05/01/1998 02:25 PM House FIN

HOUSE BILL NO. 469                                                             
                                                                               
"An Act approving the sale of Prudhoe Bay Unit royalty                         
oil by the State of Alaska to Mapco Alaska Petroleum,                          
Inc.; and providing for an effective date."                                    
                                                                               
KEVIN BANKS, DIVISION OF OIL AND GAS, DEPARTMENT OF NATURAL                    
RESOURCES explained that HB 469 would ratify a five-year                       
contract that would begin on December 1, 1998 with MAPCO.                      
The expiration date would coincide with a long-term contract                   
that MAPCO has with the state of Alaska.  The contract also                    
has a security clause.  MAPCO has agreed to put a letter of                    
credit equal to 75 days worth of oil.  This would cover the                    
state of Alaska in the case that MAPCO defaults in the                         
contract.  MAPCO is required to process at least 80 percent                    
of the oil in the state of Alaska.  MAPCO has indicated that                   
they would process most of the oil.  There is also a local                     
hire provision in the contract.  Residents are defined in                      
the same manner as in the North Star lease agreement.                          
                                                                               
Mr. Banks explained that the price is based on the value                       
calculated by the producers.  The producers base their price                   
on the market value of Alaska North Slope (ANS) oil,                           
transportation chargers for tankers, tariffs for the                           
pipeline, and adjustments for quality.  MAPCO would pay this                   
price plus .15 cents.                                                          
                                                                               
Co-Chair Therriault noted that the State established this                      
pricing structure in the Amerada Hess settlement.                              
                                                                               
In response to a question by Representative Davies, Mr.                        
Banks explained that the additional .15 cents was added to                     
assure that the value to the state of Alaska is considered                     
first.  He observed that the state of Alaska is taking a                       
portion of its oil and selling it in the same market.  There                   
is concern that the State could reduce the value of royalty                    
oil through the sale of oil.  He explained how the sale of                     
oil by the state of Alaska could shift the balance of oil                      
distribution between the West Coast and the Far East or mid                    
United States.                                                                 
                                                                               
Representative Davies noted that MAPCO can increase or                         
decrease the monthly nomination.  MAPCO would have to stay                     
below the maximum quantity authorized per year.  Mr. Banks                     
noted that there is a reservation fee if MAPCO fails to take                   
the maximum quantity in any given month.  The state of                         
Alaska is committed to a certain amount per month.  He                         
clarified that MAPCO would not be allowed to exceed 33                         
percent in any month.  The nomination occurs 3 months before                   
production begins.                                                             
                                                                               
In response to a question by Representative Martin, Mr.                        
Banks pointed out that the State is confined in its ability                    
to offer competitive bids.  He observed that a substantial                     
amount of oil is going to MAPCO under a contract that was                      
awarded in the late 70's.  At the end of the contract the                      
State hopes to be free to begin competitive bidding without                    
any potential customers having a significant advantage over                    
another.  Both contracts would end in the year 2003.                           
                                                                               
Representative Martin questioned the criteria that would be                    
used to ensure local hire.  Mr. Banks observed that MAPCO's                    
state contract provided them with the stability of supply                      
needed to start a refinery.                                                    
                                                                               
Representative Martin asked why the contract would only add                    
.15 cent a barrel.  He maintained that the price is too low.                   
He suggested that in-state refineries have the advantage of                    
not paying shipping costs.  Mr. Banks maintained that the                      
price at pump station one represents an amount close to                        
market value.  The additional .15 cents provides a cushion.                    
                                                                               
Co-Chair Therriault pointed out that no monetary value is                      
applied to local hire.  Mr. Banks noted that the commercial                    
terms of the contract were kept separate from other                            
potential benefits.                                                            
                                                                               
Representative Kelly referred to the definition of "royalty                    
value" on page 2, line 17.  He observed that MAPCO is paying                   
what the State could get for the oil plus .15 cents.                           
                                                                               
JEFF COOK, VICE PRESIDENT EXTERNAL AFFAIRS, MAPCO, FAIRBANKS                   
spoke in support of the legislation.  He noted that the oil                    
will be refined into jet fuel and diesel.  He stressed that                    
MAPCO has hired locally.  He noted that the Alaska Royalty                     
Oil and Gas Advisory Board took testimony on the MAPCO                         
contract.  The Board approved the contract unanimously.  He                    
emphasized that they pay the fair market value and the                         
tariff cost to Fairbanks.                                                      
                                                                               
Representative Kelly asked if MAPCO has any other sources of                   
oil.  Mr. Cook observed that MAPCO purchases oil from the                      
state of Alaska and Phillips Oil.  He noted that MAPCO pays                    
less to the Phillips Oil company than it pays to the state                     
of Alaska.                                                                     
                                                                               
Representative Martin maintained that cost factors are not                     
the same.  Mr. Cook observed that MAPCO did not receive any                    
tax breaks to offset their $70 million dollar expansion.  He                   
pointed out that the same expansion would cost approximately                   
$45 million dollars if it were built in Tennessee.                             
                                                                               
Co-Chair Therriault noted that there is a zero fiscal note.                    
                                                                               
Representative Kohring stated that he is concerned with the                    
issue of competition.                                                          
                                                                               
Representative Kelly MOVED to report HB 469 out of Committee                   
with the accompanying fiscal note.  There being NO                             
OBJECTION, it was so ordered.                                                  
                                                                               
HB 469 was REPORTED out of Committee with "no                                  
recommendation" and with a fiscal impact note by the                           
Department of Natural Resources.