SB 280-OIL & GAS PROPERTY TAX; MUNI TAX  SB 275-NATURAL GAS PROJECTS/INCOME TAX/SURCHARGE 3:31:44 PM [CHAIR GIESSEL announced the consideration of: SENATE BILL NO. 280 "An Act relating to the taxation of certain natural gas pipeline property; relating to municipal taxation limitations; establishing an alternative volumetric tax on natural gas throughput; relating to the allocation of revenue from the alternative volumetric tax; and providing for an effective date." and SENATE BILL NO. 275 "An Act relating to natural gas and natural gas projects; relating to the Alaska Gasline Development Corporation; relating to the powers and duties of the Legislative Budget and Audit Committee; relating to the value of certain oil and gas; relating to an income tax on certain natural gas-related entities; relating to the oil and gas production tax; establishing a surcharge on gas processed in the state; and providing for an effective date."] We are going to start out first of all with a presentation from GaffneyCline. Public testimony was noticed for today's meeting, and we will take that up probably around 4:30-ish. Anyone who might be on the line or here in the room wishing to testify, we're going to hear from GaffneyCline first. I will welcome Nick Fulford. He is the Senior Director of LNG and Energy Transition with GaffneyCline. Mr. Fulford, thank you for joining us today. I know you were listening in yesterday as well. I'm hoping you have some comments to share with us about yesterday. So welcome. 3:32:29 PM NICK FULFORD, Senior Director, Liquid Natural Gas and Energy Transition, GaffneyCline, Houston, Texas, provided the presentation: Comments on SB 280. Really to start off today's dialogue, I would draw those viewing at home to the basis of opinion [on slide 2]. I'll leave that to read at your leisure. 3:33:07 PM MR. FULFORD moved to slide 3: Agenda - Topics to be Covered Today's discussion is formulated in three parts: The first main area deals with what I would describe as the fiscal framework around how an LNG project typically evolves, and the pros and cons of making decisions around that while the project is still in a formative stage. Secondly, I wanted to talk about some of the mechanisms that have been used elsewhere to recognize the impact of LNG projects on communities and their infrastructure. For that, I'll recap briefly on Texas and Louisiana, which we've spoken about before. I also wanted to highlight how the approach differs when the impact of the project is arguably that bit more. Finally, really picking up the tail end of yesterday's committee hearing, I also wanted to talk about the economics and the impact of the six cents and how it fits in more broadly with other features. Before continuing, I also wanted to highlight, particularly for those viewing at home, I know Chair Giessel and I think Senator Wielechowski will be very well aware of the work that was done under Governor Parnell and then under Governor Walker on the Municipal Advisory Gas Project Review Board back in 2014. It's a good reminder that the question of property tax and its structure has been under review for quite some time. Several revenue commissioners have dealt with this in different ways, and certainly from my perspective, back in 2014 I worked with quite a number of the boroughs and those affected, so I do have a sense of how important these property taxes are for the local communities. With that, maybe we can move ahead to slide 5, which is really the start of the content. 3:35:06 PM MR. FULFORD moved to slide 5: Potential Approach to Fiscal Framework I think to frame today's discussion, it might be useful to think about SB 280 really in two ways. The first is the way in which the alternative volumetric tax works compared with existing law, and the second is to then consider the level of tax, the six cents. But the first question is much more strategic. It concerns the basic fiscal architecture of the project, which developers, buyers, and lenders typically like to see in a reasonable level of detail before progressing the project toward FEED [Front-End Engineering Design.] What is fiscal architecture? I would describe that as the main interfaces with the host government and the way in which taxes and so forth are organized. Examples of fiscal architecture are shown on the left of this slide, starting with upstream taxes. Obviously, Alaska has decades of experience in determining a framework for resource development. It's based on a combination of royalty and tax, and it's something that is reviewed from time to time and indeed may be reviewed in the context of this project. The basic framework is there and well understood. I'd also include corporate income tax under that heading, both federal and state. Again, there's an existing framework, albeit with some changes under discussion, but these features are well understood, and the different scenarios can be modeled effectively. Next, we have the question of federal support. For the LNG project what we're talking about here is whether or not loan guarantees are offered. It's a key feature of the project economics. It's potentially worth about half the property tax question that's under discussion today. If you look at Mr. Stickel's presentation, page 36, you'll see that the change in project economics with a move from 5 to 7 percent cost of debt, which is roughly the order of magnitude involved, the impact is also fairly significant. So that's an interesting question in terms of how property tax and federal loan guarantees impact one another. 3:37:54 PM In one scenario, both a change to property tax and federal loan guarantees might be needed to get the project over the line. A question for the legislature may be how those two features interact with one another. Moving on, we've talked before in this committee about fiscal stability and the fact that some LNG developers enter into a contractual commitment with host governments. For Alaska, that's unlikely to be the case. An investor would look instead at the decades of governance and resource management that Alaska has experienced over the years. It's also interesting to note that the very bill we're debating today would be seen as an important step, I think, toward establishing the fiscal stability that developers and other stakeholders would want to see. Next, we have the important question of in-state supply. For the most part, the regulatory controls that would apply to tariff setting and so forth are in place, some conceivably under FERC, others under the RCA. Even if changes are needed, the basic premise is set out there for people to see. That leaves us with property tax. You've heard other testimony on what is effectively a lack of compatibility between the structure and framing of the existing legislation in the context of what is an exceptionally large capital-intensive project that is also highly exposed to front-end costs. This is the one element of the fiscal architecture that really remains to be resolved. It will be a concerned bias for project developers, lenders, and others. As I mentioned, this has been under discussion for quite a few decades. 3:40:07 PM CHAIR GIESSEL I'm just going to comment on your second-to-the-last bullet. I appreciate the last one you had, of course. The RCA, the Regulatory Commission of Alaska, does have some interest in the regulatory process, which may not be as clear-cut as you may assume. They will be presenting to us next week. I mentioned to the committee previously that the Alaska Oil and Gas Conservation Commission (AOGCC) has a process for gas offtake authorization, so that also is a topic that will be pertinent here. 3:40:52 PM SENATOR MYERS I just kind of want to revisit the fiscal stability bullet that you've got on there. I recognize that we've been doing this for 50-odd years or so, and we've got some experience in it, but I still wonder if we're as stable as other places, or as stable as we could be. You mentioned that some places do this contractually. We can't because of our Constitution, Article IX, Section 1. We've changed our tax structure around. We've talked about some changes on both the upstream and the corporate tax side this year. I believe a few meetings ago the chair mentioned we did some tax breaks for Cook Inlet a dozen or so years ago, and then we turned around and changed and rescinded some of those. So, I'm really wondering if, compared to the global benchmark, we really have the fiscal stability that we need for a project of this size. 3:42:00 PM MR. FULFORD Clearly, this is a topic that frequently comes up in the context of Alaska, so I'll keep my comments short. I think in testimony provided by myself, my colleagues, and other individuals, investors don't like change, particularly on the tax front. You can divide those changes into fundamental structural changes and then changes to rates. With a resource-rich economy like Alaska's, it's not unusual to see changes in tax. Interestingly, I was doing some research on this the other day. The UK is actually the least stable oil and gas regime at the moment because of the significant changes that have been undergoing there. Norway, I know you've looked at that in this committee, is one of the most stable. It's a very high- taxation regime, but it's been like that for many, many years. It's a major topic. Indeed, one I'm sure we'll return to, but I'll leave my comments at that. 3:43:27 PM SENATOR RAUSCHER This question is for you. He's got the last one here, property tax community impacts. I know we heard from the mayors in the past. I'm wondering, have we gotten anything in writing from each one of the mayors on how it was going to impact their communities for us to review from time to time, or have we not? I was just wondering. 3:43:52 PM CHAIR GIESSEL No, I have nothing in writing. 3:44:04 PM MR. FULFORD moved to slide 6: Approaches to Mitigating the Risks of Early Decisions Just a reminder that there are about 130 LNG export terminals around the world today, in 22 countries. Each of these projects has gone on a very similar journey to the one we're talking about here in Alaska. Each has lessons and experience from which to draw. Fundamentally how these projects come together depends a great deal on the specific, unique features of the project and the host government. One of the most encouraging features of all this is that while the projects are complex and challenging, they've all managed to navigate their way through some of the complexities and challenges that we've been hearing about over the last couple of days in these hearings. The other feature I would add from years of experience on many LNG projects is that they typically encounter very tough financial hurdles with very thin margins, at least initially. That's another feature that we're seeing here in Alaska that's quite common. Of course, the real value tends to come in the following decades, where they can become a huge contributing element to the economy. Listening to the previous testimonies and other committee meetings so far on this bill, the intricacies of how it would be applied really show quite clearly, I think that as the project develops, new features will emerge that need to be addressed. For example, given the importance of in-state supply and the potential for equity, the number of moving parts is quite significant, especially at this early stage. As you think about the approach and the decision-making that goes into this, one very common characteristic of all these big projects is that they are iterative in nature as they reach the final stage of FID [Final Investment Decision]. As the various features of the project come together, things start to fall into place. Glenfarne and AGDC are also working on the project in this kind of iterative way. They're securing technical and contractual milestones while working on a complete set of documents. 3:46:43 PM MR. FULFORD continued comments related to slide 6: Coming back to my comments on the previous slide, it is really at these earlier stages of the dialogue between the project stakeholders that this kind of basic framework in which the project has to operate needs to have a reasonable degree of definition. It isn't typically until the project has been through the FEED process that ultimately precise terms evolve. By the time the project reaches FID, you'd expect both the fiscal mechanisms and the precise tax rates to be in place. It wouldn't be unusual to see a number of iterations of these details as the FEED process evolves and the EPC and construction contracts and so forth are put in place. Market changes have to be incorporated. In fact, even when the project is past FID and into its operational phase, sometimes these features have to be adjusted or recalibrated to refine how they work. For example, this is quite frequently done when an LNG project is expanded and moves from three to four trains and so forth. There's a little bit of a parallel here in terms of what's happening on the other side of the equation. LNG sale and purchase agreements for the last 10 years or so typically come with some kind of reopener or trigger to examine how things are working. Just to be clear, these reopeners and triggers are within very constrained mechanisms. Nevertheless, there's a recognition that sometimes the contract can't foresee or take into account every change that a project has to go through. Another way to mitigate the risks of these early decisions is to include what are sometimes called "conditions precedent." You'll see them referred to as CPs. This could include a requirement that certain things happen or certain outcomes are achieved, or it may simply be a time constraint. These sorts of things are quite common in commercial sales contracts. Ultimately, these are mechanisms that are available to the legislature as well. At the end of the day, the legislature clearly has considerable discretion in the passing and repealing of laws. Interestingly, you've heard me refer many times to the LNG Canada experience. The British Columbia (BC) government repealed and replaced LNG-related laws twice and changed the tax allowances for the project before the final package was agreed. That's a good example of how the tax framework evolved with the project as things became better defined. 3:49:59 PM MR. FULFORD moved to slide 7: Pros and Cons of Early Fiscal Commitment So much of the debate around SB 280 has been the pros and cons of agreeing to what is a fundamental change to tax law in Alaska compared with the benefits of providing greater clarity to the project. Firstly, as we look at what some of those could be, and I highlighted this a few minutes ago in the context of fiscal stability, progress on the property tax challenge is clear evidence of a working dialogue between the project developer and the state. A shared goal to create a suitable economic framework for the project. This goes further than the property tax question and basically adds momentum to the project. It will encourage buyers, it will encourage lenders, and it will demonstrate that there's a collaborative process underway to essentially get the project over the line. Secondly, it helps define the economics and financing features of the project. That helps to progress pricing negotiations with buyers and dialogue with lenders and finance providers. In that way, it arguably helps pave the way as the dialogue with buyers moves from a letter of intent to heads of agreement and finally a sale and purchase agreement. Thirdly, and there's been evidence of this in the dialogue around the DOR presentation, it will help the state manage its budget and some of the potential challenges and longer-term implications of making a change like this. That was starting to come out in the dialogue and, obviously, with a decision on moving to an AVT, for example, some of these budget-planning features can be addressed in more detail. The other thing, as I mentioned, is that as things come together, there will be other features of taxation that need to be adjusted or altered in some way. With the [alternative volumetric tax] AVT mechanism that then helps you move to other features like upstream tax or corporate income tax and so forth, and establish a basis for those at the same time. So, in general, it creates a much better planning horizon. 3:53:06 PM MR. FULFORD continued comments related to slide 7: If we look at the other side of the equation, what are some of the challenges? The biggest challenge, of course, is that the legislature is being asked to consider this change without a detailed insight into the project, its economics, and how both the structural move to the AVT and the level of tax set alter the balance between government take and profits being put into the private sector. This speaks to the heart of the constitutional obligation that you have, and in an environment without that full pricing mechanism, it's hard to take a decision. I would add, though, that obviously for Glenfarne and AGDC, the same applies. We heard yesterday, I think, that they've yet to get their Class 2 cost estimates for the processing plant and the liquefaction. So, to some extent they have some exposure too. They'll be going through a similar process of iteratively trying to put the building blocks in place for the project. Related to this loss of option value, any trader or decision- maker will always tell you that the best time to make a decision is right at the last minute, when you have as much information at your disposal as possible. It's one of those things where the decision to move to an AVT can be seen as a positive step toward the broader project, but at the end of the day making a decision early does have risks. 3:55:17 PM MR. FULFORD continued comments related to slide 7: The other feature here is clearly something everyone on the committee, and more widely in the state, is aware of: property tax is a topic of great interest to a lot of people. It affects the boroughs and many others quite fundamentally. As the debate continues, it wouldn't be surprising to see continuing pressure to revisit this issue or look at it again. That's one of the things I'll come back to later in my presentation where we talk about some of the mechanisms that have been put in place elsewhere. Interestingly, on incentive misalignment, I spoke on the last slide about the federal government initiatives, such as loan guarantees or grants that may be available, and the state's decision around property tax. Those two elements are so separated in terms of policy and decision drivers that it's hard to see one affecting the other. Nevertheless, there are features where a decision on property tax could affect something else. The question of revenue distribution and transparency has clearly come up a lot. It came up in some of the comments received from the boroughs. The bill provides considerable discretion for the state to work on how those funds are distributed, but again, I'll come back to that a little more later on. So that's really the end of my comments on this slide, I think. In the next part of the presentation, we move on to some of the more specifics and the numbers. 3:54:59 PM SENATOR CLAMAN joined the meeting. 3:57:28 PM MR. FULFORD moved to slide 9: Host Government Approach Depends on Economic and Legislative Drivers As you think about the population of LNG projects, they kind of fall into three buckets. The nature of the dialogue between the developers and the host government, and indeed communities, is quite different depending on where you are in terms of these constraints. In the simplest examples, you have a host government with a privately funded LNG project and no particular policy goals that impact how the state enters its dialogue with the developer. Great examples of this would be Texas and Louisiana. A single LNG project makes very little difference to the state economy. It obviously does impact the communities involved, but typically the dialogue between the state and the project would be limited to things like property tax changes and so forth. Then you move to other countries, or states indeed, where there's a clear constitutional requirement to manage resources in a way that is demonstrably in the interests of the citizens and the ultimate benefit of the state. Immediately, with that constitutional duty, comes a much higher hurdle in terms of diligence, understanding the economics of the project, and being very clear about the division of wealth between the host nation or host state and the project. 3:59:30 PM MR. FULFORD continued comments related to slide 9: I think I've spoken about some of these features previously, but they have a very different characteristic from the much more straightforward discussion in the first example. Then we move on a step further, which is where there's not only some kind of constitutional obligation on the state to ensure that things are being done appropriately, but the state is acquiring potentially equity in the project. With that, you move to the kind of due diligence that you would see in a commercial LNG project where, for example, a Japanese buyer might be interested in taking equity in an LNG export project. There's a very considerable process of due diligence that goes on behind that. The same is true with a lender. Any large lender. I want to set the scene with that explanation because it does explain why the dialogue between the LNG project and the state here in Alaska is so different from how it would be characterized in Texas or Louisiana. It's the constitutional element, and it's also the fundamental impact that the project would have on the state and its economy. 4:01:09 PM SENATOR MYERS You said the rest of the United States and Canada are in the top category there. I think in our other discussions we've made it pretty clear that most places outside of North America are in the bottom category, the bottom box in your chart. Alaska is the one in the middle. Is there anybody else in the oil and gas field that functions in that middle place besides Alaska? 4:01:41 PM MR. FULFORD I'd have to refer back to some of our previous analysis. I could remind myself of the detail and respond in writing to that question. 4:02:02 PM SENATOR WIELECHOWSKI In other jurisdictions that are similar to Alaska, where there's: an obligation to develop the resources for the public good, and closer collaboration and information sharing with the project developers and other stakeholders is required, how would you say Alaska compares in this project to those jurisdictions in terms of the information that we're getting and the collaboration that we're having? 4:02:38 PM MR. FULFORD One of the features that you typically see in some of these other jurisdictions is a state oil and gas company, which typically has extremely close eyes into the energy ministry and the functions of government. In this example, AGDC was created through SB 138 and so forth, and so it has a role which is akin to a state-owned oil or gas company, but is also different. One of the differences, I think, would be in the way that AGDC is set up and how that plays into this question of the dialogue between developers and the state. 4:03:47 PM SENATOR WIELECHOWSKI But do you think the Alaska Legislature is getting the appropriate amount of information needed to make the decisions that we need to make? Do you think we should just be relying on AGDC? Or do you think there should be more information than we're getting? 4:04:14 PM MR. FULFORD One of the features which I've talked about and we've discussed is this question of the open-book economic model, which is typically an Excel-based model of the project that is accessible by all the stakeholders, including the host government, or at least certain individuals within the host government. Listening to the testimony over the last couple of days, I noticed in the DOR presentation and the comments that Mr. Stickel made, he referred a number of times to receiving guidance from AGDC on certain assumptions or how his model had been structured. My sense, without having discussed any of this with the individuals concerned, is that Mr. Stickel's model, the DOR model, is starting to approach what I would describe as an open- book economic model, or an OBEM. As that develops and as the project starts to benefit from better definition around budget cost estimates and so forth, I would expect potentially that economic model, and the discussions around it, to form an OBEM- like dialogue. In some ways, it's not surprising that the detail of the project isn't being fully shared with the legislature, although clearly AGDC has access to some or all of that. We're obviously on a journey, and as we go down that road, more and more information will be shared. But we are still at a relatively early stage of the project, and I think there's a way to go before those details can probably be shared. 4:06:35 PM SENATOR WIELECHOWSKI Do you think the legislature has the information that it needs in order to make the decisions that we need to make, or do you think we should wait until the information is more closely defined, whether it's FID or FEED? Do you think we should wait until those numbers are fleshed out a little bit more, or do you think we should just go ahead and make the decision and hope we're right? 4:07:05 PM MR. FULFORD Obviously, there are a whole range of policy implications involved in a decision by the legislature. As I said at the start of the presentation, I think it might be helpful to look at SB 280 in two different ways. One is a structural change in the property tax mechanism, which aligns the mechanism much better with what would be needed for the true economic basis of the project. The second is the question of the tax rate. The first, I would say, is an imperative for the legislature to resolve because the lack of a resolution on that is, I suspect, potentially holding up the dialogue with interested stakeholders. The second, the setting of the rate, is a more complex question. If you look at other jurisdictions, were you to settle the rate now, you may wish to revisit it at the point where FID is approaching. As I mentioned before, there's an iterative process going on where quite significant changes in project economics could occur between now and FID. Ultimately the legislature will want some discretion in terms of setting the tax rate and so forth such that it's done appropriately prior to FID, when the project is actually launched. 4:09:04 PM SENATOR WIELECHOWSKI That is an extremely helpful statement, at least for me. I want to restate what you said, because I think it's important and I want to make sure I got it right. You're saying that the discussion about going to an AVT, you believe, is critical. Correct me if I'm wrong on that. You're also saying we could set a rate, or maybe set a framework for a rate. What advice would you give us on that? So, there are two questions there. 4:09:38 PM MR. FULFORD I would agree with the first restatement. A formulation of the property tax mechanism toward an AVT would be an essential step in creating an economic framework for the project with appropriate fiscal controls. On the second point, my assumption is that in suggesting a 6- cent-per-Mcf AVT, which I understand has arisen from the project developers, correct me if I'm wrong, there's probably a reasonable expectation on their part that, give or take, that's about the number that the project could sustain. I don't think they would wish to see material changes in tax rates as the project progresses. One approach would be to set the tax at 6 cents and provide a framework for reexamining it if required. I think some thought would need to go into what that framework would look like because it wouldn't be in anybody's interest for it to be essentially a completely open question. I mentioned LNG price reopeners. They typically contain certain criteria that have to occur for the reopener to be followed. Sometimes there's a time constraint. Maybe some of the lessons from that type of framework could be applied to this to provide the state with some flexibility as you go forward and as the economics of the project become more disclosed. 4:11:57 PM MR. FULFORD moved to slide 10: Property Tax Incentives (Louisiana) Some of these numbers will look familiar. These are property tax subsidies that I've discussed before. For the benefit of today's discussion, I thought it would be useful to turn them into dollars per Mcf, given that we're talking about a dollar per Mcf charge. As you look across the table, the number in the right-hand column is not a tax that's imposed. It's a tax reduction that's being offered to the project. For example, Sabine Pass at the top there, 30 million tons per annum, the property tax holiday that was offered is worth about 33 cents per Mcf, and so forth as you go down. The other thing to recognize here is that the nominal property tax rate in Louisiana is 100 mills, so it's already half of what it would be in Alaska. It should also be added that the taxable value of the LNG plant is worked out in a different way. At the bottom, I put an example calculation. It's not an accurate reflection of Alaska property tax. It's simply an approximation based on a $50 billion initial capital number, depreciated over 20 years and taxed at 20 mills Obviously, there are nuances around municipal taxes versus state taxes, but as a helpful guide, the numbers are there for illustrative purposes. You can see that the contribution of the property tax subsidies offered to these projects is material, and it compares, at least in some way, to the discussion here in Alaska. 4:14:21 PM MR. FULFORD moved to slide 11: Property Tax Incentives (Texas) Slide 11 represents the same analysis for Texas. The mill rates are a little different in Texas. They are made up of county, city, and port authority. In 2022, the potential for LNG projects to benefit from a reduction in property taxes for school districts was removed. You can see in the last two projects, including Glenfarne's Texas LNG project, that the size of the property tax subsidy was somewhat smaller. Again, taxable value is typically about 75 percent of the cost of the terminal. These examples provide a guide as to how property tax has been addressed in other projects and the extent to which projects have been offered concessions. 4:15:33 PM SENATOR DUNBAR I'm trying to interpret this information and put it in a way that I can understand, and maybe the public can digest as well. The numbers on the far right, approximate value of the tax holiday per Mcf, that's just property taxes, as you indicated. There are also other taxes in these jurisdictions that maybe we don't have, correct? MR. FULFORD Yes. SENATOR DUNBAR Beyond that, if you compare the two, other projects that are going forward with 3 cents, 10 cents, and 3 cents again, while ours is 78 cents, that seems very much out of step with the other projects. Is that a fair interpretation? 4:16:21 PM MR. FULFORD It is. Brief comment. There are two reasons. One is the relatively high mill rate, and the other is the nature of the tax, which is very much focused on the front end, so that the highest tax occurs at the start of operations. Those are the two reasons why the numbers are different. 4:16:51 PM SENATOR DUNBAR I understand the issue of having the tax on the front end. We discussed that yesterday. There might be other ways to shift the cost to the pipeline, not just the pipeline but the project, into out-years when they are generating revenue while simultaneously protecting the state's interests. Both in the short run and hopefully over the long run, we can recover some of that value. My question is, if those two numbers were reversed and it was 53 cents for the first 10 years and 78 cents for the out-years, would that appreciably change things for the project? 4:17:39 PM MR. FULFORD I think it's worth considering how project investors would typically look at the economics for an LNG project like this. First of all, they would apply a fairly significant discount rate to revenues and indeed costs as time progresses. A burden on the project, taxes charged to the project that occur 10 years from now, would be very significantly discounted compared to taxes on the project in year one. That's one of the main reasons why, in Texas and Louisiana, we're talking about a 10-year tax holiday, because by the time the taxes do become payable, the value in money of the day terms is significantly less than the project. Equally, debt has been paid down, cash flows have increased, so the ability of the project to support these taxes later in life is much higher than in the early days. 4:19:01 PM SENATOR DUNBAR That all makes sense. Of course, what we're being asked to do is more than just a tax holiday. It's a tax holiday and then a permanent tax cut. Nothing, of course, can be permanent with our legislature; we can't bind future legislatures. But essentially that's what we're being asked to do. Mr. Fulford, shouldn't we also apply something like that discount rate for the out-years? You saw the graphs yesterday, or maybe it was two days ago. We're doing this every day now, so it's starting to flow together a little bit. We're being asked to actually run our revenue into the negative when it comes to connected oil taxes in the short term on the promise of increased revenues in the out term. Shouldn't we use similar logic to what these projects are using and value immediate dollars more than highly discounted future dollars? 4:20:00 PM MR. FULFORD There's a third feature that's worth discussing too, and that is revenue stability. It's not just the amount; it's how stable that revenue is for the state and for municipalities. That has value to the state and to municipalities. There are, if you like, two or three factors at stake. One is the time value of money and how that is used to value the broader tax. The other is how you value a steady income that can be more dependable for schools, health, and so forth. I didn't put it on the slides today, but in Maryland, the PILT that was agreed to for the Cove Point LNG project was mainly agreed to because the alternative was creating extremely volatile property tax income for the local communities. So, I would add that. The other feature, which is potentially quite a material element of the AVT, is that it continues in perpetuity. From a time- value-of-money perspective, $60 million a year in today's dollars, received 20, 30, or 40 years from now, has very low value once discounted. But for the state and the communities involved, a revenue like that, which could continue for many decades, has some significance compared to a property tax that may be based on a pretty well written-down asset. 4:22:17 PM SENATOR DUNBAR I think it would hold its value if it were adjusted for inflation, but I don't think we're being asked to do a percentage value. I think we're asking for a flat cent value that's going to get progressively less valuable as the years progress. 4:22:34 PM SENATOR KAWASAKI This seems to be sweeping larger than property taxes. It talks about replacing all state and municipal property, ad valorem and sales and use taxes on qualified property, municipal taxes on gross or net income, license fees, excise taxes, and other charges. Is that typical for most jurisdictions? 4:23:05 PM MR. FULFORD I must admit I've not come across that in any other jurisdictions. In a place like Tanzania or Mozambique, for example, where you're really talking about a transformational impact of the LNG project, the dialogue does get down to quite detailed features of how communities, municipalities, and local governments can be assisted. So, it can get very detailed. VAT, value-added tax, is typically a feature in many countries, though not quite the same, it typically gets roped into the discussion. 4:24:04 PM SENATOR WIELECHOWSKI The information in this slide and the previous slide is interesting, but I don't know how to put this in context. I don't know that this helps me a whole lot. It shows me that some communities give a tax holiday of 2 cents, and some give a tax holiday on the previous slide of 58 cents. I see what the value of that is, but fundamentally we have a constitutional obligation to get the maximum value for the resource. What that means to me is sort of what Jay Hammond used to say: extract every penny you can. That's our job. I don't know that this is helpful to me in getting to that answer. What would be helpful to me is maybe some information from you or the department saying, well, the internal rate of return for the company needs to be 10 percent. Pick a number. If you tax at 6 cents, they have an 11 percent rate of return. If you tax at 7 cents, they have a 10.9 percent rate of return. That just seems to be more where this discussion should be. Am I wrong in that? 4:25:22 PM MR. FULFORD The process you described is very consistent with the type of dialogue that we've seen in many other jurisdictions. This is where getting down to the nitty-gritty of the economics and the economic model, with all these factors, is ultimately what will drive the equation that governs the split between the private investor and the host government. 4:25:57 PM SENATOR WIELECHOWSKI Can you get us modeling like that as we move forward in these next few weeks of debate and discussion? At least to me, that seems to be what has driven our decisions on oil taxes in recent years, well, in the last 20 years, where we've had analysis on what the implications of various tax rates would be on particular oil fields. In this case, we have one discrete project. It seems to me you could simply create an analysis that would show what the cost of the project is estimated to be, what the total taxes the producer has to pay are, what the cost of the product is, what the sale price of the product is, and what the gas treatment costs are. You could create a formula. It seems like it wouldn't be that hard to do. It would be hard for me, but probably not hard for you. Then you could plug in the numbers and figure out the standard rate of return. That would be a helpful process. 4:27:00 PM MR. FULFORD Yes, I agree, Senator Wielechowski, through the chair. The greatest uncertainty is the capital cost and where that's likely to come out. The mechanics of LNG economics are relatively straightforward. It involves a fairly complex Excel model, but the mechanics themselves are relatively straightforward. It's the assumptions that will drive the outcome because, in a very high-capital-cost outcome, clearly the potential for government revenue is less, and vice versa. So, the modeling per se can be done. It's the assumptions that are key. While we're on the topic, depending on how the committee wants to progress this type of work, I mentioned that I think the DOR model is potentially moving toward what I would classify as an OBEM, an open-book economic model, given the guidance that we have from AGDC. That might be the place to start, and I'd be happy to work with DOR on what that looks like and compare it against other models that we have. Anyway, I'll leave that for you to consider. 4:28:40 PM SENATOR CLAMAN One of the challenges that I continue to have with all the discussion is the unknown of whether this project will actually go forward or not. In the best possible world, we come up with the perfect tax rate, the project goes forward next summer, and construction starts. Suppose we come up with some sort of legislative solution that has many uncertainties, including whether the project even goes forward. Is there some reasonable time period to essentially sunset that proposal? So, if it has not developed and things are not going forward, or even if it has developed, we put ourselves in a position to further examine whether the project is really working or not working. How do we avoid getting into a situation where we lock ourselves into a 20-year picture and then, 10 years in, people are saying we did not really look at all those things? If we were to try to put in a sunset, what is a reasonable sunset approach given the uncertainty of whether the project even goes forward? 4:29:56 PM MR. FULFORD Obviously, I have no insight into any of the project documentation or contracts, but I would assume that some or many of those also have some kind of clause that relates to timeframes. In an ideal world, a sunset clause around legislative actions would potentially correspond to some of the key timeframes in those contracts, and that might be a dialogue to have with AGDC. 4:30:45 PM MR. FULFORD moved to slide 12: Worker Impact and Taxation This comes to the ad valorem, bed tax, and so forth. This came up at yesterday's hearing, and you had some testimony from, I think, Legal, in terms of the interpretation of the bill as it stands. This slide simply highlights the likely level of expenditure that could be directed toward some of those other taxes, which may or may not be included in the bill. As you can see here, in terms of the workforce, I think Glenfarne has suggested the peak workforce would be about 12,000 people, which most likely would be about two-thirds of the way through the project. At a $200 per worker subsistence and accommodation cost, you can see that generates almost $1 billion of expenditure around the middle part of the project. This is simply an illustration that the topic of how activities related to the project are taxed is a fairly material number. 4:32:20 PM MR. FULFORD moved to slide 13: LNG Jurisdictions with a Constitutional Duty We talked about jurisdictions with a similar constitutional requirement to monetize resources for the benefit of the citizens. This is a list of some of those jurisdictions. In the context of SB [280,] it is interesting to compare Mozambique and Tanzania in the context of Alaska and British Columbia (BC), two adjoining jurisdictions with similar gas economics and so forth. What's interesting is that in 2017 Tanzania introduced a bill that provided such a high degree of control over the project, using the constitutional obligation as the rationale, that it became very difficult for international energy companies to operate without concern that the government might change key project features. In effect, what happened is that capital flowed toward Mozambique, which equally had a demanding framework for the project, for taxes and so forth. In the context of Alaska and BC, a really good textbook example of how capital can flow between two countries depending on perceptions of risk and control. The other example on this slide, which I will return to in a few minutes, is Papua New Guinea. It introduced a very comprehensive program to support communities impacted by the project. On the next slide are examples of different jurisdictions and how they have imposed taxes. As you think about the 6-cent-per- Mcf AVT, the next slide sets out some of those comparisons. 4:35:05 PM SENATOR MYERS I can't help but notice that with all these countries that have public-interest or ownership language, you're, well, to be blunt, comparing us to third-world countries, more or less. I have to wonder whether, in your analysis, some of these requirements for the country to basically get the maximum revenue have acted in such a way as to help keep those countries poor to some extent. 4:35:47 PM MR. FULFORD I fully accept your initial comment that the comparison between Alaska, with its developed economy and standard of living, is very different from some of these countries. Nevertheless, from an LNG perspective, I think there are some very interesting parallels that can be learned. Of these countries, Nigeria has well-known challenges in terms of governance and transparency. Mozambique is an interesting one. They've been exporting LNG now for probably two and a half years, and already you can see the differences in terms of stability, foreign exchange, and so forth. That's maybe an example of where things have turned out well. But there's a phrase, I think it's called the "winner's curse," where countries that encounter significant wealth and income sometimes find that the outcome is not what was planned. 4:37:11 PM SENATOR MYERS With these countries that you listed, when their LNG projects were going forward, were they also offering tax incentives at the time those projects were being created? 4:37:30 PM MR. FULFORD In some of these countries, it required almost a complete reinvention of tax and tax mechanisms. The formulation of the tax mechanisms and tax rates was almost like a commercial negotiation. It was a unique set of laws that was specific to the LNG project, and that's another thing that is useful to remember. These projects are so big and so complex that sometimes they need their own enabling legislation that sets them apart from any other oil or gas activity. 4:38:29 PM SENATOR WIELECHOWSKI When we talk about stability, a lot of people like to criticize the state we live in by saying we're unstable. I would point out that a number of these jurisdictions are not what some people would say are the most stable in the world. Papua New Guinea. The United States government urges Americans to reconsider travel there. Nigeria. Known for having its pipelines blown up and its workers assassinated. Algeria. The border areas are fraught with terrorism. Peru. Recently it has been subject to nationwide strikes. Mozambique. It has Islamic State-linked insurgencies. I know people like to beat up on Alaska and say we're not the most stable place, but looking at some of these other jurisdictions around the world, I would say we're a pretty good place to do business. That's not including Venezuela, where taxes were raised to 90 percent and assets were expropriated; Russia, where Vladimir Putin raised taxes to 90 percent and expropriated assets; Bolivia, where the president expropriated assets; and Libya, where Muammar Gaddafi presided over a civil war, expropriated assets, and raised taxes to 90 percent. I would say Alaska is not a terrible place to do business for those who like to beat up on our state. 4:39:49 PM MR. FULFORD It's actually a highly relevant comment because, given the events of the last couple of months, stability and reliability have moved so far up the LNG agenda that, as you look at Alaska from a stability and dependability point of view, it's very much at the top of the list. As I mentioned before, it's a short hop across the Pacific Ocean, there are no navigation threats, and so your comments are actually very relevant at the moment. 4:40:42 PM MR. FULFORD moved to slide 14: Municipal/Community Support - Global Examples What I've done here is look at specific features that have been directed toward benefits for local communities. I've tried to put them in cents-per-Mcf terms so you can compare them with the 6 cents here. For example, you've got benefits to the local municipality in Norway of 7 cents. That's probably the closest approximation. LNG Canada, for the benefit of one of the local First Nations, is 1 cent. There's another 1 cent with the wider British Columbia coastal fund, and another Canadian example, also directed toward First Nations, that was 4 cents. With the time remaining, I might suggest that we move briefly to slide 15, which does a little more of a deep dive into Papua New Guinea. 4:41:51 PM MR. FULFORD moved to slide 15: Papua New Guinea - Features to Assist Impacted Communities It's an interesting example because a lot of time and effort was put into addressing concerns about how the original LNG project would impact some of the local communities, many of which were relatively isolated and not accustomed to industrial activity. The way they did it was in two halves. One was financial, with what was essentially a royalty on the gas based on its value at the wellhead. That was split between direct benefits to what they class as clans or what might be considered a tribe, community investments and infrastructure, and a future generations fund. There was also a development levy, which is less well defined, but is supplied for local infrastructure development. With that came an opportunity to invest in equity on the project. In that case, there was an overall state interest of 19.4 percent, of which 4.27 percent, under what was called the "kroton equity option," was an amalgamation of the local communities impacted. They had equity in the project. It was not a carried interest, as it sometimes is. They had to fund the original equity, but they were offered assistance to do so by the state government. Coming back to some of the remarks made earlier. I think this is a good example of how, even with the best thought and planning, putting in place a fair and equitable mechanism to recognize the disruption to local communities is a difficult thing to do. Since it was put in place, there has been quite a lot of dialogue and indeed litigation around it. But this was the mechanism they chose. 4:44:40 PM CHAIR GIESSEL opened public testimony [on SB 280 and SB 275.] 4:45:11 PM BRIAN KASSOF, Lead Regulatory Analyst, Alaska Public Interest Research Group (AKPIRG), Fairbanks, Alaska, testified in support of SB 275 with the following remarks: My name is Brian Kassoff. I'm calling in from Fairbanks on behalf of the Alaska Public Interest Research Group, a statewide nonpartisan 501(c)(3) nonprofit with more than 50 years of history advocating for the public interest in Alaska. AKPIRG strongly supports the transparency and fiscal accountability provisions of SB 275 and appreciates the committee's efforts to address these important questions. Glenfarne has refused to share critical information about project governance and economics with legislators. This would be concerning under any circumstance, but is particularly alarming given the following: Glenfarne has no proven track record, having never brought an LNG export project to final investment decision. Glenfarne's assertions that the project might not go ahead without substantial tax breaks raise questions about its competitiveness. Glenfarne proposes to begin construction on phase one, an in- state natural gas pipeline, before it completes the final engineering studies for phase two, the gas treatment plant and LNG export facility, without any guarantee of the viability of phase two. There is a very real possibility that Alaskans could be left responsible for the full cost of a pipeline. Glenfarne has promised that gas from the phase one pipeline would be competitive with imported LNG. I think cost estimates for imported LNG are between $12 and $16, but Glenfarne will not share the information necessary to verify that claim. Their calculations assume a volume of gas that is more than twice current in-state use. A 2023 estimate by the Berkeley Research Group, which was hired by Enstar and other utilities to consider new gas supplies, estimated a much higher price for gas from a privately owned in-state pipeline, at about $28 per thousand cubic feet. All of these reasons, and others, make transparency essential. We support other aspects of the bill as well. I included those in my written comments, and I will close there. 4:47:54 PM MIKE CHENAULT, Board Member, Alaska Gasline Development Corporation (AGDC), Nikiski, Alaska, testified in support of SB 275 with the following remarks: Thank you, Madam Chair and committee members. I have a lot more to say than what I'm allowed in two minutes, but I'll try to get through it. When creating AGDC, the legislature wanted to take decision- making out of the political arena of the legislature and provide it to a board whose main focus is to assess commercial, fiscal, and legal risk impacts. The sponsor stated that the project has changed since Senate Bill 138, [ch. 14, SLA 14]. The ExxonMobil project was originally envisioned as an equity participation project where all the partners would be responsible for bringing their percentage of equity to final investment decision (FID) to move the project forward. At $40 billion, that would have meant the state would have had to fund $10 billion and accept the risk of schedule and project cost overruns. We heard from Wood Mackenzie that the Exxon project was uneconomical due to the high rate of return the producers would require to invest their equity. Wood Mackenzie recommended that the project move to a project- finance model akin to LNG export projects then under construction on the U.S. Gulf Coast. The project-finance model, where the project is financed with a combination of debt and equity, and the debt is underpinned by off-take agreements. The project sponsors are willing to accept a lower rate of return, perhaps 10 to 12 percent, compared to international oil companies, who want 18 to 22 percent. With lower equity and debt costs, the project is more economical. In 2024, Glenfarne stepped in as a potential lead developer and began due diligence in earnest, coming to Alaska and meeting with various companies, government officials, utilities, and several legislators. 4:50:31 PM SEAN MCDERMOTT, Energy Policy Analyst, Fairbanks Climate Action Coalition, Homer, Alaska, testified in support of SB 275 with the following remarks: Thank you for the opportunity to comment today and for the committee's diligence on this issue. I'm calling to express our support for the measures outlined in Senate Bill 275. Without detailed cost estimates from AGDC and Glenfarne, there is no way for legislators in Alaskans to know the true cost and impact this project will have on our communities. In response to questions from this committee on March 18, Mr. Fulford acknowledged that, without the type of financial guardrails proposed in this legislation, existing Alaska law does not adequately protect Alaska's interests in this project. This project is also operating on a lot of problematic assumptions. The claim for the phased approach to the project was to provide affordable gas to Alaska, but Mr. Kissinger with AGDC has told House Resources that the phase one pipeline would not provide lower-cost gas to Alaskans. The Wood Mackenzie Alaska LNG report, that is often cited, assumes that 90 percent of Fairbanks will be connected to natural gas within just a few years, but there is no plan for a spur line to Fairbanks. As Fairbanks North Star Borough Mayor Hopkins pointed out, even with current property tax rates, Fairbanks does not receive revenue or cash from this project. AGDC continues to say the project will cost $44 billion to $46 billion. This committee heard Monday that project consultant Mark Begich recently suggested the cost could be $57 billion. Independent analyses suggest that number is likely to be upward of $70 billion. Without transparency concerning overall cost estimates, the true impacts of the governor's and Glenfarne's property tax legislation are also a mystery. How can they possibly ask Alaskans to subsidize the project through property tax cuts worth billions before the true cost of those cuts is known? Another critical financial piece of this conversation that I feel has not been addressed is the need for a clearly defined and funded plan for dismantling, removal, and restoration, like TAPS, which could otherwise cost Alaskans billions in public funds. Thank you for your time and consideration. I'm happy to answer any questions. 4:52:59 PM MADDIE HALLORAN, representing self, Anchorage, Alaska, testified in support of SB 275 with the following remarks: I'm a born-and-raised Alaskan. I want to start by thanking both you for bringing this really important issue to light with this bill, and also Senator Dunbar, who is a great representative of my neighborhood. Thanks to both of you. I'm supportive of SB 275 because I'm really concerned about this project for a lot of reasons, but the potential impact of moving forward on such a costly project when it appears, from all of the great questions you all were just asking during that presentation, legislators close to the project do not currently have a whole picture of what it will cost the state. As Sean just said, Glenfarne has not provided an updated construction estimate in years, and I'm worried that the current gas crisis in the Railbelt and the current state fiscal crisis are being leveraged to push this project forward when it won't actually come online in time to help solve those issues. A friend told me yesterday that her heating bill in Fairbanks for an apartment complex is normally $1,200 for the first three months of the year, and this year it was $4,000 because of high prices and an unusually deep cold in Fairbanks this year. I've heard from lots of neighbors across Alaska. We're all facing really big utility bills that are only going to grow with the current world oil crisis and local gas crisis, and we've all watched there be an insufficient budget to meet state needs year after year. We're basically losing twice by hinging our future on these extraction projects, and this project in particular feels like we're doubling down on a strategy that is not really serving us anymore as a state. I'd love to see the legislature consider an analysis showing how much money we could save Alaskans by mobilizing just a fraction of the cost of this proposal into renewable energy projects and training Alaskans to maintain new energy infrastructure. I believe public dollars should be used to serve the public and not subsidize projects that will on make out-of-state millionaires richer. 4:55:31 PM DOUG WOODBY, representing self, Juneau, Alaska, testified in support of [SB 275] with the following remarks: Mostly, I want to thank you, Senator Giessel, your staff, and others on the committee who have done the hard work to bring this bill forward to increase transparency for the LNG project. The developer of the project, 8 Star Alaska, suffers from a transparency gap, especially regarding project timelines and project costs. Just yesterday morning in this room, you heard that the FEED studies for the gas treatment plant and liquefaction plant may not get started until sometime midyear this year. They're not expected to be completed for a year, which means the FID, the final investment decision, won't happen until sometime next year at the earliest. But we keep seeing glowing press releases from Glenfarne, such as the one that came out on April 2 saying that Alaska LNG offtake volumes will be "determined when customer allocations are finalized in the coming weeks." Our governor and others keep saying we're closer than ever to having a gasline. It could make a person wonder whether we're being taken for a ride. There's a consulting industry built around this pipeline planning process that must be profiting pretty well, and we have Alaskan workers and families looking forward to the promise of good jobs, an economic boom, and supposedly cheaper energy costs. But does it pencil out? It's hard to know. Yes, we need greater transparency, and I'm really thankful that you brought this bill forward. That's all I have. 4:57:41 PM BEN BOETTGER, Energy Policy Analyst, Cook Inletkeeper, Soldotna, Alaska, testified in support of SB 275 with the following remarks as paraphrased: I thank the committee for bringing forward this much-needed bill. The project is changing fast. It is far from clear that every possible scenario would necessarily bring benefit to Alaskans in the form of lower energy costs or revenue. I think it is not even clear that the majority of scenarios, or the most likely scenarios, would bring benefits to Alaskans. As our representatives with a constitutional mandate to realize the maximum value of Alaska's resources, you have an obligation to be proactive in watching these developments and getting all the information needed for sound decision-making. SB 275 is a strong step and a far smarter approach than the blind trust and wishful thinking that have so far guided Alaska's approach to this gasline project. All week, you have been looking at a spread of potential outcomes for the project involving variable capital costs and uncertain gas prices. Another variable in the background is the LNG prices Asian utilities' will decide to accept. I hope that seeing these possible scenarios makes it clear to you what Alaska LNG actually is. It is gambling on geopolitical scenarios involving price LNG in Asia. It is gambling on the capacity of partners we do not know much about. We have yet to actually bring an LNG project final investment decision. The legislature has made bad bets in the past. If you are going to continue rolling dice for Alaska's energy future, you should at least understand the [indiscernible] area and who you are playing with. I hope you will pass this bill. Thank you. 4:59:27 PM CHAIR GIESSEL closed public testimony [on SB 280 and SB 275]. 4:59:47 PM [SB 280 and SB 275 were held in committee.]