04/07/1998 10:15 AM House O&G

HB 469 - APPROVE SALE ROYALTY OIL TO MAPCO                                     
                                                                               
Number 0016                                                                    
                                                                               
CHAIRMAN HODGINS announced the committee would hear HB 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."                                                            
                                                                               
Number 0032                                                                    
                                                                               
JOHN SHIVELY, Commissioner, Department of Natural Resources stated             
that the basic terms of the contract with Mapco is that it is a                
five year contract starting on December 1 of this year and ending              
on December 31, 2003.  They have chosen that date because there is             
an existing contract that ends in 2003 and therefore both contracts            
will end together.  He stated that quantity is based on a                      
percentage of Prudhoe Bay production, as they are selling out of               
Prudhoe Bay.  He stated that the percentage varies from 27 percent             
to 33 percent which was designed to have an annual volume of 2,800             
barrels.  He stated that there is a weighted average price based on            
royalty value and they are required to get at least what they would            
get if they took royalty in-value instead of in-kind.  He stated               
that 15 percent extra has been added on that, as they always try to            
get a little bit extra per barrel in order to meet the policy set              
by the legislature.  He stated that there is no price reopener, if             
the price changes they either have to accept the new price or                  
terminate the contract.  He pointed out that there is a security               
set up for a letter of credit for 75 days that would protect the               
state if Mapco were to decide to stop taking the oil.  There is a              
provision that states they can reduce the letter of credit if they             
find a back-up buyer for the oil.  He stated that there is a                   
requirement that at least 80 percent of it is refined in state and             
there is a local hire provision that contains the same language as             
in the North Star deal.  He stated that they have made a best                  
interest finding that deals with the socio-economic and                        
environmental effects, as required.  He stated that the royalty                
board unanimously endorsed it and received public comment as well.             
                                                                               
Number 0345                                                                    
                                                                               
REPRESENTATIVE JOE RYAN asked why is it only 80 percent in-state               
refining.                                                                      
                                                                               
Number 0355                                                                    
                                                                               
KEVIN BANKS, Petroleum Market Analyst, Division of Oil and Gas,                
Department of Natural Resources, stated that in the past there has             
only been one existing contract where all of oil is required to be             
processed in state.  He pointed out that since the mid-80's,                   
contracts that have been negotiated with in-state refineries have              
set 80 percent as the number because there is a certain amount of              
commercial flexibility allowed under that.  He stated that in the              
winter time production in the North Slope is at its highest and                
lower in the summer, but the demand is the exact opposite.  He                 
stated this would give the flexibility to replace those volumes in             
the summertime when they are short.                                            
                                                                               
Number 0432                                                                    
                                                                               
REPRESENTATIVE RYAN asked when the residual oil is put back in the             
pipeline does that oil no longer belong to Mapco and is given back             
to state.                                                                      
                                                                               
Number 0500                                                                    
                                                                               
MR. BANKS replied that the oil that goes throughout the refinery is            
borrowed or rented and they have the arrangements with several                 
North Slope Producers to take the oil that they extract and use for            
products, which is the oil that we are selling them.  The oil that             
is returned, Mapco pays the quality bank plus (Indisc. -- paper                
ripping) to those who provide the rental service for the use of                
that oil.  He stated that 210,000 barrels pass throughout the                  
refinery every day but about 67,000 barrels will actually be made              
into product.                                                                  
                                                                               
Number 0650                                                                    
                                                                               
REPRESENTATIVE RYAN asked who owns this residual oil that leaves               
Mapco but goes back in with other oil that is not residual, gets               
mixed and increases in value.                                                  
                                                                               
Number 0669                                                                    
                                                                               
COMMISSIONER SHIVELY responded the producers own that oil.                     
                                                                               
Number 0689                                                                    
                                                                               
JEFF COOK, Vice President, External Affairs, Mapco Alaska                      
Petroleum, stated that the contract will enable and expand the                 
partnership between Mapco and the state of Alaska.  He stated that             
it is a value-added effort that will take additional Alaska crude              
oil and refine it into 14,000 barrels a day into additional jet                
fuel, which is what the state is currently importing.  It will also            
provide an additional 3,000 barrels of diesel and the crude will be            
refined in a new $70 million expansion.  He stated that they are               
moving forward for 100 percent Alaskan hire for the product.  The              
new unit is a stand alone unit and it can only make jet and diesel             
fuel.                                                                          
                                                                               
Number 0880                                                                    
                                                                               
REPRESENTATIVE RYAN asked if the quality bank contribution that                
Mapco makes reflects the spread between what North Slope Crude is              
verses what Number 6 Bunker fuel would be, or the equivalent of                
residual oil.                                                                  
                                                                               
MR. COOK replied that what is put back in is not the equivalent to             
bunker oil but there is a complex formula for the quality bank.                
The Federal Energy Regulatory Commission concluded a hearing to                
adjust and make sure that was a fair quality bank penalty                      
mechanism.  He stated that the conclusion was the quality bank does            
equalize the quality of the crude oil through the payment. Last                
year, Mapco paid $30 million which equaled to 5 cents a gallon for             
refined products.                                                              
                                                                               
Number 1035                                                                    
                                                                               
REPRESENTATIVE TOM BRICE made a motion to move HB 469, with                    
individual recommendations and attached fiscal note.                           
                                                                               
Number 1055                                                                    
                                                                               
CHAIRMAN HODGINS asked if there was an objection.  Hearing None, HB
 moved out of the House Special Committee of Oil and Gas.