Legislature(2013 - 2014)BARNES 124

03/06/2014 12:00 PM House RESOURCES


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12:05:18 PM Start
12:05:50 PM HB287
12:28:04 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to Noon Today from 3/5/14 --
+ Bills Previously Heard/Scheduled TELECONFERENCED
*+ HB 287 APPROVE TESORO ROYALTY OIL SALE TELECONFERENCED
Moved Out of Committee
<Bill Hearing Rescheduled from 3/3/14>
-- Public Testimony --
             HB 287-APPROVE TESORO ROYALTY OIL SALE                                                                         
                                                                                                                                
12:05:50 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  HAWKER announced  the only  order of  business is                                                               
HOUSE BILL NO.  287, "An Act approving and ratifying  the sale of                                                               
royalty  oil by  the State  of Alaska  to Tesoro  Corporation and                                                               
Tesoro Refining and  Marketing Company LLC; and  providing for an                                                               
effective date."                                                                                                                
                                                                                                                                
REPRESENTATIVE HAWKER  noted HB 287  was introduced by  the House                                                               
Rules  Standing Committee  at the  request of  the governor.   He                                                               
said the intention is to  move the bill today following testimony                                                               
and any amendments.                                                                                                             
                                                                                                                                
12:06:46 PM                                                                                                                   
                                                                                                                                
JOE BALASH, Commissioner, Department  of Natural Resources (DNR),                                                               
introduced HB  287 on behalf of  the administration.  He  said he                                                               
has a slide  pack ready for presentation but  proposed to instead                                                               
provide a summary and answer the committee's questions.                                                                         
                                                                                                                                
REPRESENTATIVE HAWKER  agreed to Commissioner  Balash's proposal,                                                               
saying committee members  are well aware of  what are royalty-in-                                                               
kind sales  and members  are only looking  for an  explanation of                                                               
why HB 287 is before the committee.                                                                                             
                                                                                                                                
12:07:26 PM                                                                                                                   
                                                                                                                                
COMMISSIONER  BALASH explained  that in  fourth quarter  2013 the                                                               
Division of Oil  & Gas, Department of  Natural Resources, entered                                                               
into a sales contract with  Tesoro to provide between [5,000] and                                                               
15,000 barrels per  day of Alaska North Slope  supply to Tesoro's                                                               
Nikiski refinery.   Because  the contract was  for less  than one                                                               
year, it  could be executed  without going through  a legislative                                                               
review.   However, in further discussion,  the operator expressed                                                               
a  desire to  extend the  contract, and  legislative approval  is                                                               
needed to  extend it beyond one  year.  The price  terms for this                                                               
particular sale are different than  the ones that were before the                                                               
committee last  year when  it considered  the much  larger volume                                                               
for  sale to  "Flint Hills"  in North  Pole.   A reason  for that                                                               
difference  is driven  in part  by the  lack of  specific special                                                               
commitments.   Some special  commitments were  made in  the Flint                                                               
Hills case and therefore Flint  Hills received a higher deduction                                                               
off of  the total price  than is seen here  with Tesoro; it  is a                                                               
difference of  about 20 cents.   The other terms are  largely the                                                               
same, with  the exception  of the  volumes.   Commissioner Balash                                                               
said  the Tesoro  refinery in  Nikiski has  been operating  since                                                               
1969  and  is the  largest  and  most sophisticated  refinery  in                                                               
Alaska.    The  refinery  manufactures  ultra-low-sulphur  diesel                                                               
(ULSD),  and  while it  is  not  the  only refinery  making  this                                                               
product, it  makes the most.   The Tesoro refinery has  a diverse                                                               
product line that includes jet  fuel to the Ted Stevens Anchorage                                                               
International Airport,  a lot of  gasoline, as well as  the ULSD.                                                               
The Nikiski plant provides more  than 200 high-paying jobs, so it                                                               
is a good opportunity to add  value to one of Alaska's resources.                                                               
He said refining  is a business that he hopes  will remain a part                                                               
of Alaska's economy for some time.                                                                                              
                                                                                                                                
12:10:28 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE HAWKER,  regarding [DNR's] October 24,  2013, best                                                               
interest  finding  for  the  sale of  Alaska  North  Slope  (ANS)                                                               
royalty oil to Tesoro Refining  and Marketing Company, LLC, noted                                                               
that a  public comment period  of at least  30 days was  held and                                                               
was  closed on  September  23  for which  no  public comment  was                                                               
received.   It is therefore  presumed that no one  is challenging                                                               
this best interest finding by the department.                                                                                   
                                                                                                                                
COMMISSIONER BALASH confirmed that  is correct, saying that under                                                               
the statutes of  "183," a hearing was conducted  with the [Alaska                                                               
Royalty  Oil  and  Gas  Development  Advisory  Board]  that  also                                                               
recommended the approval of this particular sales contract.                                                                     
                                                                                                                                
12:12:09 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE TARR  inquired whether closure of  the Flint Hills                                                               
refinery  will have  any  impact  on this  contract  in terms  of                                                               
volume.   For example, whether  more than 15,000 barrels  per day                                                               
would be available for the Tesoro contract.                                                                                     
                                                                                                                                
COMMISSIONER  BALASH responded  the specific  negotiation on  the                                                               
volume  for this  contract was  somewhat limited  because of  the                                                               
sale of royalty to Flint Hills.   Both contracts have a proration                                                               
clause in  the event that  the state, for whatever  reason, winds                                                               
up short  on royalty production  -- the  state is able  to reduce                                                               
the  volume it  is  selling to  either or  both  refineries.   As                                                               
information related  to the Flint  Hills closure continues  to be                                                               
understood, it  is important to  note that the  contract approved                                                               
for Flint Hills  is a larger volume  and is still in  place.  The                                                               
first  notification  of  a  zero  barrel  requirement  under  the                                                               
contract  has been  received.   After the  receipt of  three zero                                                               
barrel  monthly nominations  in a  row, the  contract terminates.                                                               
So, it  would be mid to  late second quarter 2014  that the Flint                                                               
Hills  contract  would  run its  natural  course  and  terminate,                                                               
freeing  up those  royalty  barrels for  selling  to a  different                                                               
party, perhaps even Tesoro.                                                                                                     
                                                                                                                                
12:14:07 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE P. WILSON understood  the current initial quantity                                                               
range included a  clause that the quantity may  be adjusted after                                                               
12  months with  commissioner approval.   She  asked whether  the                                                               
contract was just for 12 months.                                                                                                
                                                                                                                                
COMMISSIONER  BALASH confirmed  the initial  contract was  for 12                                                               
months.   Responding further, he  explained this is  an extension                                                               
and  further  authorization,  and  the  department  is  presently                                                               
investigating  with Tesoro  whether and  how the  volumes can  be                                                               
increased  if additional  royalty volumes  become available,  but                                                               
nothing in that regard has been closed yet.                                                                                     
                                                                                                                                
REPRESENTATIVE  P.  WILSON inquired  whether  she  is correct  in                                                               
understanding that this is another contract for another year.                                                                   
                                                                                                                                
COMMISSIONER BALASH believed this  contract runs through 2016, so                                                               
it would be approximately one additional year.                                                                                  
                                                                                                                                
REPRESENTATIVE  P.  WILSON  surmised  the  provision  saying  the                                                               
commissioner can change those amounts after 12 months is moot.                                                                  
                                                                                                                                
COMMISSIONER BALASH  replied that,  in this  case, what  would be                                                               
looked  at is  an  opportunity after  the first  year  to make  a                                                               
change in the second year because  this is, in effect, now a two-                                                               
year contract.   He explained that the initial  contract was just                                                               
one year.   A new  contract is  being entered into  which extends                                                               
that initial  contract by one  year and includes the  latitude to                                                               
increase the  volume after the first  12 months.  He  deferred to                                                               
the Division of Oil & Gas to provide further information.                                                                       
                                                                                                                                
12:17:19 PM                                                                                                                   
                                                                                                                                
KEVIN BANKS,  Petroleum Market  Analyst, Division  of Oil  & Gas,                                                               
Department  of Natural  Resources  (DNR),  confirmed the  initial                                                               
contract  period was  for  one year,  as  stated by  Commissioner                                                               
Balash.   A  term  in  that one-year  agreement  talks about  re-                                                               
adjusting the  volumes; this  term is something  of a  vestige of                                                               
the contract the state has with  Flint Hills.  In the Flint Hills                                                               
case,  it was  intended to  give  Flint Hills  an opportunity  to                                                               
reduce volumes because that seemed to  be a bigger issue for that                                                               
company.  In this case with  Tesoro, it is a clause that actually                                                               
does not have  effect in a one-year term.   Now that the division                                                               
would like  to be  able to add  a second term,  it will  give the                                                               
opportunity to  adjust the  volumes up or  down depending  on the                                                               
needs expressed by Tesoro.                                                                                                      
                                                                                                                                
REPRESENTATIVE P. WILSON said she wants  to ensure that it is not                                                               
being automatically  said that the  contract is going  to renewed                                                               
again  for one  year and  have all  the wording  the same  in the                                                               
contract.   She  asked whether  she is  correct in  understanding                                                               
that the contract is being renewed  for one year, but some of the                                                               
language in the contract has been changed.                                                                                      
                                                                                                                                
MR.  BANKS responded  the only  difference in  the new  one-year-                                                               
addition contract  is the  language that changes  the date.   The                                                               
original contract and  all of the terms are  identical except for                                                               
the dates that the contract will run.                                                                                           
                                                                                                                                
REPRESENTATIVE  HAWKER  understood  that  HB  287  authorizes  an                                                               
extension of the existing contract.   So, instead of it being the                                                               
one  year   that  could  be  entered   into  without  legislative                                                               
approval, the contract  is being extended beyond  that first one-                                                               
year, which requires  legislative approval and is  what is before                                                               
the committee.                                                                                                                  
                                                                                                                                
MR. BANKS replied correct.                                                                                                      
                                                                                                                                
12:19:42 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  P. WILSON  noted she  has not  seen the  contract                                                               
itself but  understands it may  be adjusted after 12  months with                                                               
commissioner  approval.   She expressed  her  concern that  "they                                                               
would be  able to  do that."   While she  knows it  is understood                                                               
that way, it is sometimes understood  one way but it does not say                                                               
that  --  it  says  it  may be  adjusted  after  12  months  with                                                               
commissioner  approval.   It does  not  say when  that 12  months                                                               
starts.  If  the same contract is  being done here, and  it is up                                                               
for starting  to continue, it does  not say "we're going  back to                                                               
the first contract at the beginning  and saying ... 12 months ...                                                               
have gone  by and so we  can do it  now."  Some attorney  may say                                                               
this  contract  has  been  extended  and so  from  the  date  the                                                               
legislature has  extended it perhaps  it says it may  be adjusted                                                               
after  12 months.   She  said she  wants to  ensure that  it says                                                               
"what we  intend it  say," adding  she does  not have  a question                                                               
with what it  says, but wants to ensure there  are not unintended                                                               
consequences because of that.                                                                                                   
                                                                                                                                
REPRESENTATIVE HAWKER  requested Mr. Banks to  clarify the change                                                               
provision that  is in the contract  and whether it does  say what                                                               
the division intends it to say.                                                                                                 
                                                                                                                                
MR. BANKS,  reading from the  language in the contract,  spoke as                                                               
follows:                                                                                                                        
                                                                                                                                
     The  buyer may  elect to  reduce the  initial sale  oil                                                                    
     quantity  by  giving  notice.   The  initial  sale  oil                                                                    
     quantity  shall remain  as stated  for 12  months after                                                                    
     the ... day of first delivery.                                                                                             
                                                                                                                                
MR.  BANKS   continued,  explaining  the  12-month   period  that                                                               
Representative P. Wilson  is concerned about is  triggered by the                                                               
delivery  of  oil under  the  existing  original contract.    Any                                                               
change to reduce  the amount of oil would occur  after January 1,                                                               
2015,  and the  commissioner has  the  right to  approve or  deny                                                               
that.  It  is specifically built into the contract  to reduce the                                                               
amount, not necessarily to increase it.   He said he thinks it is                                                               
saying  exactly  what  should  resolve  the  concerns  raised  by                                                               
Representation P. Wilson.                                                                                                       
                                                                                                                                
REPRESENTATIVE P. WILSON  agreed it sounds like  her concerns are                                                               
addressed.                                                                                                                      
                                                                                                                                
12:23:16 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE TARR  surmised that  when the contract  with Flint                                                               
Hills is eliminated in three months  there will be royalty oil to                                                               
get to somebody else.  She  asked whether the contract is written                                                               
in such  a way that it  would delay until 1/1/15  the opportunity                                                               
to make  adjustments, although she  allowed that the  state could                                                               
look for somebody else during that time period.                                                                                 
                                                                                                                                
COMMISSIONER BALASH  responded the  opportunity of that  gap will                                                               
likely require  the department  to enter  into a  second contract                                                               
with Tesoro  for the state to  be able to sell  additional volume                                                               
to Tesoro  above 15,000  barrels per  day because  the adjustment                                                               
provision only allows for going down.                                                                                           
                                                                                                                                
12:24:23 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE HAWKER opened public testimony on HB 287.                                                                        
                                                                                                                                
12:24:45 PM                                                                                                                   
                                                                                                                                
JAMES  TANGARO,  Vice  President Kenai  Refinery,  Tesoro  Alaska                                                               
Company,  said Commissioner  Balash hit  most of  the key  points                                                               
contained  in  his  March  3,   2014,  letter  to  the  committee                                                               
[included  in  the committee  packet].    He stated  that  Tesoro                                                               
supports HB  287 and urges the  committee to support it  as well.                                                               
The  refinery has  existed  for  45 years,  has  no  plans to  be                                                               
elsewhere, and is  a big part of  the community.  He  said HB 287                                                               
extends the  contract and  gives Tesoro a  firm supply  of Alaska                                                               
North Slope  crude and  the flexibility  to operate  the refinery                                                               
efficiently.  The bill is important to Tesoro, he said.                                                                         
                                                                                                                                
REPRESENTATIVE HAWKER  related his staff has  reviewed DNR's best                                                               
interest findings, which state that  the Tesoro refinery supplies                                                               
35  percent  of  the  jet  fuel used  at  Ted  Stevens  Anchorage                                                               
International Airport.                                                                                                          
                                                                                                                                
MR. TANGERO replied it is 35 percent or a little higher.                                                                        
                                                                                                                                
REPRESENTATIVE  HAWKER further  shared that  DNR's best  interest                                                               
findings state  that the Tesoro  refinery provides 60  percent of                                                               
the gasoline  consumed by Alaskans, indicating  the importance of                                                               
the commercial service provided by the refinery to Alaskans.                                                                    
                                                                                                                                
MR. TANGERO answered thank you.                                                                                                 
                                                                                                                                
12:27:00 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE HAWKER closed  public testimony after ascertaining                                                               
that no one else wished to testify.                                                                                             
                                                                                                                                
12:27:26 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE P. WILSON moved to  report HB 287 out of committee                                                               
with  individual  recommendations  and  the  accompanying  fiscal                                                               
note.                                                                                                                           
                                                                                                                                
REPRESENTATIVE  HAWKER observed  it is  an indeterminate  revenue                                                               
fiscal note  because the  value of the  resource is  unknown over                                                               
time because the price fluctuates with the open market.                                                                         
                                                                                                                                
There  being no  objection, HB  287 was  reported from  the House                                                               
Resources Standing Committee.                                                                                                   

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