Legislature(2009 - 2010)BUTROVICH 205

02/08/2010 03:30 PM RESOURCES

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Heard & Held
Heard & Held
Moved SB 195 Out of Committee
+ Bills Previously Heard/Scheduled TELECONFERENCED
            SB 228-TAX INCENTIVES FOR GAS-TO-LIQUID                                                                         
4:31:49 PM                                                                                                                    
CO-CHAIR   WIELECHOWSKI   announced  SB   228   to   be  up   for                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
SENATOR WAGONER asked if he had  been looking at a coal plant for                                                               
gasification  earlier and  asked what  kind  of study  he did  in                                                               
terms of sequestering CO.                                                                                                       
MR. PETERSON  said they did  a very preliminary study  looking at                                                               
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                                                               
CO-CHAIR WIELECHOWSKI said they heard  that in South Africa, too,                                                               
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                                                                                                                    
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                                                               
on enhanced oil recovery using  CO, and  Dr. Paul Metz's paper on                                                               
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                                                               
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.                                                                                                          

Document Name Date/Time Subjects
SB 203 Bill Packet - Part 1.pdf SRES 2/8/2010 3:30:00 PM
SB 203
SB 203 Bill Packet - Part 2.pdf SRES 2/8/2010 3:30:00 PM
SB 203
SB 228 Bill Packet - Part 1.pdf SRES 2/8/2010 3:30:00 PM
SB 228
SB 228 Bill Packet - Part 2.pdf SRES 2/8/2010 3:30:00 PM
SB 228
SB 195 - Bill Packet - Part 1.pdf SRES 2/8/2010 3:30:00 PM
SB 195
SB 195 - Bill Packet - Part 2.pdf SRES 2/8/2010 3:30:00 PM
SB 195