared his work history working on oil and gas issues,
oil tax reform, and transition to gas issues. He lead the
Enalytica's team at PFC Energy focused on upstream economic and
financial evaluation, constructing economic and financial models
of projects, assets, transactions, portfolios for large
international companies to small independent players to private
equity firms.
NIKOS TSAFOS, Partner, Enalytica, said his chief responsibility
was heading the global gas consulting practice of the firm and
that he had worked with some of the world's largest oil and gas
companies on a number of themes: helping companies that have gas
figure out how to sell it, helping companies that want gas
figure out how to buy it, and helping companies try to make
sense of what is happening in the market and thinking through
possibilities and scenarios. His core expertise is natural gas,
natural gas markets, and commercialization strategies.
3:35:17 PM
MR. TSAFOS began with a focus on the need for alignment in
making the decisions embodied in SB 138. He said it was
complicated, but he would try to explain LNG in terms of oil.
The Department of Revenue's (DOR) fall 2013 Revenue Sources Book
forecasted the value of oil for FY2015 to be about $105/barrel,
minus $20 for the mid-stream and $46 for the deductible lease
expenditures; that ends up being worth $49 at the well head on
the North Slope (slide 4).
3:38:41 PM
MR. TSAFOS said the price of gas isn't quite as clear as the
price of oil; it's less transparent, because you can't really
pick up the Wall Street Journal to see what the LNG price is.
It's not consistent and it is variable by destination and
contract. He explained the same project could be selling gas to
five different people at five very different prices. The price
of gas is likely to be linked to oil and likely to be linked to
the Japan Customs Cleared price (JCC) or what is known as the
Japanese Crude Cocktail. It's effectively the price that Japan
pays for its oil and that trades at a 22 cent discount to ANS.
So, for all intents and purposes, if the state sells LNG that is
linked to the price of JCC, it is linked to the price of ANS.
Lastly, Mr. Tsafos said, in general, gas trades at a thermal
discount to oil. So, a $100-barrel of oil does not lead one to a
$100-BOE. There are a number of reasons for that, the chief one
being, especially in targeting the Asian market, there are still
consumers that would switch to oil if LNG were higher (by
declining to buy a cargo of LNG because oil is cheaper). So, in
some ways, oil places a little bit of a cap on the price of gas.
SENATOR MICCICHE asked for an explanation of BOE.
3:41:59 PM
MR. TSAFOS explained that BOE means barrel of oil equivalent and
it tries to get to the question of how much energy different
fuel agents - oil, gas, coal - have. This conversion process
tries to turn gas into having the same energy as oil, so in
theory a barrel of oil and a BOE should contain the same amount
of energy.
He explained that there are two main differences between oil and
gas in the midstream, however; gas is more expensive to
transport than oil and the tariff is not going to be regulated
by FERC. Its price will be very much driven by not just the cost
but also how the expected return on the investment is
structured.
Slide 7 assumed a FY15 forecast of almost 500,000 barrels of oil
(bbl) and about 400,000 BOE at $100 bbl/$81 BOE; the midstream
is $10 bbl/$66 BOE.
3:45:07 PM
Upstream oil is about $6 and about $9 BOE at the wellhead. So,
if you're trying to tax at the wellhead, you're kind of ignoring
the largest part of the BOE, which is midstream. Slide 8
indicated how a drop in ANS at $90 can wipe out that $9 BOE, and
at that point you basically have no value up on the North Slope
to tax. In a different way, slide 9 hiked the costs or tariffs,
not an extreme assumption, but that still ends up as zero.
Slide 10 brought it all together and allowed conclusions to be
formulated. The big picture is you want to get a fair value for
your gas, but how the midstream is structured is a huge driver:
envision the litigation surrounding $10/barrel midstream and
then what it would be for $66/BOE midstream! Upstream is
important but in the grand scheme of things it really pales
compared to the midstream; 35 percent of 384,000 annual
production at $81/BOE would result in a state take of $370
million, not a very big number.
3:49:03 PM
MR. MAYER showed an analysis of $80 BOE with $10 (roughly what
one might expect as a sale price into Asia in a $100 ANS West
Coast world) attempting to illustrate that returns to the
upstream, royalty, and production tax vary wildly if those are
the principle sources of revenue for Alaska. He said one can see
the potential benefits from equity participation and taking RIK,
but that gives a lot of exposure to local gas prices. Basically,
whatever the state does, it is exposed to risk from quantity
prices and royalty, and taking RIV actually poses the greatest
price risk to the state, because of its amplifying mechanism.
The reason being the construct of the fixed tariff, which in the
oil world is a very small portion of the overall BOE, but it is
such a large portion in the LNG world that it's like the state
guaranteeing a particular rate of return and taking a share of
what is left over. If that fixed portion takes up the vast
majority of the BOE, what is left varies wildly with very small
changes in prices. So, a 10 percent drop in price can mean the
difference between still substantial revenue and tax take versus
none at all.
3:52:53 PM
SENATOR FRENCH said the RIV should be fixed at the state's
royalty rate of 12.5 percent, so he was assuming the blue box
would be steady all the way down, but instead it was shrinking.
MR. MAYER said the point is that it's not 12 percent of $100 or
$110 in value; it's 12 percent of $110 minus the tariff. That is
the reason in talking about alignment that the tariff becomes
critical. Small changes in capital structure and rates of return
that set that tariff can suddenly take away the vast amounts of
the share of value for the state. Price movements can also erode
the value to the state entirely. The counterintuitive point is
that in lots of ways gas, both RIK and tax in kind, with a
corresponding equity share offers more rather than less downside
protection for the state, and the state in this environment
actually takes a little less on the upside. There is potential
upside to the state in a high price environment from the RIV but
more downside as well.
He said his analysis, unlike the previous analysis, was of
actual results from Enalytica's model of an AKLNG project over a
30-year timeframe, but using general terms like low, mid, and
high prices rather than specific price points. It shows a world
in which the state takes (and the HOA sets out) a range of 20 to
25 percent share of gas and a corresponding equity stake
throughout the value chain. While some of the assumptions need
to be refined, the questions are the same: at relative price
movements where value to the state is at high and low prices.
The analysis showed that the return to the state was greatest
for taking RIK when prices are low but that in return the state
gave up a little when the prices were high.
3:57:39 PM
SENATOR FRENCH asked why the crossover point was at a different
price for the producers than it was for the state. He thought it
would be a mirror image.
MR. MAYER said there are more variables at play than just what
the state and producers receive: the other stakeholders - like
the federal government and the debt holders in the project.
SENATOR FRENCH asked if TransCanada performs identically to the
state in this scenario.
MR. MAYER answered not necessarily, but this analysis didn't
detail TransCanada's participation; further, he said that
involving a separate third-party midstream player for any of the
state's share inherently brings some fixed tariff component back
into the equation - not the full $66, just the tariff on the
liquefaction and the pipeline, and if the state were to exercise
its 40 percent option the level under which it would be subject
to that fixed obligation would be reduced further.
MR. TSAFOS added another reason it is not identical is because
the state's share includes parts of the chain that TransCanada
is not a partner in: the LNG facility and the upstream. The
whole idea in slide 11 was that RIV makes the upstream the sole
price absorber and the fixed nature of tariff in "in value"
amplifies the impact of price movement on state returns.
4:00:39 PM
MR. MAYER said for this analysis he had both parties sell their
LNG for the same price, to help people understand what a change
in either direction would do for either party - all other things
being equal and RIK participation versus RIV. The state is more
insulated from price movements taking less of the downside with
less upside exposure and the producers, counter to that, have
greater price exposure through RIK than RIV. The federal
government also has more exposure to price changes in the RIV
world. By participating in the project the State of Alaska
becomes a non-taxpaying entity, as long as everything is
structured properly (if it owes any state taxes it owes them to
itself and can discount them) with the exclusion of property tax
which they had factored in as a state obligation.
So the project has two components: a producer component and a
state component. The producer component with revenues from the
sale of LNG, costs associated with building the upstream and
different midstream components, tax obligations, and then
netting all those out, an after-tax cash flow. The other
component, Alaska, has the revenues, the same cost components or
at least a 25 percent share of them (except for the upstream
cost), and no tax obligations. That means the state is better
off in low price environments and as the non-taxpaying entity
that means the federal government is worse off.
4:03:38 PM
MR. MAYER pointed out that just because the state has a 25
percent share in a project doesn't mean that it gets 25 percent
of the overall value (slide 13). In most circumstances the state
is actually taking substantially more than 25 percent and there
are a couple of reasons for that, which come back to federal
government take: while the state foots 25 percent of the bill
for the midstream components it doesn't foot any of the bills
for the upstream and it's also a tax exempt player in this
project. So the portion of value it gets out of its 25 percent
share is very different than the portion of the value that the
other 75 percent get from their taxed portion.
Finally, there is an even bigger difference with a substantially
different cost of capital for the state than what the producers
have. He ran his analysis using the same amount for cost of
capital for both just to show the difference federal take makes
to state value. Property tax is a fixed amount based not on
revenues but on the capital value of the physical infrastructure
that producers have built up and that takes up an ever larger
portion of the total pie that the state is not paying. So, the
state takes more and more of the net present value of the cash
flows at low price environments and at times that share is quite
substantial, sometimes a majority of the value the project
creates.
4:08:18 PM
SENATOR BISHOP asked because of the state's tax exempt status
from the feds if its' 25 percent participation was more
valuable.
MR. MAYER answered being tax exempt was the primary driver, but
not sharing the upstream costs was another big factor.
SENATOR BISHOP asked if another company had to be formed under
AGDC to get that advantage.
MR. MAYER said that was his understanding of the
administration's rationale.
4:09:23 PM
MR. MAYER summarized that the state gets a greater share
relatively speaking in lower price environments (because less is
going to the federal government) and more that 25 percent at
almost any price range.
4:10:28 PM
MR. TSAFOS turned to slide 14 and said the path laid out by the
HOA fosters the state and oil companies caring about two similar
things: the price of the commodity and making sure it gets
produced at the lowest possible cost.
He underscored that just because gas is indexed to oil doesn't
mean it's the same price. That indexation to oil merely defines
a relationship between two commodities, but the price can be
very different in different contracts. Evidence for this was on
slide 15 that graphed Taiwan's three long term suppliers:
Indonesia, Malaysia, and Qatar - all three with prices linked to
oil. Taiwan has two contracts with Indonesia, one signed in the
late 1980s and the other signed in the mid-1990s. The high slope
of the two contracts ran in tandem and indicated that a $10-20
increase in the price of oil generates a pretty significant
increase in the price of gas.
The Qatar contract was signed in 2005 at a time when the buyers
had the bargaining power. That relationship, even though it was
still linked to oil, was very different. So, even though the LNG
prices were linked to oil, the contracts were signed at
different times in different markets. So the price of LNG to
Taiwan, for Indonesia was about $20, for Qatar $7 or $8, and for
Malaysia $6 or $7. But in 2008 when oil was at $100 and they
were paying the Indonesians $19 and $20, Qatar got its deal
revised.
MR. TSAFOS said the lessons to learn are: first, don't obsess
over the link to oil and, second, that new contracts don't
impact existing deals. The reality is that most long-term deals
will probably be wrong and all contracts have provisions to
revisit things; the state's lawyers should have a strong review
clause in any contracts they write. The standard practice is to
have a price review every 4 or 5 years and once outside of that
cycle if things get out of hand. A contract with too much
flexibility won't be worth anything and a contract that is too
rigid is likely to be taken over by events, he advised.
4:17:04 PM
SENATOR MICCICHE asked what could trigger a review clause and
mentioned a scenario where LNG goes from $7.50 to $16 and
shipping goes up as well and asked if the trigger could be
caused by the price alone or the cost across the supply chain.
MR. TSAFOS responded that a price review is usually exercised
for two reasons: the first is volatility protection and the
second is the distribution of value between different
participants. He turned to slide 15 to explain volatility
protection: the idea being a shaky project can find commercial
ways to protect itself. The most typical is an S-curve. If you
don't have an S-curve you're like Indonesia: the price of oil
goes up and the price of gas goes up. The S-curve says I am
concerned that the price of oil may go down and I might not make
a good return on my investment, so I would like to slow down how
that relationship plays out as prices go down. I want some
insurance; and I want to make sure I earn $12 no matter what.
You can probably sign a contract like that as long as you are
willing to give up on the upside.
He said these contracts were not written to survive for the long
term and assume that at times the world will no longer
fundamentally represent what is in them and allow for making
fundamental price reviews. For instance, if you were to sign a
contract today and oil went up to $110 you couldn't raise your
hand and call for a price review, because that would be
unreasonable. However if it went up to $250, you could. A big
part of price review is triggered by these clauses.
MR. TSAFOS said a second cause for price review is triggered by
the distribution of value between different participants (slide
16). For instance, Equatorial Guinea when it was developing its
project thought its LNG was shipping from its port to the United
States, so it wanted a netback relative to the U.S. And just
like everyone else who got the U.S., wrong they did. So, when
the U.S. price tanked their sales prices tanked, too. That LNG
was then taken by someone else at the port, put on their ships,
and sold to Japan for $17. So, it leaves the port at $2 and ends
up at $17. When that happens the company can say the world has
changed because they thought it was going to the U.S. When the
company, BG, did that, the sovereign was very unhappy, because
they were taxing the LNG at 2 percent. And now the company, BG,
is making voluntary payments to the government of Equatorial
Guinea; the point being you can upset governments only so much.
He said this had also happened in Trinidad: they had a deal
where they thought they weren't sharing the upside so they
fought to change the terms. Yemen just recently concluded deals
to basically strike out S-curves, because they signed contracts
in 2006/7 that assumed a much lower oil price world.
More often it's the sovereigns who try to restructure, because
if you are an oil company, you actually buy the gas from Yemen
at $5 and sell it to Korea for $20: they care about the $20 but
only get taxed on the $5, and that's what creates tension. So it
does not matter to the oil company where along the chain that
value is distributed. The bottom line for what the state should
really care about when there is a gas deal in front of it is its
exposure to risk and if there are ways to protect the downside,
and usually that can be done by foregoing some of the upside.
The other thing critical to price is that timing matters. If the
buyers have the power, you won't get as good of a deal as when
the sellers have the power. And while this is pretty self-
evident, the reason he underscored was because you get tied to
that relationship. So, Qatar is still living in the bargaining
power of 2005 not the bargaining power of 2014.
4:25:12 PM
MR. TSAFOS said investors care about the price and the costs,
and the costs are what are essentially affected by what could go
wrong. In the current scenario the state is on the hook for 25
percent of the liquefaction and for a share of the 25 percent of
the midstream, potentially, depending on how the TransCanada
deal works through the GTP and the pipeline.
He showed some large complicated projects showing what kind of
cost escalation had happened to other projects (slide 16).
Sometimes they come on line on time and under budget, but they
usually don't. Some of the costs are global: the price of steel
going up and not much can be done about that: some are country
specific: in Australia a good living can be made working on
these projects, so when the competition for labor is so intense
because there is a once-in-a-generation commodity boom there,
the only way to secure labor is to pay up. The last category
that could cause costs to go up is very specific project issues:
an accident, a fire, strikes, the pipeline route, and other
things that can just go wrong. It's not a shock to have a 10 to
20 percent cost overrun, he said, and the slide showed a range
of projects with cost overruns ranging from 0 percent to 120
percent.
4:29:23 PM
SENATOR MICCICHE asked if a project delay can be beneficial in
terms of commodity price and value.
MR. TSAFOS answered that he could think of project delays where
the damage was less than expected but not what could be called
beneficial. Tying up capital does not make sense. During the
economic depression of 2008/9 demand cratered and at that time
there were projects going at 100 percent but they slowed down,
because there was no reason to pay people overtime to complete a
project to sell a commodity that no one was dying to get. Things
like that on the margin can make a difference, but, again, so
much capital is tied up in spending $40 billion you really want
the money to start coming in.
MR. MAYER answered that question this way: there is a big
difference between the delays they are talking about here in the
FEED process, and the ones that really count, which are those
that happen post-FID. Many projects have delays for one reason
or another in terms of the process, but at the point of FID the
deals have been done and that is when the real money is getting
spent. Delays after that point add up every year in terms of
tens of billions of dollars in NPV lost along with no revenue
coming in.
4:32:50 PM
SENATOR MICCICHE asked if he was saying that after the contracts
have been executed after FID that every moment not selling gas
is a delay and a hit to the bottom line, essentially.
MR. MAYER responded that maybe the contracts have been executed
and include a requirement to have gas to sell, in which case
that hurts; but if market conditions improve post-FID, there is
no benefit, because the state will not be signing new contracts
at a better oil price slope, and it would get the downside of
another year's delay and another year's interest on tens of
billions of dollars with no revenue coming in.
MR. TSAFOS said the revenue might even become negative, because
the state might be obligated to find something to sell if the
project is not on line. For example, Indonesia had a low S-curve
structure and, in fact, one of the operators was shipping gas
from Egypt that was previously fetching $17-18 for $3-4 because
they had to meet some commitments. Things like that could drive
the value of the delay; it generally tends to be bad in
different degrees of seriousness.
4:34:36 PM
SENATOR BISHOP observed that there were four projects in the
billion-dollar range came in on budget and with no cost
overruns, but then four other projects in the $37-60 billion
range had overruns of 15.6 percent to 45 percent. That
underscored that value equals getting the highest price possible
along with the lowest cost of construction possible, because
they want to get gas back to Alaskans at the cheapest molecule
price at the burner tip.
SENATOR FRENCH asked MR. Tsafos to talk about the risk to the
state of having only one project to sell at one time. How can
Alaska best protect itself against the fact that it is just
going - in one 12-month window - to the market to establish long
term contracts for all of the gas going through the pipeline for
a 20-year period.
4:36:26 PM
MR. TSAFOS said first - big picture - everyone will know what
kind of deal it is getting at the FID and if they are fairly
similar between the players, but if the market is timed wrongly,
the project won't get built. Less than 10 percent of the total
cost is spent before the FID in terms of the administration's
time table.
However, he said, there are other things to consider. One is
that selling the gas from a project of this type is a multi-year
affair (2-3 years). More important to appreciate is that Alaska
has one asset but it is targeting a marketing window that no one
else is targeting - no one is cutting LNG deals for 2022 or
longer. Because it is taking so long for this project to get
going, the window is different and the state might benefit from
the fact that it is tapping into a need for some companies that
are thinking strategically long-term that other players aren't
necessarily responding to. Before coming to Juneau he had
conversations with some of his Japanese colleagues who are
getting very excited about Alaska, because they are thinking it
is the next tranche after the Lower 48, after east Africa and
western Canada, and that could be quite beneficial.
Lastly, he said there is a possibility for Alaska to sign up the
gas in several blocks rather than one big one. There are three
trains and they usually come on line maybe six months between
one another and Alaska may still have some gas to play around
with. The bottom line is if the state is marketing gas and the
responses from the buyers are not good, don't worry; the project
just won't go forward and the sizeable money won't be spent.
That's typically what happens in LNG projects.
4:41:28 PM
SENATOR MICCICHE said his understanding was that you don't
necessarily have less risk because you have more projects. It's
not like Australia averages its risks and the huge cost overruns
were largely because of the amount of projects in a short time
and their associated labor cost overruns.
MR. TSAFOS answered he was right; but some of the risk also had
to do with the exchange rate between the Australian and the U.S.
dollar. Because of the commodity boom, international companies
earn U.S. dollars, but they buy Australian dollars to pay labor.
Alaska may not have the same types of cost overruns. The AKLNG
project is estimated to cost $45-65 billion and the $65 billion
is the overrun. That is how companies are presenting their
projects now: as a range.
SENATOR MICCICHE asked if the AKLNG project's royalty production
tax model was more advantageous than Australia's individual
contractual model.
MR. MAYER answered that there are a number of ways to set up
appropriate fiscal arrangements and Australia's is similar in
some ways to Alaska's. The Australian system is a profit based
tax as is Alaska's: for offshore projects there's no royalty;
for onshore projects there is a royalty but it is credited back
by the federal government. Contractual arrangements apply to LNG
projects in places like Qatar and Indonesia. But one thing
really stands about Alaska that is not present in a lot of other
projects, which is the sheer size of the midstream compared to
the upstream component. They talked about Gorgon being similar -
with a very big difficult costly upstream deep water development
being a big portion of the value, along with the pipeline and a
liquefaction project, whereas he couldn't think of any other LNG
projects in the $45-60 billion ranger where almost all of that
is in the midstream. In that sense, a tax regime that is focused
entirely on the upstream with value netted back to the upstream
is less likely to be of benefit to the state than something,
however it's structured, that focuses on getting value
throughout the chain.
SENATOR MCGUIRE said having alignment in the equity share is the
best way to go forward. She also appreciated Senator French's
question as to what happens if no one shows up and the fact that
the market takes care of those things. For her the last area of
risk for the state was in the midstream and not wanting to lock
into something like it did in AGIA (paying forward by $300
million) that seemed out of alignment with basic economics. She
wanted to be able to extricate in a place that isn't in
alignment with fair business and market principles. She said she
likes this bill, because it does make sense, and she likes
TransCanada as a partner, but they need to scrutinize the
midstream.
SENATOR GIESSEL said she had asked the administration to clarify
where those off ramps are and what they will cost.
CHAIR GIESSEL thanked the presenters and asked the committee
members to submit amendments by Tuesday at 9 a.m.
SENATOR FRENCH said they hadn't even heard the entire bill yet
and wanted another day.
CHAIR GIESSEL said she would take that under consideration. [SB
138 was held in committee.]
SJR 5-OFFSHORE OIL & GAS REVENUE
4:49:59 PM
CHAIR GIESSEL announced that the next order of business would be
SJR 5.
4:50:40 PM
MICHELLE SYDEMAN, staff to Senator Bill Wielechowski, sponsor of
SJR 5, presented it on behalf of the sponsor. She said everyone
is aware of the vast oil and gas potential in the federal waters
off our coasts (OCS) - more than a billion acres on more than
6,000 miles of coastline. This area is believed to contain the
largest undiscovered energy resources in the United States,
estimated to be 25 billion barrels of oil and 132 tcf/natural
gas; more than the current estimates for the Atlantic and
Pacific regions of the OCS combined. The potential for
development is obviously enormous as is the potential benefit to
the U.S. Treasury.
A University of Alaska study found that energy production off
Alaska could generate 35,000 jobs on average annually over a 50
year period; the total payroll an estimated $80 billion. Since
statehood, the federal government has held numerous lease sales
off our coasts and collected more than $8 billion for them.
Unfortunately, Alaska has received little revenue in contrast to
what happens when the federal government leases within the
state's boundaries, in which case the host state receives 50
percent of the revenue - to compensate for any impacts they may
bear as a result of that development. This is an automatic
process that occurs off-budget at the federal level. The same
should hold true for offshore development where costs and risks
are often much greater.
MS. SYDEMAN said in 2006, the federal government recognized the
inequity and gave four states a 37.5 percent share of revenues
generated from offshore development; that did not include
Alaska. It did include Mississippi, Louisiana, Texas, and
Alabama, and it makes to no sense for us to be left out of that
sort of arrangement.
She said fortunately the stars are coming closer in alignment in
Washington, D.C. The Senate Energy and Natural Resources
Committee is being by Senator Mary Landrieu, who has been a huge
advocate of OCS revenue sharing. She has joined forces with
Senator Lisa Murkowski and introduced a bill called Fixing
America's Inequities with Review Act (FAIR). The White House is
opposing this act and the primary reason is the cost and concern
over the federal deficit. Senator Murkowski said this was short
sighted because revenue sharing will enable the states to
support offshore development by investing in roads, ports, and
other necessary facilities, and to invest in the infrastructure
that will enable that development to be safe and environmentally
responsible. More off shore development will lead to greater
revenues for the federal government.
4:55:22 PM
MS. SYDEMAN said they had developed a committee substitute (CS)
after consulting with Mr. Adrian Herrera oh Arctic Power who
walked them through the White House's main concerns and those
were addressed in the CS. He advised that action very soon would
be helpful because Senator Landrieu would be pushing this in the
near term; and having a resolution sponsored by a Democratic
member of the state legislature would be helpful, because they
were trying to convince a Democratic administration.
SENATOR GIESSEL opened public testimony.
4:57:03 PM
ADRIAN HERRERA, Coordinator, Arctic Power, Anchorage, Alaska,
testified in support of SJR 5. He said their sole purpose is to
argue for the environmentally responsible development of the
federal lands in the Alaska Arctic, both on and offshore. He
cautioned that the resolution must address the White House's
specific concerns as laid out by the Congressional Budget Office
Secretary during the hearings for the FAIR Act last year. Senior
members of the committee support the bill and he expects it to
move this year. It is also supported by Senator Begich who has a
similar bill on revenue sharing but it is region specific.
He said the FAIR Act had one hearing last year in July and will
need another one. They have not come up with $6 billion, which
the Congressional Budget Office warns the bill asks to pay, but
it is spread over ten years. The White House's argument has to
do with the reduction of funds going to the national Treasury.
The President wants to use offshore revenues to fund the Land
Water Conservation Fund (LWCF) nationwide and other
environmental projects. But there is no intent to take a penny
away from LWCF; so for SCR 5 to succeed, it has to address this
concern.
5:00:30 PM
He opined that both sides can be aligned, but it's a case of the
state providing a rebuttal to the White House's arguments
against this to say we understand your concerns, but you can
fund LWCF and arrange the funding to states so that
environmental projects are mitigated. He explained that the 37.5
percent is made up of two sectors: 27.5 percent goes to the
state and then the state would have to apply to the Treasury for
an additional 10 percent, which could only be spent on
alternative energy development or environmental mitigation.
Until the Treasury was satisfied of the projects submitted for
money, it wouldn't award that 10 percent. He said this 10
percent is going for projects that are exactly the same as those
in the LWCF and the President's other environmental projects.
The new chairwoman has stated that these projects will be much
better mitigated on a state level than by the Treasury of
Department of Interior on a national level, since states are
much more efficient at environmental mitigation and spending
money appropriately with regard to OCS development.
5:02:30 PM
SENATOR GIESSEL, finding no questions, thanked him for his
testimony and closed public testimony.
SENATOR GIESSEL thanked Ms. Sydeman for updating them on this
legislation and said she was considering some amendments;
therefore, SJR 5 would be held in committee.
SENATOR MCGUIRE expressed her frustration about how Alaska is
viewed by the federal government and she would love to see a few
more whereases about what has been done in the state already to
relocating villages to prevent coastal erosion, funding the
Arctic University in Fairbanks, helping look at affordable
housing in villages, and looking at funding for deep water
ports. It's important to educate the federal government about
what the state is doing with these funds and what it is already
doing. For 20 years they had been asking for a Polar-class ice
breaker and haven't gotten one and they had been asking for help
developing the Arctic. Alaska has dug into its own coffers to do
this and it would be nice to have some additional revenue
sharing the way other Gulf Coast states have.
She said $250 billion in infrastructure needs had been
identified for the people of Alaska; it comes down to the
potential for oil spills occurring in the Bering Sea that has
fed the earth almost a billion tons of Pollock.
SENATOR GIESSEL said those were excellent comments. [SJR 5 was
held in committee.]
5:06:20 PM
There being no further business to come before the committee,
Chair Giessel adjourned the Senate Resources Standing Committee
at 5:06 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SJR 5 vs A.pdf |
SRES 2/14/2014 3:30:00 PM |
SJR 5 |
| SJR 5 Sponsor Statement.pdf |
SRES 2/14/2014 3:30:00 PM |
SJR 5 |
| SJR 5 Fiscal Note.pdf |
SRES 2/14/2014 3:30:00 PM |
SJR 5 |
| Gov Parnell letter on OCS Revenue Sharing.pdf |
SRES 2/14/2014 3:30:00 PM |
SJR 5 |
| Gulf of Mexico Act Sec 5.pdf |
SRES 2/14/2014 3:30:00 PM |
SJR 5 |
| Petroleum News March 2 2008.pdf |
SRES 2/14/2014 3:30:00 PM |
SJR 5 |
| SRES, enalytica 20140214 UPDATED.pdf |
SRES 2/14/2014 3:30:00 PM |
SB 138 |