SB 228-TAX INCENTIVES FOR GAS-TO-LIQUID  4:31:49 PM CO-CHAIR WIELECHOWSKI announced SB 228 to be up for consideration. MIKE PAWLOWSKI, staff to Senator McGuire, sponsor of SB 228, explained that he would give a brief introduction of the bill and then address the committee substitute (CS) that members have in their packets. He said the basic premise behind SB 228 is to look at the end market for gas and to look at what other jurisdictions have done to build an industrial base around their supply and to use it to create a valued-added liquid through the Fischer-Tropsch process. SB 228 started off with a reauthorization of an old industrial incentive tax credit that existed in statute for petrochemical oil and gas facilities that expired in 1999. The sponsor updated and reauthorized it in sections 1-6 of the original bill. The second part of the bill, was written with the understanding that these plants might be the downstream facility and that the upstream might be the producer selling to the facility. 4:33:33 PM MR. PAWLOWSKI said the definition of gas used in-state for heat and power in the ACES bill was expanded in SB 228 to include gas used for raw materials for producing liquids or petrochemicals. This was the beginning of the bill and the idea was to incentivize both the downstream and the upstream. 4:34:07 PM He explained that after talking to the Department of Revenue and Legislative Legal, the sponsor discovered several problems in the approach. The first one was that the original intent was to incentivize any Fischer-Tropsch process - looking at coal-to- liquids, biomass-to-liquids, and gas-to-liquids. But either coal or biomass has to first be synthesized into a gas and then turned into a liquid and the definition of gas-to-liquids in the original version of the bill wasn't broad enough to include the whole world of possibilities for this type of development in Alaska. So CSSB 228 (), version 26-LS1324\S, changes the definition on page 1, lines 10-11 to say a facility that produces liquids from gas, coal or biomass - thus including the world of Fischer-Tropsch fuels. MR. PAWLOWSKI said secondly the original industrial incentive tax credit couldn't be reauthorized because the provisions it referenced in federal law had changed. So, an entirely separate industrial incentive was designed within the CS. Sections 1-6 became section 1 that simply says if you make this investment you get a descending capital credit against your corporate income taxes up to the first billion dollars. He said that technical issues still need to be corrected to limit that credit; for one thing multiple entities could claim credit on the same investment, which is not the sponsor's intent. 4:36:10 PM So, language on page 2, lines 24-28, has the important credit limits to protect the state's downside, he said. The first provision is that the tax credit can never be more than 60 percent of the tax liability in a year. This assures that the state is accruing some revenue and that it is just foregoing revenue when the facilities are getting built. The second part on line 28 says that the credits cannot be carried forward past 2025. 4:37:24 PM RICHARD PETERSON, President, Alaska Natural Gas-to-Liquids, said he had been looking at this particular concept in Alaska since 1997. He said he didn't care who built the gas-to-liquids plant, but the idea is to put the mechanism in place for anybody to compete for that type of project. In this respect they wholeheartedly support this bill. Through the years of their looking at gas-to-liquids in Alaska, the one thing that seemed to be apparent is that Alaska isn't interested in the Fischer- Tropsch process. This bill is the first sign of support for Fischer-Tropsch. 4:39:53 PM SENATOR WAGONER asked if he is here to promote some other company to do the Fischer-Tropsch process. MR. PETERSON responded that he hopes to be the successful party to do it and he has been working on it with Sasol and Shell, the two leaders in Fischer-Tropsch technology and the only two major companies in the world that actually have operating Fischer- Tropsch plants. However, he said, Exxon has the ability to do this and if they want to take advantage of the energy credits, that's great. He said the whole purpose in 1997 was to introduce Fischer- Tropsch technology to the US to help it reduce its dependence on imported energy. Most of his time has been spent putting federal legislation in effect that would help this process. MR. PETERSON said he also has a more personal reason. His son is a career Marine who came back in April from his sixth tour in Iraq, and he didn't want him to have to go back. But that won't happen unless the US as a nation creates a national energy policy to reduce its dependence on imported energy - "and that's what Fischer-Tropsch can do." It can do it across natural gas, coal, and biomass including garbage. 4:42:24 PM SENATOR WAGONER asked how Alaska can compete in a worldwide market when Shell can buy its gas for $0.50/mcf at tidewater for their 140,000-barrel/day plant that is being built in Qatar. MR. PETERSON replied that is why he worked to enact federal legislation that would provide energy credits and lower excise tax rates on domestic Fischer-Tropsch fuels sold in the US. These energy credits when combined will amount to about $700 million/year towards a plant in Alaska, or in Montana or in any other state in the US. That translates into about $4/mmbtu. The federal legislation makes them competitive; the sole purpose of enacting it is so that the plant is competitive around the world. MR. PETERSON also stated that when Senator Stevens enacted the energy credits for Fischer-Tropsch fuels made from coal and biomass, every coal-rich state in the United State "beat a path" to South Africa and to Shell, every state except Alaska, and he wants to make sure that Alaska leads this type of technology in the US. CO-CHAIR WIELECHOWSKI asked Mr. Peterson if he still thought Alaska could be competitive at $24/barrel for oil - with the federal tax credits. MR. PETERSON replied yes - in theory - assuming a plant can get built for $5 billion and a lot of other assumptions. The combined credits amount to $34/barrel. So that makes these projects competitive at $55-60/barrel. This means in theory that even at $28-30/barrel, they can be price competitive. From a pure marketing point of view he hoped the numbers stayed up around $60-70/barrel. SENATOR WAGONER asked what size plant could get built for $700 million. MR. PETERSON answered a 70,000 barrel/day plant. SENATOR WAGONER asked the difference between the Fischer-Tropsch process and the Bixby-something process in Virginia. MR. PETERSON said he didn't know, but Fischer-Tropsch is a generic name from the two German scientists who commercialized the process in the 1930s. 4:49:01 PM SENATOR WAGONER said he mentioned that everyone but Alaska went to South Africa to look at that plant and he asked how many of those are building those plants now. MR. PETERSON answered that at least 8 or 10 of those states passed legislation enabling price support tax credits, loan guarantees, municipal bond funding, et cetera. All of them are moving forwarding, including Alaska that did a $2 million pre- feasibility study for an 80,000 barrel/day coal-to-liquids plant in Cook Inlet. The numbers worked, but the big issue was the 2 cost of sequestering CO and how "cap and trade" would affect it. CO-CHAIR MCGUIRE said the idea behind this credit is much like her geothermal production tax credit from last year that later grew to include hydro, solar, wind, biomass, carbon capture and sequestration, but from that Alaska has invited the world in to talk about geothermal prospects. This bill is another attempt at incentivizing these projects that might otherwise be marginal. She said that she and Senator Wielechowski came back from South Africa trying to get Fischer-Tropsch facilities built in Alaska. She said Alaska is unique with respect to this technology because it has all three of the natural resources that are needed as the feed stock in spades; we have the quantities of gas that would be needed as well, but they are stranded. The main thing is to make sure we're not double and triple dipping in on the tax credits. She also believed that developing Alaska's resources was very important because of the war we are fighting "largely over crude oil." 4:55:54 PM SENATOR STEDMAN added that a fundamental concern a lot of people have is that Alaska doesn't get a major export line out of the state into Alberta, or LNG export with vast stores of gas just sitting everywhere, or that we end up with an export line to Alberta with no base jobs in Alaska except for a couple of hundred compressor station operators. He didn't know if income tax was the right thing to incentivize. He also said that he wanted the committee to get educated on the possible impacts this technology could have on the state in case the big pipeline didn't go through and also in the event that we do get a pipeline that something could be created in the state that would generate some jobs. CO-CHAIR WIELECHOWSKI remarked that this plant could be a big job creator and could potentially be a huge anchor for a bullet line or spur line into Southcentral. It has tremendous potential. SENATOR WAGONER asked if he had been looking at a coal plant for gasification earlier and asked what kind of study he did in 2 terms of sequestering CO. MR. PETERSON said they did a very preliminary study looking at 2 existing wells in Cook Inlet with the idea of using CO for enhanced oil recovery. That was a good idea five years ago, but as time goes on those wells in the existing oil fields are getting to the point where it might not make any economic sense to do that. So, they primarily looked at storing gas in the depleted oil and gas fields as a pure cost to the project of about $50-75 million/year, but it could be more like $500 million/year with cap and trade. He said the two best Alaska places to sequester CO were Prudhoe Bay and Cook Inlet. Every other place in the country would have an issue with where to put it. Both Sasol and Shell in 1995 said they would not consider locating a coal-to-liquids or gas-to- liquids program in the US unless there was a viable place to put 2 CO. CO-CHAIR WIELECHOWSKI said they heard that in South Africa, too, 2 where the plant is located next to an oil field where the CO could be injected right into the ground. SENATOR HUGGINS said the Pentagon wanted to get into a cooperative effort with the state of Alaska to produce a blended jet fuel a while ago and asked where that was and how confident he felt they could pull it off. 5:01:50 PM MR. PETERSON replied if they can build a GTL/CTL plant in Alaska they can easily meet that criterion. 5:02:09 PM 2 SENATOR WAGONER said he was not sure CO injection would work in the Cook Inlet because the fields have been water flooding for so long. 5:03:13 PM JIM DODSON, President, Fairbanks Economic Development Corporation, said they have done an extensive feasibility study on a coal/biomass/natural gas-to-liquids facility in Interior Alaska. He noted copies of "The Hatch Report," a 2005-DOE report 2 on enhanced oil recovery using CO, and Dr. Paul Metz's paper on 2 the value of using CO for enhanced oil recovery on the North Slope and said the issue to Alaskans is the possibility of turning relatively low-valued natural resources including biomass, coal and natural gas into high-value product synthetic fuel - produced in Alaska by Alaskans. He said the size of the plant is enormous as is the $5-6 billion to build it. MR. DODSON said that Dr. Metz's paper states that sequestering 2 CO on the North Slope could potentially return Alaska an additional $100 billion from existing oil fields. 5:06:23 PM CO-CHAIR WIELECHOWSKI announced that SB 228 would be set aside for future discussion.