Legislature(2015 - 2016)BARNES 124
03/28/2016 01:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| HB373 | |
| HB253 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 373 | TELECONFERENCED | |
| += | HB 253 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 373-APPROVAL OF SALE OF ROYALTY OIL TO TESORO
1:03:07 PM
CO-CHAIR NAGEAK announced that the first order of business is
HOUSE BILL NO. 373, "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."
1:03:42 PM
JAMES SHINE, Special Project Assistant, Office of the
Commissioner, Department of Natural Resources (DNR), said HB 373
would affirm the contract of sale of royalty oil to [Tesoro
Corporation and Tesoro Refining and Marketing Company LLC
("Tesoro")]. To review the bill's provisions he provided a
PowerPoint presentation entitled, "Proposed Sale of the State's
Royalty Oil to Tesoro: House Bill 373."
MR. SHINE displayed slide 2, "Royalty In-Kind versus Royalty In-
Value," and explained that the State of Alaska has a choice to
receive its royalty share of oil production in-kind (RIK) or in-
value (RIV). A presumption in statute is that the state take
its royalties in-kind unless it is found in the state's best
interest to take it in-value. Conversely, the commissioner also
has to make a best interest finding when the state takes royalty
in-kind. He advised that when the state does a royalty in-kind
process the department must perform a solicitation of interest
to gauge market demand. A letter was sent last January to the
five companies with in-state refineries: BP Exploration
(Alaska) and ConocoPhillips Alaska each have a North Slope
topping plant; Petro Star Inc. has refineries in North Pole and
Valdez; Tesoro has a refinery in Nikiski; and Flint Hills
Resources, even though it ceased operations in June 2014. Two
responses, one from Petro Star and one from Tesoro, sought to
refine the state's oil within the state. The Tesoro response
met the demands of price contained within DNR's solicitation,
whereas Petro Star responded affirmatively to purchase royalty
oil but proposed a different pricing structure that was not as
advantageous to the state. Thus, the department elected to
proceed on a non-competitive contract negotiation with Tesoro.
Historically since 1979, the state has elected to choose its
royalty in-kind, although not all portions of the oil have been
taken in-kind. He clarified that since February 1, the state
has been taking all of its royalty in-value because the state's
most recent Tesoro contract terminated on January 31, 2016. Up
to that point, commencing in 1979, the state has disposed of a
significant volume of its royalty oil to Petro Star, Tesoro,
Flint Hills, Williams, and other in-state users.
1:06:38 PM
MR. SHINE turned to slide 3, "Non-Competitive RIK Sale Process."
He advised that DNR elected to proceed with Tesoro and started
commercial negotiations with Tesoro in February or March 2015.
The contract in the committee packet is the culmination of those
commercial negotiations. He explained that when the
commissioner elects to take the royalty in-kind it is necessary
to make a Best Interest Finding (BIF) that what is being done is
maximizing the benefits and the value of the state's resources
for the citizens of the state. Showing slide 4, "Commissioner's
Decision Criteria," he said that under AS 38.05.183(e) the
commissioner must consider the cash value offered, the economic
benefits, the benefits of refining in-state, meeting in-state
demands, as well as the criteria that the Alaska Royalty Oil and
Gas Development Advisory Board ("Royalty Board") considers as
directed by the legislature in AS 38.06.070.
1:08:04 PM
MR. SHINE displayed slide 5, "Approval Process for the RIK
Sale," and noted that DNR goes through the BIF process outlined
in statute on why the royalty in-kind (RIK) election is in the
state's best interest. He said this process commenced in
January 2015 with a solicitation of interest, and then a lengthy
commercial negotiation with the Division of Oil & Gas and
Tesoro. The department then presented the proposed contract and
a preliminary BIF for public comment in early February 2016 for
30 days, and comments were received only from Petro Star and
Arctic Slope Regional Corporation (ASRC). Subsequent to
receiving those comments, DNR revised the contract to address
the concerns raised in those comment letters. After addressing
the concerns the next step was presenting it to the Royalty
Board on March 15, 2016. The division's Commercial Section
provided the overview of the contract and walked through the
process. The Royalty Board voted unanimously to approve the
contract and forward its recommendation to the legislature to
ratify the contract. Included within the committee's bill
packet are a resolution signed by the board members and a report
to the legislature on why this proposed contract meets the best
interests of the state.
MR. SHINE moved to slides 6-7, "Royalty Board's Decision
Criteria," and said the report outlines the reasons why the
proposed contract meets the statutory criteria that the Royalty
Board considers in its deliberation. The eight criteria are
similar to what the DNR commissioner considers in regard to
economic and price issues with respect to how they impact the
state.
1:10:16 PM
MR. SHINE reviewed slide 8, "Tesoro RIK Contract Terms." He
advised that the goal of the proposed five-year contract that is
before the committee is to commence deliveries on August 1,
2016. The state would sell to Tesoro between 20,000 and 25,000
barrels per day over the course of the contract. There are some
safeguards and other provisions within this contract, one of
which is if Tesoro nominates zero barrels over the course of
three months, the contract terminates. Some of these provisions
are customary for what has been done in the past with RIK
contracts. For example, in 2013 the legislature ratified a
contract with Flint Hills. When Flint Hills terminated its
operations in spring 2014, the state's RIK contract ceased to
exist after that point. The state has provided security - if
Tesoro's credit rating falls below a certain level it then has
to provide a Letter of Opinion from a financial analyst or a
Letter of Credit equal to the value of 90 days' worth of Alaska
North Slope (ANS) oil. The purpose of that security provision
is essentially if the state is delivering oil and for some
reason someone goes out of business, then the state at least has
the Letter of Credit that provides the state some security that
it is not going to be providing oil and not receiving any
compensation. This has not happened to date but is still
something that is included in the state's contracts.
MR. SHINE pointed to two other provisions in the contract. In-
state processing is a consideration that the commissioner makes
in issuing the Solicitation of Interest for meeting in-state
demand. Therefore, the contract provides that Tesoro use
commercially reasonable efforts to use the refined products of
ANS royalty within the state. Over the last two years, Tesoro
has been purchasing royalty oil from the state and has refined
them in its Nikiski facility. The department has been told that
nothing is changing with respect to this contract, that these
barrels are intended to be refined within the state as well.
1:12:38 PM
REPRESENTATIVE SEATON, with regard to the 90 days of ANS royalty
oil on slide 8, inquired as to whether that is looking forward
or the situation where if there was a bankruptcy the bankruptcy
court could go back 90 days before and ask for those being
preferential payments and therefore claw them back.
MR. SHINE understood the 90-day value of ANS royalty is if the
purchaser falls below a certain credit rating; then the
purchaser would be required, per this contract, to provide the
value of 90 days of ANS crude. He said he assumes that that
would be 90 days' value of ANS crude as it currently exists at
that time, not at today's dollars. In the event this happened
in 2019 or 2020, the [contract] would look at the value of the
crude at that point and require that 90-day payment.
REPRESENTATIVE SEATON said his point was not that current dollar
value. He asked whether that is looking backwards so that 90
days before that date, payments that were made to the state
would not be subject to recapture from a bankruptcy court, or is
it going forward from that date so Tesoro would have to post
that so it has money on file for oil that would be being
purchased from that point on where it would have to post a
Letter of Opinion.
MR. SHINE replied he does not have an understanding of how it
works in a bankruptcy proceeding. He said this particular term
is intended to address a situation in which under the contract
the state is selling and Tesoro is purchasing oil on a daily
basis. If Tesoro's credit rating fell below a certain
threshold, at that point the state would require a 90-day
payment, essentially a bond payment, to backstop any potential
shortfall the state would experience through a non-payment. He
reiterated that the state has never had to implement this
provision but it is a safeguard the state includes in its RIK
contracts to ensure that should a purchaser not meet a certain
credit threshold that the state does have some protection for
the purpose of the royalty barrels that have already occurred.
1:15:28 PM
MR. SHINE returned to his presentation, addressing the last
bullet point on slide 8 with respect to employment of Alaska
residents. He explained that while the state cannot require
Alaska hire in the contract it does encourage Alaska hire.
MR. SHINE turned to slide 9, "RIK Contract Price," and advised
that the valuation methodology for RIK takes the ANS spot price,
which is essentially the monthly average of the daily average of
the two reporting agencies Platts and Reuters, and then nets
back from that point to get the RIK price. The $1.95 is the
actual RIK differential deducted from the spot price, and the
other deductions or adjustments from that point onward are the
same ones that would be seen in an RIV valuation, which includes
the tariff allowance for transportation in the Trans-Alaska
Pipeline System (TAPS), Quality Bank adjustments per any
direction from the Quality Bank administrator, as well as any
subtraction in line loss from Pump Station 1 to the Valdez
Marine Terminal (VMT). He noted that the biggest differential
between RIK and RIV would be with respect to the RIK location
differential as it relates to what would be experienced in an
RIV world, which is a marine transportation deduction.
Currently, the marine transportation deduction on average is
about $3.50 per barrel. The delta between the $3.50 deduction
from a barrel of RIV to the $1.95 deduction for RIK is where the
state will see the most benefit in this contract over the status
quo of RIV. Based on predictions, the department estimates that
the delta between RIV and RIK will bring the state approximately
$45 million to $56 million more than it would have realized if
it had taken these barrels in-value over the course of this
contract. So, approximately $10 million per year more will be
realized as a result of this contract.
1:17:37 PM
MR. SHINE explained that slide 10, "Contract is in the State's
Best Interest," goes into more detail about the location
differential and transportation deduction. Criteria the Royalty
Board and the commissioner considers are the economic and social
benefits to the economy. Tesoro employs 210 Alaskans, provides
$127 million in benefits to the local economy, and refines
approximately 59,000 barrels per day at Tesoro's Nikiski
refinery. Eighty percent of each barrel that is produced at the
refinery is put back into the local economy through jet fuel,
home heating fuel, and ultra-low sulfur diesel (ULSD) fuel.
MR. SHINE said slide 11, "Additional Royalty Oil Sales,"
outlines another provision that DNR added to the contract with
Tesoro. The department is also including this provision in the
contracts it is currently negotiating with Petro Star. This
provision is that if the state has additional volumes of royalty
oil available that are not under contract, there is a nomination
period 100 days prior to a purchaser taking possession of those
barrels where the state would offer those additional barrels on
an equal basis to the two in-state refiners to purchase so that
the state maximizes the value of its resources and also provides
more royalty oil to the local refining industry.
1:19:21 PM
REPRESENTATIVE SEATON referred to slide 9 and asked whether the
line loss, the loss of volume between Pump Station 1 and the
Valdez Marine Terminal, is mainly from temperature.
MR. SHINE replied that it is a formulaic multiplier intended to
represent loss due to temperature and processing. He deferred
to the Division of Oil & Gas to answer the question further.
CORRI FEIGE, Director, Division of Oil & Gas, Department of
Natural Resources (DNR), deferred to Greg Bidwell of the
Commercial Section. She said he was involved in the calculation
and contract drafting and would be able to speak to line loss
estimations specifically.
GREG BIDWELL, Commercial Analyst, Commercial Section, Division
of Oil and Gas, Department of Natural Resources (DNR), responded
that the definition of line loss that was provided is fine. It
is a measurement error as well and is something that has been
part of the TAPS tariff since inception, so it has been there as
part of the item for paying royalties and value in-kind.
REPRESENTATIVE SEATON asked whether there is a loss in getting
to the Valdez Marine Terminal from processing and, if so, what
is the processing. He further asked whether there are other
types of loss, or a calculation of an assumed percentage of
loss, or a temperature volume consideration that is adjusted.
MR. BIDWELL answered that he thinks it is primarily temperature
and measurement rather than processing. He explained that the
first four pump stations run off of natural gas from the North
Slope and the rest of the pump stations use diesel, but not
diesel from the oil itself. There is not any processing, it
just temperature measurement oriented differences that are
applied through the system.
1:22:58 PM
REPRESENTATIVE JOSEPHSON observed that the Arctic Slope Regional
Corporation's (ASRC's) letter of March 7, 2016, argues that
there should have been proportional proration. He requested the
department to speak to this.
MR. SHINE responded that that is correct. With respect to the
original contract presented to the public in early February,
Petro Star and ASRC raised two primary concerns. The first
concern was the proration preference granted to Tesoro through
the course of commercial negotiations, and that has since been
removed. He explained that the department typically, when it is
selling royalty, if there is for instance a service interruption
or seasonal maintenance work that happens and there is a
reduction in royalty volumes available to meet the state's
contractual demands or contractual obligations, then all RIK
purchases will be prorated down proportionate to their
percentage of purchasing of the state's royalty oil. Through
the course of negotiations, Tesoro reduced its maximum
nomination volume to make more room, so to speak, for Petro
Star's ability to purchase royalty oil from the state. In
exchange for that the state granted the proration preference,
but after public comments and internal deliberation the
department decided to strike that term from the contract. So,
there is no longer a proration preference, it went back to the
status quo in which if there is any proration required it comes
down proportionate to each purchaser. There is no preference
for any RIK purchasers at this time. The second concern raised
by Petro Star and ASRC with respect to the draft contract was
the term of the contract. The proposed contract that went out
for public comment had a five-year initial term with the option
to extend for five years among consent of the state and Tesoro.
That extension has since been struck from the contract. Thus,
the contract before the committee has a five-year term, no
extensions, and no proration preference.
1:25:29 PM
REPRESENTATIVE SEATON returned to slide 9 and the $1.95 RIK
differential comparison to the $3.50 marine transport for RIV.
He inquired whether that means the $1.95 is basically marine
transport between Valdez and Tesoro's terminal. He further
inquired whether that also applies then to the other buyers and
whether they have the same $1.95 in their term whether they do
marine transport or not.
MR. SHINE answered that the $1.95 RIK differential is meant to
represent the selling of crude within Alaska, not marine
transportation per se. He said he is unsure of Tesoro's actual
cost to ship between the Valdez Marine Terminal and its Nikiski
refinery. Regarding the second question, he said this
absolutely applies to Petro Star; these are the same RIK prices
on which the state is currently negotiating contracts with Petro
Star, which is meant to represent the cost of selling a barrel
of oil in the state, exclusive of marine transportation.
1:26:58 PM
REPRESENTATIVE TARR referred to the overall use of RIV or RIK,
and noted the transmittal refers to the remaining volume being
available for Petro Star. She recalled that in 2013 the state
signed a contract with Flint Hills and asked whether that is
still in place as far as the overall distribution.
MR. SHINE answered no, that contract is terminated since Flint
Hills has ceased operating. The legislature ratified that
contract in 2013 and the volumes were 18,000-30,000 barrels per
day over the course of five years. When Flint Hills ceased
operating in June 2014 that contract terminated. Currently, the
state does not have any RIK barrels under contract and is taking
everything in value. There have been a couple periods in the
course of history starting in 1979 that this has occurred, but
primarily the state sells its available volumes in RIK, which is
what is before the committee.
REPRESENTATIVE TARR surmised that when talking about the total
volume available, it would be between these two at this time.
MR. SHINE replied that the Commercial Section has reviewed the
production forecast and current production levels and estimated
that the state has approximately 50,000-52,000 barrels of
royalty oil currently available. With current production
forecasts and only considering current production that is on
line today without considering potential new projects, that
decline curve over the course of this contract will come down to
approximately 36,000-38,000 barrels per day. Therefore, the
20,000-25,000 barrels the state is selling to Tesoro today
represents approximately 55-60 percent of the state's overall
royalty volume available for purchase. Over the course of the
next five years, that percentage will increase as production
forecasts continue to fall.
1:29:15 PM
REPRESENTATIVE OLSON asked what the current Quality Bank
adjustment is under this contract.
MR. SHINE responded he does not know what the actual adjustment
is in dollar figures right now because that is something that
happens through the Quality Bank administrator. Those
adjustments are considered in this contract through the
department's evaluation process that takes into account what
comes from the Quality Bank administrator for Quality Bank
adjustments, whether they are up or down.
REPRESENTATIVE OLSON therefore surmised that if he wanted to
compare it to what it was for Flint Hills, it would not be
something the committee could receive today.
MR. SHINE answered he does not have that figure at his
fingertips right now, but said he does not imagine that it would
be much different than under the Flint Hills contract of 2013.
It is the same provision that was allowed for in the last
contract, but the Quality Bank administration is something that
happens exclusive to how the department operates.
1:30:23 PM
REPRESENTATIVE OLSON understood the adjustment was originally
for companies like Flint Hills that were putting a waste product
into the pipeline. Given Tesoro is not doing that he questioned
how they could be similar.
MR. SHINE replied that Representative Olson is correct. Flint
Hills and Petro Star take their main fee stock for their
refining off of TAPS and then refine it and then have to
reinject the residual or the heavy ends of the barrel. They do
pay a Quality Bank penalty for putting that lower quality oil
back in and it gets co-mingled among the other streams that are
not taken out and refined. So, they are subject to a different
Quality Bank adjustment than, for instance, would be Tesoro as
an end-stream user at the Valdez Marine Terminal. Tesoro, just
because of its location, would not necessarily be paying the
same kind of penalty as Petro Star's North Pole facility or
Flint Hills' former facility.
REPRESENTATIVE OLSON remarked that what he is getting at is how
they could almost be the same, in that one is flushing the
toilet and the other is the mixing zone.
MR. SHINE allowed he misspoke in not considering the location
between the two refineries. What he meant to allude to was that
the Quality Bank adjustment is not something the state controls,
it is determined by the Quality Bank Administer. He explained
that when he is comparing RIV versus RIK, the barrels that get
to the Valdez Marine Terminal are purchased by Tesoro or sent to
the West Coast on the state's behalf by the producers in an RIV
situation. The netback formula for both of those situations
will include a Quality Bank adjustment that will be the same.
1:32:27 PM
REPRESENTATIVE CHENAULT, regarding Mr. Shine's statement that
the Quality Bank adjustment will be the same, posited that Flint
Hills would pay more for the Quality Bank end and Tesoro could
actually see a credit, because the quality of the crude oil is
less at the Valdez Marine Terminal than at Pump Station 1. So,
for any draw, he said, Flint Hills or Petro Star would have to
pay more for the Quality Bank versus Tesoro at the other end of
the line.
MR. SHINE responded that that is his understanding as well.
1:33:30 PM
CO-CHAIR NAGEAK opened public testimony on HB 373.
FRED PARADY, Deputy Commissioner, Office of the Commissioner,
Department of Commerce, Community & Economic Development
(DCCED); Board Member, Alaska Royalty Oil and Gas Development
Advisory Board, noted that in addition to his position as deputy
commissioner of DCCED, he is the designee to the Royalty Board.
He related that the Royalty Board carefully considered this
contract and made appropriate revisions to it during its board
meeting and the board supports the recommendation that is before
the committee. He pointed out that the declining volumes in
throughput through TAPS are resulting in declining royalty
barrels for in-kind purposes in this proposed contract and said
"the amendments that were worked to it takes care of both our
in-state refining facilities."
1:35:03 PM
MATT GILL, External Affairs Senior Manager, Tesoro Alaska
Company, testified in support of HB 373. He paraphrased from
his March 18, 2016, letter to the House Resources Standing
Committee, which reads as follows [original punctuation
provided]:
I am writing to you in support for House Bill 373 "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."
Tesoro Corporation is a Fortune 100 company and is an
independent refiner and marketer of petroleum
products. Tesoro's refining operations started Alaska
with the purchase of the Kenai refinery back in 1969.
Our Kenai refinery has the operational capacity to
produce up to 72,000 barrels per day and is primarily
focused on Jet and Diesel production followed by
gasoline and gasoline blendstocks, heating oil and
heavy fuel oils, propane and asphalt. We operate a 68-
mile, common-carrier products pipeline that transports
jet fuel, gasoline and diesel fuel to the Port of
Anchorage and the Anchorage International Airport. The
wholesale delivery of our products occurs through our
terminals in Kenai, Anchorage, our Nikiski dock and
the Port of Anchorage.
In addition to being the largest taxpayer in the Kenai
Peninsula Borough, Tesoro is also able to provide
around 225 family wage jobs at the refinery, along
with about 30 full-time contractors that are working
in and around the refinery year round. We provide
retail fuels at our company-owned Tesoro 2-Go retail
outlets as well as at numerous branded and unbranded
outlets. We employ operators who work at our terminals
in the Port of Anchorage and in Nikiski.
We are a major supporter of the Cook Inlet Regional
Citizens Advisory Council (CIRCAC) and the largest
member of the Cook Inlet Spill Prevention & Response
team (CISPRI).
We actively support a wide range of local events and
programs - from employee fundraising for the United
Way to youth sports programs. Each year we sponsor all
of the 5th and 6th grade classes on the Kenai
Peninsula to conduct a mission at the Kenai Challenger
Learning Center and we are the Signature Sponsor of
"Caring for the Kenai" program.
Tesoro strongly urges you to support House Bill 373,
"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."
This legislation is the result of constructive dialog
and productive negotiations between the Department of
Natural Resources and the Tesoro Corporation. By all
accounts, our company was very impressed with the
State's ability to understand our issues and arrive at
a mutually beneficial agreement that is truly a win-
win for both parties as well as accommodating to the
other refineries in the State.
For the State, the DNR estimates that it will continue
to receive a price for its Royalty-in-Kind oil that
exceeds the price it would have receive if it elected
to keep its Royalty Oil in Value.
For Tesoro, this five year contract will provide us
with a stable supply of ANS crude while also giving us
the volumetric flexibility to help accommodate
seasonal fluctuations in demand for refined products.
The availability, flexibility and stability that this
contract offers will have a positive impact on our
ability to maintain our ongoing operations at our
Kenai refinery.
In order to accommodate the needs of the other in-
state refiners, Tesoro and the State modified this
contract to reduce volumes as well as eliminate a
proration clause and a five year extension option.
Tesoro believes in Alaska's future and is committed to
being an active corporate citizen. We look forward to
continuing to provide Alaskans with clean burning
fuels to keep your homes warm and your cars, boats and
snow machines traveling across this great state.
I urge you to support House Bill 373.
1:39:14 PM
REPRESENTATIVE SEATON inquired whether the calculation of the
sales price is a daily or monthly value.
MR. GILL deferred to Damon VanZandt to answer the question.
DAMON VANZANDT, Senior Director, North American Crude Oil
Strategy and Trading, Tesoro Petroleum Corporation, offered his
belief that the contract references two pricing sources, Platts
and Reuters, and they publish a price for the Alaska North Slope
(ANS) crude which is actually a West Coast (WC) delivered price.
That is a daily assessment, they produce a high and low price
and the contract takes the average of those highs and lows for
one day, and then takes a monthly average where it computes the
average daily price for the entire month of delivery. That
establishes the monthly average price that Tesoro pays.
MR. VANZANDT addressed an earlier question regarding how the
marine transportation discount of $1.95 was arrived at. He
pointed out that that price is a U.S. West Coast delivered
price, so it is a price that represents cargos of ANS that trade
down into California and the Pacific Northwest. That $1.95
marine discount represents the marine transportation to those
delivery destinations from Valdez. So, taking the $1.95 off
arrives back at the Valdez price.
1:41:20 PM
REPRESENTATIVE SEATON appreciated that the price is averaged
monthly. He understood that $3.50 is the average transportation
charge between Valdez and West Coast port, and asked whether the
$1.95 is related to transportation from Valdez to Nikiski.
MR. VANZANDT offered his belief that the $3.50 is representative
of the royalty in-value marine discount, which is the reason the
royalty in-kind contract is basically $1.55 better. "Royalty
in-value contracts that you sell, it costs you another $1.55 to
sell those back to the producers," he continued, and actually
Tesoro just deducts the $1.95, which is the same discount that
Tesoro and Petro Star take off the ANS published price.
1:42:28 PM
REPRESENTATIVE JOSEPHSON recalled Mr. Shine's testimony that
since 1979 there has been the rare occurrence where the state
has taken royalty in-value. He asked Mr. Gill's understanding
of this gap and whether it is avoidable in the future.
MR. GILL offered his understanding that it became very difficult
to buy royalty oil in the past, there were netbacks and the
coming back on contracts Tesoro had with additional fees year
after year after the fact. That appears to have been alleviated
recently. Tesoro engaged two years ago in its first royalty
contract in many years, and Tesoro is very satisfied with terms
it came up with and extended it for one year and that expired in
January. Tesoro has had a great working relationship and the
majority of the issues have been ironed out that kept Tesoro
from engaging in royalty oil in the past. Tesoro is happy to be
back in business with the state.
MR. SHINE clarified that there has been only a few instances
where the state has taken all of its royalty in-value (RIV); the
state always takes a certain portion of its royalty in-value, at
least 5 percent. In that manner the state is still given market
information and netback pricing so the state can ensure it is
still receiving better than RIV. He reiterated that the state
has been selling royalty in-kind (RIK) since 1979, a portion of
the state's overall volume, but that fluctuates depending upon
who is purchasing, the actual production, and how many barrels
the state has available. With respect to the state's current
situation, it was a combination of market factors with Flint
Hills. The state had 18,000-30,000 barrels under contract with
Flint Hills before it shut down. So when Flint Hills ceased
operation in 2014 the state had a one-year contract with Tesoro
which was subsequently extended and terminated January 31, 2016.
Given the lengthy public process, there was a long lead time
involved in these commercial negotiations to get the state to
where it is today. The state cannot essentially flip a switch
and start selling RIK oil for long-term contracts when things
become available, it takes longer than that.
1:45:04 PM
REPRESENTATIVE TARR, regarding the five-year extension and Mr.
Shine's explanation about the amount of lead time, inquired as
to how much time that actually will take. She further inquired
whether the state will start that process somewhere mid-way
through this contract so that the state is not pushed up against
any deadline and whether that is how it would naturally occur if
the Flint Hills anomaly had not taken place.
MR. SHINE replied correct, the lead time based upon what has
been seen in this process is approximately 14 months. The state
went out for solicitation in January 2015 and now it is toward
the end of March 2016 with the contract before the committee.
If Tesoro is interested in purchasing RIK volumes after this
five-year contract terminates, that conversation will start in
advance of the termination of this contract. At that time the
division will go out for an additional public solicitation and
gauge market demand to determine which entities are interested
in purchasing at whichever volumes the state has available at
that time. In an earlier statement he mentioned that the state
is currently negotiating a contract with Petro Star and is doing
a one-year contract; concurrently the state is negotiating a
four-year contract so that that would commence at the end of the
one-year contract. So, both entities will have five-year
contracts terminating at approximately the same time in 2021.
At that time the state will have a better handle on production
forecasts and which royalty volumes the state has available to
sell to the market. If all goes well, the committee will have a
Petro Star contract before it next spring.
REPRESENTATIVE TARR understood that the shorter term contracts
can be done without the same kind of legislative approval and
surmised this is why the legislature was not so closely involved
in what took place during the gap with Flint Hills and Tesoro.
MR. SHINE responded correct. Under AS 38.06.055, a contract of
less than 365 days does not require legislative ratification,
and contracts of one year or longer require legislative
ratification. To meet Petro Star's near-term demands, and for
the state to deliver royalty barrels to Petro Star in 2016, the
state is now seeking to do a short-term, less than one year,
contract while currently negotiating a new four-year contract
that would extend past when the one-year contract terminates.
1:47:59 PM
REPRESENTATIVE OLSON noted the cheapest Tesoro gas on the Kenai
Peninsula is about one-half mile from the refinery. He asked
whether it is being trucked out from Anchorage or being trucked
over from the refinery.
MR. GILL offered his belief that it is being trucked over from
the refinery.
REPRESENTATIVE OLSON remarked that there has been a lot of
speculation on that.
MR. GILL said he has heard a lot of stories.
1:48:26 PM
REPRESENTATIVE TARR understood that the in-state use of Tesoro's
refined products is predominantly jet fuel and not retail fuels.
She inquired about the numbers for the in-state products.
MR. GILL replied that pretty much all of Tesoro's gasoline and
all of its jet diesel is consumed in the state. When Flint
Hills shut down the demand for gasoline picked up and Tesoro was
able to fill that. About the only thing that goes out [of
state] is the bottom one-third of the barrel, the heavy bottoms
that Tesoro cannot do anything with because of how the refinery
is configured. So, it has to be stored and a home found for it
somewhere down south.
1:49:21 PM
REPRESENTATIVE OLSON asked whether there is another federal
mandate coming down on production, like the ultra-low sulfur
diesel mandate that came down a few years ago.
MR. GILL offered his belief that Tier 3 gasoline standards will
go into effect this year. It is volumetric and requires extra
hydro treating of the gasoline to pull out additional sulfur,
and Tesoro is prepared to meet those standards.
1:49:58 PM
REPRESENTATIVE JOSEPHSON recalled that this issue has come up
with the cruising industry and that the cruising industry has
highlighted the impact on its market and prices.
MR. GILL answered that that is different, it is heavy bunker
fuel and what is allowed to be used in the ships. He understood
that ships within three miles [of the coast] must use cleaner
burning fuels, which are more expensive. That is what is
driving some of the cargo companies to switch over to liquefied
natural gas (LNG), he posited.
CO-CHAIR NAGEAK closed public testimony after ascertaining that
no one wished to testify.
1:51:01 PM
REPRESENTATIVE TARR said she is pleased that the committee has
something before it, because it appears the RIK will bring in
roughly $50 million more in value, which is good news.
REPRESENTATIVE OLSON commented that this is probably the most
non-controversial bill the committee has had all session.
REPRESENTATIVE HERRON remarked it is the most unamended bill.
1:51:56 PM
CO-CHAIR TALERICO moved to report HB 373 out of committee with
individual recommendations and the accompanying fiscal notes.
There being no objection, HB 373 was reported from the House
Resources Standing Committee.