Legislature(2013 - 2014)HOUSE FINANCE 519
04/08/2013 08:00 AM FINANCE
Download Mp3. <- Right click and save file as
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SENATE BILL NO. 86 "An Act approving and ratifying the sale of royalty oil by the State of Alaska to Flint Hills Resources Alaska, LLC; and providing for an effective date." 9:29:36 AM JOE BALASH, DEPUTY COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES, provided a presentation for orientation. He provided a PowerPoint presentation: "Royalty In-Kind (RIK) Sale to Flint Hills Resources." He noted that the state's interest was generally 12.5 percent at legacy fields and the royalty could be collected in cash value or in physical possession of the product produced. The statutes that governed the sale of royalty were laid out in title 38, with the presumption that taking royalty in-kind was in the state's best interest. He discussed slide 2: "Royalty in- Value versus Royalty in-Kind:" The state has a choice to take its royalty in-value (RIV) or in-kind (RIK). · When the State takes its royalty as RIV, the lessees who produce the oil also market the State's share along with their own production and pay the State the value of its royalty share. · When the State takes its royalty share as RIK, the State assumes ownership of the oil, and the commissioner disposes of it through the sale procedures prescribed by AS 38.05.183. 9:30:50 AM Mr. Balash discussed slide 3: "Non-Competitive RIK Sale Process." He noted that an informal letter of solicitation led to two interested parties; one was Flint Hills and the other Tesoro. · Statute presumes State's Best Interest is met by o Taking royalty in-king - AS 38.05.182(a) o With sale to in-state buyer - AS 38.05.183(d) o Accomplished through a competitive process - AS 38.05.183(a) · August 13, 2012 Informal Solicitation of Interest sent to: o North Slope Producers o In-state Refiners o Industry specific & general media 9:32:21 AM Mr. Balash discussed slide 4: "RIK contract terms." · Proposed 2013 contract is similar to 2004 contract ƒProposed 2013 contract, like 2004 contract, does not directly reference RIV valuation in RIK price calculations · Key Contract provisions o Price o Quantity o Term o Special Commitments o In-State Processing and Local Hire Mr. Balash detailed slide 5: "RIK Contract Price." ANS Spot Price - $2.15 - Tariff Allowance + Quality Bank Adjustment - Line Loss · ANS Spot Price = Average US West Coast Price for Alaska North Slope oil. o Reported by industry publications: Platts, Telerate, Reuters · $2.15 = RIK DIFFERENTIAL o Destination - Marine Costs so RIK > RIV. o Subject to a one-time adjustment of no more than + $0.15 per barrel. o This amount = $1.65 per barrel in the current 2004 contract. · Tariff Allowance = TAPS and Pipelines Upstream of PS-1. · Quality Bank Adjustment = as reported by the TAPS Quality Bank Administrator · Line Loss = 0.0009 times the netback price Mr. Balash discussed slide 6, "2013 RIK Contract Quantity:" · Initial Quantity Range o 18,000-30,000 barrels per day o May be adjusted after 12 months, with Commissioner approval · Termination of Contract o No or zero nomination for 3 months terminates contract o Contract terms comparable to the private market · Refinery Turnaround o Contract allows FHR the flexibility to cease royalty oil purchases during maintenance · Guarantees, reserves and proration clauses included o 24,000 barrels per day with 15 percent reserves for other RIV or RIK interests Mr. Balash discussed slide 7, "2013 RIK Contract Term:" · FHR initially sought a ten-year contract o Creates supply and price risk o Increases counterparty risk o Limits the State's ability to supply other RIK buyers · DNR negotiated a five year term o April 1, 2014 to March 31, 2019 o Possible extension condition for: ƒLarge capital improvement at the North Pole Refinery ƒBinding support for a North Slope natural gas transportation system 9:35:34 AM Mr. Balash discussed slide 8: "2013 RIK Contract Quantity." The graph illustrated a 10-year royalty profile. He explained that the total contract demand for Flint Hills was less than half of the state's total royalty volume. The percentage increased throughout the years with a projected 82.1 percent of royalty value accounted for in a single sale. He mentioned that the seasonal variability on North Slope production made the terms instituted by Flint Hills difficult for the state to meet. 9:37:04 AM Mr. Balash discussed slide 9: "Commissioner's Decision Criteria." AS 38.05.183(e) states that the commissioner must sell the state's royalty oil to the buyer who offers "maximum benefits to the citizens of the state." In making this determination the commissioner must consider: 1. The cash value offered 2. The projected effects of the sale on the economy of the state 3. The projected benefits of refining or processing the oil in state 4. The ability of the prospective buyer to provide refined products for distribution and sale in the state with price or supply benefits to the citizens of the state 5. The eight criteria listed in AS 38.06.070(a), as reviewed by the Royalty Board Mr. Balash discussed slide 10: "Royalty Board's Decision Criteria." AS 38.06.070(a) states that the Alaska Royalty Oil and Gas Development Advisory Board must consider: 1. The revenue needs and projected fiscal condition of the state 2. The existence and extent of present and projected local and regional needs for oil and gas products 3. The desirability of localized capital investment, increased payroll, secondary development and other possible effect of the sale 4. The projected social impacts of the transaction 5. The projected additional costs and responsibilities which could be imposed upon the state and affected political subdivisions by development related to the transactions. 6. The existence of specific local or regional labor or consumption markets or both which should be met by the transaction 7. The projected positive or negative environmental effects related to the transactions 8. The projected effects of the proposed transaction upon existing private commercial enterprise and patterns of investment 9:38:28 AM Mr. Balash discussed slide 12: "Figure 1: Royalty In-Kind Sales History." He stated that the refinery depicted had purchased royalty oil from the state. Mr. Balash discussed slide 13: "Best Interest of the State Served by the RIK Contract with Flint Hills Resources (FHR)." · Cash Value Offered with Contract Cash value of $3.5-5.9 Billion over 5 years ƒAnalyzed for Consistent value between RIK and RIV ƒVolume weighted average of current reported netback price (11 AAC 03.026(b)) Anticipated increases in marine transportation allowance will favor RIK contract · Positive effect on the State Maintain stability in in-state refining and distribution of refined products Supports jobs and economy of Fairbanks North Star Borough Co-Chair Stoltze reflected on prior testimony about pipeline physics and the importance of the facility. Mr. Balash replied that the issue was discussed on slide 14. 9:39:55 AM Mr. Balash discussed slide 14: "FHR's North Pole Refinery." · Strategically located on Trans-Alaska Pipeline System (TAPS) · Current throughput of 82,000 - 84,000 barrels per day of ANS crude · Producing approximately 22,000 - 25,000 barrels of refined product · All crude and constituents that are not transformed into refined product are injected back into TAPS (with a penalty paid) 9:41:33 AM Mr. Balash discussed slide 15: "FHR's North Pole Refinery." · FHR produces approximately o 672,000 gallons of jet fuel per day o 143,000 gallons of gasoline per day o 41,000 gallons of home heating fuel per day o 68,000 to 194,000 gallons per day of product consisting of HAGO, LAGO, naphtha, asphalt, refining fuel, and a small volume of high-sulfur diesel · 680,000 gallons per day shipped to Anchorage via the Alaska Railroad · 230,000 gallons of ultra-low sulfur diesel and gasoline on the backhaul to Fairbanks · FHR owns 50 million gallons of storage facilities o 30.7 million in Anchorage and 19.3 million in Fairbanks 9:42:30 AM Mr. Balash discussed slide 16: "Proposed Contract Benefits." · Proposed contract is expected to: o Maintain status quo of in-state refining behavior o Produce 330 million gallons of refined product or 18 percent of gasoline and 26 percent of jet fuel consumed in Alaska o Provide approximately $140 million per year in gross regional product sales for the Fairbanks North Star Borough (FNSB) o Support 1,300 direct and indirect jobs in the FNSB o Sustain $100 million in annual earnings in FNSB o Provide socio-economic stability against energy costs Mr. Balash discussed slide 17: "Projected Impacts if not Approved." · If FHR stops refining, anticipated effects include: o Loss of approximately 1,300 direct and indirect jobs in the Fairbanks North Star Borough o State could experience increased utilization of the social safety net o Possibility of population redistribution o Increased and decreased infrastructure utilization and maintenance with population shift o Impact to the fuel supply for the Fairbanks and Anchorage airports, affecting trade and tourism and the Alaska Railroad o Loss of heat source for warming low flow in TAPS 9:44:02 AM Representative Gara stated that the less oil in TAPS the more expensive the tariff. The more expensive the tariff, the less money the state received in taxes for the oil. He asked if a discount for royalty in-kind oil would increase the cost in taps and impact state revenue. Mr. Balash replied that if the state received royalty in- value and the current contract returned approximately $120 million more than the expected value. He stated that the current terms in the contract would not achieve the same monetary surplus or addition due to the short term and small volume. The department was confident that they would receive an increment of value for the state. Representative Gara understood that taking less oil from North Pole would increase the tariff south of North Pole. If the oil was not purchased from the state, it would be purchased from the oil companies, which would also increase the tariff. Mr. Balash concurred, if supply was available from another source. 9:46:24 AM Representative Gara noted evidence that refiners had increased the mark-up for gas produced and sold by 100 percent in the last five or six years, which might be responsible for the high cost of gas in Alaska. If the state offered oil to the refinery, would the department offer a return on limitation of markup for consumer gas? Mr. Balash replied that investigations by the Department of Law evaluated the market behavior of Alaska's refineries and distributors. The conclusion of the investigation was that collusion or anti-competitive behavior was not an issue. The contract continued a term written in the previous one. The term stated that when Flint Hills produced and sold wholesale gasoline, they must offer a price comparable to that sold in Anchorage. Anchorage was a water-born market with an additional refinery. 9:48:53 AM Representative Costello asked about the commissioner's identification of the economic effect. She asked if the department accounted for the 26 percent loss of avgas, which was supplied through Flint Hills to the state's economy. Mr. Balash replied that the refinery produced a tremendous amount of jet fuel, but he was unaware of the avgas production. 9:50:28 AM Co-Chair Stoltze asked the connection for defending the army bases in Alaska. Mr. Balash replied that Petro Star Inc. was owned by Arctic Slope Regional Corporation (ASRC) and enjoyed certain contracting preferences with the United States Department of Defense. He stated that Petro Star Inc. supplied most of the fuel for the military bases in the interior. He stated that Flint Hills was supportive of the Interior community at large. The families supported by their employment with Flint Hills provided the backbone of the community. Co-Chair Stoltze asked about the military facilities. Mr. Balash replied that the military facilities must consider the loss of Flint Hills as a back-up to the Petro Star facility. He mentioned a provision in the contract intended to enable Flint Hills to become a customer of the North Slope Transportation Project. If natural gas was made available to the Interior the cost of operating the bases would be reduced. The contract could help with the retention of those installations. 9:53:14 AM Co-Chair Stoltze noted that an effect felt in one region of the state impacted all of Alaska. Representative Wilson stated that one tower was shut down resulting in an unforeseen impact in her district. The fuel provided allowed for electric energy for the district. 9:54:31 AM Representative Kawasaki asked about the special commitment contract extension on page 22. He noted that the special commitment was tied as a reward for substantial investment. He read about a request for an extension. He wondered if the issue would be revisited with the royalty board. 9:55:11 AM Mr. Balash replied that the initial step included negotiations with the department. Upon conclusion of the negotiation process, the royalty board and legislature would provide the next steps. The provision was intended to truncate the negotiation process. The terms would be agreed upon and presented to both the board and the legislature in five years. 9:56:04 AM JEFF COOK, REGIONAL DIRECTOR, EXTERNAL AFFAIRS, FLINT HILLS RESOURCES, NORTH POLE, spoke in support of SB 86. He mentioned his productive negotiations with the Division of Oil and Gas through the Department of Natural Resources. He stated that he began working for the refinery in 1994 and he had seen the oil enter the refinery at increasingly lower temperatures. He explained the refinery's important task of returning oil to TAPS. He pointed out that the refinery had only one source of crude and electricity costs were four times higher than refineries in the state of Washington without the benefit of natural gas. Mr. Cook continued that the five year contract would provide the stability and certainty of crude oil at a fair price with expansion as a result. Though the current contract did not expire until April 1, 2014 the pressure to pass the bill was strong this session. He discussed the negotiation process regarding one-year supply contracts for jet fuel and other projects. 9:59:01 AM Representative Thompson understood that the refinery produced 26 percent of the jet fuel consumed in Alaska. He stated that the Anchorage port had storage tanks for the import of jet fuel for Ted Stevens International Airport. He asked about the change in competitiveness. Mr. Cook replied that his refinery was limited to one source of crude. He added that the change in energy costs placed Flint Hills at a disadvantage. Representative Thompson asked about the impact of the large transportation cost required to bring jet fuel to Alaska from Asia. Mr. Cook replied that the differential in his refinery's energy cost was $12 higher than the West Texas Intermediate (WTI). Representative Thompson asked if natural gas in the Interior would help with competitiveness. Mr. Cook replied yes. He hoped for projects that would allow the company to enter the export business again and expand for greater competitiveness in the jet fuel market. 10:01:02 AM REPRESENTATIVE DOUG ISAACSON testified in support of the legislation. Co-Chair Stoltze CLOSED public testimony. 10:02:11 AM Co-Chair Stoltze noted that he placed great emphasis on Interior issues. Representative Costello discussed the zero fiscal note. Co-Chair Stoltze stated that the bill's fiscal terms were best described in the contract. Mr. Balash agreed. 10:03:24 AM Representative Wilson MOVED to REPORT SB 86 out of committee with individual recommendations and the accompanying fiscal note. SB 86 was REPORTED out of committee with a "do pass" recommendation and with one previously published fiscal note: FN1 (DNR).