HB 83 - NATURAL GAS RESOURCES DEVELOPMENT [Contains testimony relating to HB 9] Number 1832 CHAIR OGAN announced the next order of business would be HOUSE BILL NO. 83, "An Act relating to natural gas pipelines, providing a statutory definition for the portion of the constitutional statement of policy on resource development as applicable to the development and transportation of the state's natural gas reserves, amending Acts relating to construction of natural gas pipelines to require conformance to the requirements of the statutory definition, and amending the standards applicable to determining whether a proposed new investment constitutes a qualified project for purposes of the Alaska Stranded Gas Development Act; and providing for an effective date." CHAIR OGAN noted that HB 83 was sponsored by the House Special Committee on Oil and Gas. He informed members that he didn't intend to move the legislation from committee anytime soon. Instead, he wished to get the issue before the public and have a thorough discussion before moving any legislation relating to the gas pipeline. CHAIR OGAN explained that HB 83 interprets Article VIII, Sections 1 and 2, of the Constitution of the State of Alaska. Section 1 of the constitution reads: It is the policy of the State to encourage the settlement of its land and the development of its resources by making them available for maximum use consistent with the public interest. Section 2, the general authority section, reads: The legislature shall provide for the utilization, development, and conservation of all natural resources belonging to the State, including land and waters, for the maximum benefit of its people. CHAIR OGAN informed members that Section 1 of HB 83 articulates those sections of the constitution. It provides a development strategy and some policy guidance for the administration, to ensure that the transportation of natural gas is designed and located to be responsive to those requirements, by talking about both short- and long-term job opportunities in the state. CHAIR OGAN pointed out that subparagraph (C) [page 2, beginning at line 22] talks about significant long-term property value to the tax base and other things to provide for local government support. Under paragraph (2) [page 2, beginning at line 26], it says that the gas pipeline from the state to North American markets does not foreclose any other options. This is to keep the options open, not only for a pipeline route but also possibly for an LNG [liquefied natural gas] line to Valdez or Anchorage. CHAIR OGAN referred to testimony at another meeting about the availability of natural gas reserves in Anchorage; he said the known reserves are estimated to last about 12 years. Despite optimism that there is more gas out there, nobody has really drilled for it yet or found it. "And 90 percent of those gas reserves were found in the 1960s," he added. CHAIR OGAN said the bill addresses environmental concerns. However, it also says the commissioner shall issue a written finding that this project will comply with the overall strategy for development, use, and control of the project or projects to develop and transport the state's natural gas resources. In a nutshell, this says that the gas pipeline must be developed for the maximum benefit of the people. He asked: What does that mean? Does it mean a northern route and simply generating revenues? Or a southern or Alaskan Highway route by which Alaskans can not only get the jobs to build it, but also get access to the gas to enhance lifestyles and keep low-cost energy for Alaskans? Chair Ogan indicated his own interpretation of maximum use would be the latter. Number 2143 LARRY PERSILY, Deputy Commissioner, Department of Revenue, came forward to testify on both HB 83 and HB 9. He noted that when the Alaska Stranded Gas Development Act (HB 393) was passed three years ago, a section in that bill set a deadline for applications under the law: June 30, 2001. The two bills before the committee [HB 83 and HB 9] would not change that deadline. He pointed out that the governor's legislation [HB 38] suggests extending that deadline to December 2001, which may be something the committee might want to consider. Mr. Persily added that he doesn't think anyone realistically expects a project application by June. He offered to give input as to what an appropriate deadline would be. [Tony Braden and Jim Cowan of the Department of Natural Resources informed the chair via teleconference that they were available to answer questions.] Number 2291 MARK MYERS, Director, Division of Oil & Gas, Department of Natural Resources (DNR), testified via teleconference regarding the technical analysis. In terms of the commissioner's findings, he said a couple of things would be of interest. First, the division believes a study should be done in Cook Inlet to determine the demand for gas in the future; that relates to the development strategy and requirements under subparagraph (A) [page 2] of the bill. MR. MYERS discussed the second issue: placement of a pipeline. A route depends on alternate gas fields that might be found along that route. Therefore, the division believes additional work would be well warranted in terms of looking at the pipeline route and what additional resources might be available to put into the system later. CHAIR OGAN asked whether that was a capital request for the study in Cook Inlet. MR. MYERS said the division is submitting a fiscal note with that in there. It duplicates a capital request already in the governor's gas line CIP [capital improvement project]. CHAIR OGAN noted that a sectional analysis for HB 83 was being handed out to members [see memorandum from Jack Chenoweth dated January 22, 2001]. Number 2379 REPRESENTATIVE GUESS asked whether there was a positive fiscal note because of those two things that the division wants to do. MR. MYERS answered that in looking at the commissioner's finding, [the commissioner] is required to determine that there is, under this bill, sufficient gas for a low-cost domestic and industrial source; that is the demand side. The second part is the routing. That issue is directly involved with the language in the bill, but is also generic to the pipeline routes in other gas bills, which is why the governor's CIP gas line (indisc.). Number 2424 CHAIR OGAN asked Mr. Myers what the governor's position is on this bill. MR. MYERS responded that it wasn't appropriate for him to comment on that; he was there to provide technical support. He added, however, that he had heard that the governor is very supportive of a gas line. CHAIR OGAN asked Mr. Myers about the part of the legislation that would require enough capacity to be provided to whatever point where this [pipeline] might "Y" for either Valdez or Anchorage. He mentioned a recent newpaper article by Ken Thompson (ph) about a gas hub. MR. MYERS answered that the concept of a gas hub itself is a sound idea, but it depends on the implementation. There are many issues, including the best use of the state royalty oil, which he indicated were also mentioned in the article. He said: We're certainly not opposed to looking at the issues. But ... I think we actually have to have some proposals on the table by the producers as to ... how much gas they're selling, in what form they're all offering it for sale, et cetera. ... So, at this point, ... conceptually it sounds great. But how it would be implemented and the sources of all that gas, again, would be issues that ... we would need to work out .... I guess I'm basically being fairly vague until we have a little more on the markets and the supplies. MR. MYERS mentioned the "Alliance" meeting and discussion of gas demand. He said demand is a real part of it, as well as the costs of various versions and of producing the gas. The gas-to- liquids (GTL) process at this point is a lot less efficient internally than producing and shipping gas farther up the pipeline. One must compare the price for the GTL process versus a straight gas line. For numerous issues there aren't yet answers. Number 2560 REPRESENTATIVE CHENAULT asked Mr. Myers what he hopes to accomplish out of this $88,000 to study the demand for gas and the declining Cook Inlet reserves. MR. MYERS answered that it is basically to understand what the demand is and how much that demand can be met locally, within Cook Inlet. He deferred to Kevin Banks for details. Number 2591 KEVIN BANKS, Petroleum Market Analyst, Division of Oil & Gas, Department of Natural Resources, spoke via teleconference. He indicated the division proposed a study last summer to examine the market - specifically, the potential growth of demand - for gas in the Cook Inlet and Southcentral regions. On the supply side of this study has been considerable research by the producers in Cook Inlet. There doesn't seem to be a lot of dissention among those producers as to how much in potential reserves is now in place in Cook Inlet. MR. BANKS said there may be some issues relating to deliverability that the division would like to examine. On the other hand, the division doesn't have a very good handle yet on what kind of demand growth will be seen in Cook Inlet, which depends on the future price of gas; the division wants to look at that because it shows how the North Slope gas might fit into meeting that demand in another couple of decades. Number 2670 CHAIR OGAN asked whether there were further questions or additional testifiers; there was no response. He announced that HB 83 would be held for further consideration. HB 9 - STRANDED GAS DEVELOPMENT PROJECT CHAIR OGAN announced the final order of business would be HOUSE BILL NO. 9, "An Act amending the standards applicable to determining whether a proposed new investment constitutes a qualified project for purposes of the Alaska Stranded Gas Development Act; and providing for an effective date." Number 2740 JEFFREY LOGAN, Staff to Representative Joe Green, Alaska State Legislature, presented HB 9 on behalf of Representative Green, sponsor. He explained that HB 9 proposes to amend the Alaska Stranded Gas Development Act (ASGDA), enacted in 1998. Section 1, page 1, lines 9 and 10, proposes to delete current statutory language that restricts the Act to projects for the export of liquefied natural gas [LNG]. MR. LOGAN explained that the ASGDA establishes a framework for a sponsor or group of sponsors - who seek to develop North Slope natural gases and transport it - to approach the commissioner of the Department of Revenue with a proposal for a system of payments to the state in lieu of other taxes. It is a way for the state to extract its economic "rent" outside of current tax statutes. Before the commissioner considers such a project, there has to be a threshold so that the commissioner knows that the proposal is viable; this was agreed upon, by the commissioner and the legislature, when this particular statute was written. Therefore, these specifications were established. MR. LOGAN noted that the first specification, which is being proposed for deletion, states that the project must be for the export of LNG. At the time, he explained, it was anticipated that a transportation system for the gas would be to tidewater, where the gas would be liquefied and exported overseas. Since then, however, a tremendous upheaval in the natural gas market has indicated to many people - including the sponsor - that the market for Alaska's North Slope gas may be found in North America or the northern United States. Representative Green proposes deleting the language on lines 9 and 10 to allow the other two standards in statute to apply without restricting the applicability of the ASGDA to a project for the export of LNG. MR. LOGAN referred to Mr. Persily's comments regarding the deadline for applications made during the hearing this date on HB 83. Mr. Logan stated: We, indeed, had considered that. Representative Green is still speaking with some of the producers and others who might be potential sponsors to see if, indeed, December 31 would be a better date than the current date in statute, or a date extended past that, so we don't have to come back every year or every other year and extend that thing out until someone is ready to step up to the plate. So, he is still considering the date. It may be a later time than December 31. MR. LOGAN noted that Representative Green is a member of the House Resources Standing Committee, where HB 9 is referred next; he anticipates taking care of it there, but obviously it is the current committee's prerogative to address that. TAPE 01-7, SIDE B Number 2950 REPRESENTATIVE JOULE referred to the section that talks to payment in lieu of taxes. He asked whether another way of interpreting that is as a kind of incentive for the producers to develop it. MR. LOGAN responded that HB 9 doesn't speak to that section of the Alaska Stranded Gas Development Act. He said he thinks, however, that it would be a fair characterization. REPRESENTATIVE JOULE stated his understanding that it was based on prices prior to the current situation. He asked for more of that kind of information to be provided to the committee. Number 2890 CHAIR OGAN said the existing legislation, in his opinion, delegates legislative duties to the governor. The constitution is pretty clear that the legislature has the oversight responsibility for the development of the resources. The administration is charged with carrying out the policies that the legislature sets in statute. He indicated Alaska's governor, whoever is elected, has a lot of power compared to governor's in other states. Although he supported this legislation in the past, it essentially says to the governor, "The legislature doesn't want to deal with this. We're going to let you deal with this, but then you come back to us and let us vote it up or down, basically." Chair Ogan asked for confirmation that the legislative approval is a "yes" or "no" vote on whatever the governor negotiates. MR. LOGAN emphasized that HB 9 doesn't address any other section of the Act. However, he agreed to come back before the committee with more information on the rest of what was then HB 393. He said he didn't want to get too far afield. CHAIR OGAN indicated a thorough discussion of the former bill and current law is imperative for committee members, in order to make a good judgment about HB 9; he suggested scheduling that for a future date. Although HB 9 looks simple, he said, the original legislation was not. This would expand not only for LNG, but also for gas-to-liquids and an overland pipeline route, for example. Chair Ogan stressed the need for discussion of gas-to-liquids and the related process, in order to make a good policy call. He said it is a major shift in policy, as well as a major delegation of legislative authority to the executive branch, which he always wants to do cautiously. MR. LOGAN noted that he had saved his materials from the debate on HB 393. CHAIR OGAN asked whether anyone else wished to testify; there was no response. He indicated there would be numerous other meetings relating to these policy calls. [HB 9 was held over.]