Legislature(2013 - 2014)SENATE FINANCE 532

04/01/2013 09:00 AM FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ SB 47 STIPEND FOR STATEWIDE BOARDING SCHOOL TELECONFERENCED
Heard & Held
+ SB 59 OIL & GAS EXPLORATION/DEVELOPMENT AREAS TELECONFERENCED
Scheduled But Not Heard
*+ SB 86 APPROVE FLINT HILLS ROYALTY OIL SALE TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
= SB 49 MEDICAID PAYMENT FOR ABORTIONS; TERMS
Moved SSSB 49 Out of Committee
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."                                                                          
                                                                                                                                
10:20:20 AM                                                                                                                   
                                                                                                                                
JOE  BALASH,  DEPUTY  COMMISSIONER,  DEPARTMENT  OF  NATURAL                                                                    
RESOURCES,  stated that  the  bill  would grant  legislative                                                                    
approval  for  the  sale  of  royalty  oil  to  Flint  Hills                                                                    
Resources by  the Department of Natural  Resources (DNR). He                                                                    
began  with Slide  2 of  the presentation,  "Royalty In-Kind                                                                    
Sale to Flint Hills Resources" (copy on file):                                                                                  
                                                                                                                                
     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.                                                                                
                                                                                                                                
10:22:13 AM                                                                                                                   
                                                                                                                                
Mr. Balash spoke to Slide 3, "Non-Competitive RIK Sale                                                                          
Process":                                                                                                                       
                                                                                                                                
     •Statute presumes State's Best Interest is met by                                                                          
          -Taking royalty in-kind-AS 38.05.182(a)                                                                               
          -With sale to in-state buyer-AS 38.05.183(d)                                                                          
          -Accomplished through a competitive process-AS                                                                        
          30.05.183(a)                                                                                                          
                                                                                                                                
     •August 13, 2012 Informal Solicitation of Interest                                                                         
     sent to:                                                                                                                   
          -North Slope Producers                                                                                                
          -In-state Refiners                                                                                                    
          -Industry specific & general media                                                                                    
                                                                                                                                
10:24:04 AM                                                                                                                   
                                                                                                                                
Mr. Balash addressed Slide 4, "RIK Contract Terms":                                                                             
                                                                                                                                
    •Proposed 2013 contract is similar to 2004 contract                                                                         
     •Proposed 2013 contract, like 2004 contract, does not                                                                      
     directly reference RIV valuation in RIK price                                                                              
     calculations                                                                                                               
     •Key Contract provisions                                                                                                   
          -Price                                                                                                                
          -Quantity                                                                                                             
          -Term                                                                                                                 
          -Special Commitments                                                                                                  
          -In-State Processing and Local Hire                                                                                   
                                                                                                                                
10:24:59 AM                                                                                                                   
                                                                                                                                
Mr. Balash discussed 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.                                                                                                    
          -Reported by industry  trade publications: Platts,                                                                    
          Telerate, Reuters                                                                                                     
                                                                                                                                
     •$2.15 = RIK Differential                                                                                                  
          -Destination Value - Marine Costs so RIK •5,9                                                                       
          -Subject to a one-time  adjustment of no more than                                                                    
          ± $0.15 per barrel.                                                                                                   
          -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                                                                                
                                                                                                                                
10:25:53 AM                                                                                                                   
                                                                                                                                
Mr. Balash pointed to Slide 6, "RIK Contract Quality":                                                                          
                                                                                                                                
     •Initial Quantity Range                                                                                                    
          -18,000 - 30,000 barrels per day                                                                                      
          -May   be   adjusted   after   12   months,   with                                                                    
          Commissioner approval                                                                                                 
                                                                                                                                
     •Termination of Contract                                                                                                   
          -No  or zero  nomination for  3 months  terminates                                                                    
          contract                                                                                                              
          -Contract terms comparable to the private market                                                                      
                                                                                                                                
     •Refinery Turnaround                                                                                                       
          -Contract  allows  FHR  the flexibility  to  cease                                                                    
         royalty oil purchases during maintenance                                                                               
                                                                                                                                
     •Guarantees, reserves and proration clauses included                                                                       
          -24,000 barrels  per day with 15  percent reserves                                                                    
          for other RIV or RIK interests                                                                                        
                                                                                                                                
10:27:31 AM                                                                                                                   
                                                                                                                                
Mr. Balash addressed Slide 7, "2013 RIK Contract Term":                                                                         
                                                                                                                                
     •FHR initially sought a ten-year contract                                                                                  
          -Creates supply and price risk                                                                                        
          -Increases counterparty risk                                                                                          
          -Limits the  State's ability  to supply  other RIK                                                                    
          buyers                                                                                                                
     •DNR negotiated a five year term                                                                                           
          -April 1, 2014 to March 31, 2019                                                                                      
          -Possible extension condition for:                                                                                    
               •Large capital improvement at the North Pole                                                                     
               Refinery                                                                                                         
               •Binding support for a North Slope natural                                                                       
               gas transportation system                                                                                        
                                                                                                                                
10:29:47 AM                                                                                                                   
                                                                                                                                
Mr. Balash discussed Slide 8,  "2013 RIK Contract Quantity",                                                                    
which was  a bar graph  that illustrated the  total expected                                                                    
royalty oil and  liquid natural gas volume  and the expected                                                                    
share committed to Flint Hills Resources.                                                                                       
                                                                                                                                
10:30:54 AM                                                                                                                   
                                                                                                                                
Mr. Balash spoke to 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 AS38.06.070(a), as                                                                    
          reviewed by the Royalty Board                                                                                         
                                                                                                                                
Mr. Balash addressed 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                                                                               
                                                                                                                                
10:32:09 AM                                                                                                                   
                                                                                                                                
Mr.  Balash  continued  with   Slide  11,  "Royalty  Board's                                                                    
Decision Criteria":                                                                                                             
                                                                                                                                
     AS 38.06.070(a) states that the Alaska Royalty Oil and                                                                     
     Gas Development Advisory Board must consider:                                                                              
          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                                                                                 
                                                                                                                                
10:32:32 AM                                                                                                                   
                                                                                                                                
Mr. Balash  addressed Slide 12, "Royalty  In-Kind Sales." He                                                                    
noted that  it was difficult  to read. He relayed  that over                                                                    
the course of  the last 30 years the state  had been engaged                                                                    
in the continuous  sale of royalty oil. He  noted that there                                                                    
were a  variety of sales in  the early 1980s and  that there                                                                    
had been a  lot more oil during that time.  He said that the                                                                    
price crash of 1986 had  caused the department to reconsider                                                                    
how  royalty  oil was  sold  and  to  limit the  number  and                                                                    
variety of sales.                                                                                                               
                                                                                                                                
10:33:58 AM                                                                                                                   
                                                                                                                                
Mr. Balash  spoke to 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                                                                          
               •Analyzed for Consistent value between RIK                                                                       
               and RIV                                                                                                          
               •Volume 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.                                                                                     
          -Support jobs and economy of Fairbanks North Star                                                                     
          Borough                                                                                                               
                                                                                                                                
10:35:00 AM                                                                                                                   
                                                                                                                                
Mr. Balash addressed Slide 14, "FHR's North Pole Refinery":                                                                     
                                                                                                                                
     •Strategically located on 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)                                                                                                            
                                                                                                                                
10:35:44 AM                                                                                                                   
                                                                                                                                
Mr. Balash continued to Slide 15, "FHR's North Pole                                                                             
Refinery":                                                                                                                      
                                                                                                                                
     •FHR produces approximately                                                                                                
          -672,000 gallons of jet fuel per day                                                                                  
          -143,000 gallons of gasoline per day                                                                                  
          -41,000 gallons of home heating fuel per day                                                                          
          -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                                                                          
          -30.7  million in  Anchorage and  19.3 million  in                                                                    
          Fairbanks                                                                                                             
                                                                                                                                
10:36:42 AM                                                                                                                   
                                                                                                                                
Mr. Balash addressed Slide 16, "Proposed Contract                                                                               
Benefits":                                                                                                                      
                                                                                                                                
     •Proposed contract is expected to:                                                                                         
          -Maintain   status   quo  of   in-state   refining                                                                    
          behavior                                                                                                              
          -Produce  330 million  gallons of  refined product                                                                    
          or 18%  of gasoline and  26% of jet  fuel consumed                                                                    
          in Alaska                                                                                                             
          -Provide  approximately $140  million per  year in                                                                    
          gross  regional product  sales  for the  Fairbanks                                                                    
          North Star Borough (FNSB)                                                                                             
          -Support  1,300 direct  and indirect  jobs in  the                                                                    
          FNSB                                                                                                                  
          -Sustain $100 million in annual earnings in FNSB                                                                      
          -Provide  socio-economic stability  against energy                                                                    
          costs                                                                                                                 
                                                                                                                                
10:37:53 AM                                                                                                                   
                                                                                                                                
Mr. Balash discussed Slide 17, "Projected Impacts if not                                                                        
Approved":                                                                                                                      
                                                                                                                                
     •If FHR stops refining, anticipated effects include:                                                                       
          -Loss of  approximately 1,300 direct  and indirect                                                                    
         jobs in the Fairbanks North Star Borough                                                                               
          -State could  experience increased  utilization of                                                                    
          the social safety net                                                                                                 
         -Possibility of population redistribution                                                                              
          -Increased     and    decreased     infrastructure                                                                    
          utilization and maintenance with population shift                                                                     
          -Impact to  the fuel supply for  the Fairbanks and                                                                    
          Anchorage  airports, affecting  trade and  tourism                                                                    
          and the Alaska Railroad                                                                                               
          -Loss of heat source for warming low flow in TAPS                                                                     
                                                                                                                                
10:39:14 AM                                                                                                                   
                                                                                                                                
Senator  Hoffman pointed  to Slide  9. He  requested further                                                                    
explanation of bullet four:                                                                                                     
                                                                                                                                
     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                                                                                                                  
                                                                                                                                
Mr.  Balash responded  that the  criteria had  been examined                                                                    
during  the  evaluation.  He   said  that  FHR  distribution                                                                    
patterns had been  examined. He said that FHR  had been able                                                                    
to sell  locally, in the  interior at the refinery,  as well                                                                    
as the  Port of Anchorage area.  He stated that there  was a                                                                    
special  contract  commitment   provision  relative  to  the                                                                    
pricing of  gasoline in  the Fairbanks  market that  help to                                                                    
provide price  discipline for the transportation  segment of                                                                    
the business line in the interior.                                                                                              
                                                                                                                                
10:41:23 AM                                                                                                                   
                                                                                                                                
Senator Hoffman  wondered how that equated  to "the citizens                                                                    
of the state" versus "the citizens of Fairbanks."                                                                               
                                                                                                                                
Mr.  Balash responded  that  that  question encompassed  the                                                                    
tension that was embedded throughout  the body of the statue                                                                    
and regulations. He  said it would be one thing  if DNR were                                                                    
to sell royalty  oil at a steep discount to  any refinery in                                                                    
that region of the state that  resulted in a lower price for                                                                    
consumers of the  region. He said that DNR  worked to ensure                                                                    
that one  community was  not benefitting  at the  expense of                                                                    
others by getting at least  royalty and value equivalent for                                                                    
the price offered in the sale  of the royalty oil itself. He                                                                    
said that the  price available in Fairbanks  was a wholesale                                                                    
price that  was being offered  to the retail outlets  in the                                                                    
area.                                                                                                                           
                                                                                                                                
10:43:12 AM                                                                                                                   
                                                                                                                                
Senator Olson asked what were  the possibly penalties to the                                                                    
state for not honoring the guarantees provided to FHR.                                                                          
                                                                                                                                
Mr.  Balash turned  to Slide  6. He  said that  the steepest                                                                    
penalty  could be  grounds for  termination of  the contract                                                                    
itself. He said  that the refinery was  required to maintain                                                                    
a  letter of  credit  in  good standing.  He  said that  the                                                                    
credit quality  of the parent  company would  be scrutinized                                                                    
as well.                                                                                                                        
10:44:34 AM                                                                                                                   
                                                                                                                                
Senator Olson restated the question.                                                                                            
                                                                                                                                
Mr. Balash  responded that he  did not think there  were any                                                                    
specific penalties to  the state. He said  that the contract                                                                    
itself would obligate  the state to no more  than 85 percent                                                                    
of the total  royalty volume. He assured  the committee that                                                                    
the state was protected to a certain degree.                                                                                    
                                                                                                                                
10:45:24 AM                                                                                                                   
                                                                                                                                
Senator  Olson queried  the future  of the  refinery in  the                                                                    
North Pole area that had been in decline.                                                                                       
                                                                                                                                
Mr. Balash responded that both  the refineries in North Pole                                                                    
served  distinct  markets.  He  said that  FHR  was  in  the                                                                    
business  of  making  jet  fuel  for  sale  at  Ted  Stevens                                                                    
International Airport;  however, some products were  sold in                                                                    
the  interior. He  shared that  the  other refinery  largely                                                                    
supplied  fuel to  military installations  and home  heating                                                                    
fuel  in the  residential  market. He  thought  that if  the                                                                    
refineries  could  fire their  plants  with  a cheaper  fuel                                                                    
product  than was  currently  being  used, overall  business                                                                    
would improve.                                                                                                                  
                                                                                                                                
10:47:57 AM                                                                                                                   
                                                                                                                                
JEFF  COOK,   REGIONAL  DIRECTOR,  EXTERNAL   AFFAIRS,  KOCH                                                                    
INDUSTRIES PUBLIC  SECTOR, FLINT  HILLS RESOURCES,  spoke in                                                                    
support of SB 86.                                                                                                               
                                                                                                                                
10:53:46 AM                                                                                                                   
                                                                                                                                
Senator Bishop  inquired whether the bill  could bring about                                                                    
growth opportunities in jet fuel.                                                                                               
                                                                                                                                
Mr. Cook responded in the affirmative.                                                                                          
                                                                                                                                
10:54:52 AM                                                                                                                   
                                                                                                                                
Senator  Dunleavy  requested  a  hard  copy  of  the  public                                                                    
testimony.                                                                                                                      
                                                                                                                                
10:55:07 AM                                                                                                                   
                                                                                                                                
Co-Chair Meyer CLOSED public testimony.                                                                                         
SB 86 was HEARD and HELD in committee for further                                                                               
consideration.                                                                                                                  
                                                                                                                                
SB 59 was SCHEDULED but not HEARD.                                                                                              
                                                                                                                                
10:55:27 AM                                                                                                                   

Document Name Date/Time Subjects
SB 47 ADM Statewide.pdf SFIN 4/1/2013 9:00:00 AM
SB 47
SB 47 AFN 2012 Resolution.pdf SFIN 4/1/2013 9:00:00 AM
SB 47
SB 47 Alaska Dispatch are Boarding Schools the Solution.pdf SFIN 4/1/2013 9:00:00 AM
SB 47
SB 47 Boarding School Enrollees By City.pdf SFIN 4/1/2013 9:00:00 AM
SB 47
SB 47 Chugach SB47 Testimony.pdf SFIN 4/1/2013 9:00:00 AM
SB 47
SB 47 CITC Letter of Support.pdf SFIN 4/1/2013 9:00:00 AM
SB 47
SB 47 Galena School Letter Dec 2012.pdf SFIN 4/1/2013 9:00:00 AM
SB 47
SB 47 North Slope School District Letter.pdf SFIN 4/1/2013 9:00:00 AM
SB 47
SB 47 Residential Boarding Homes 2013Summary 3 6 13.pdf SFIN 4/1/2013 9:00:00 AM
SB 47
SB 47 ResidentialActualCostsFY09-FY13 3 12 13.pdf SFIN 4/1/2013 9:00:00 AM
SB 47
SB 47 SchoolClosuresFY99-FY13_3-4-13.pdf SFIN 4/1/2013 9:00:00 AM
SB 47
SB 47 Sectional Analysis Version P.docx SFIN 4/1/2013 9:00:00 AM
SB 47
SB 47 SSSB047-EED-K12-3-5-13 Fiscal Note.pdf SFIN 4/1/2013 9:00:00 AM
SB 47
SB 47 Support Letter for SB 47 Nenana.pdf SFIN 4/1/2013 9:00:00 AM
SB 47
SB 59 Briefing Paper.pdf SFIN 4/1/2013 9:00:00 AM
SB 59
SB 59 BRPC Letter of Support.pdf SFIN 4/1/2013 9:00:00 AM
SB 59
SB 59 Letter DNR 2013.03.19.pdf SFIN 4/1/2013 9:00:00 AM
SB 59
SB 59 Linc Letter of Support for Permit Reform 4 Mar 13.pdf SFIN 4/1/2013 9:00:00 AM
SB 59
SB 59 NSB Support Letter.pdf SFIN 4/1/2013 9:00:00 AM
SB 59
SB 59 Sectional Analysis.pdf SFIN 4/1/2013 9:00:00 AM
SB 59
SB 59 Transmittal Letter.pdf SFIN 4/1/2013 9:00:00 AM
SB 59
SB 86 Final BIF FHR 3-25-13.pdf SFIN 4/1/2013 9:00:00 AM
SB 86
SB 49 Rebuttal to Planned Parenthood and testimony from Saturday.docx SFIN 4/1/2013 9:00:00 AM
SB 49
SB 47Boarding School Stipends.pdf SFIN 4/1/2013 9:00:00 AM
SB 47
SB 86 DNR FHR PBIF Presentation 4-1-13.pdf SFIN 4/1/2013 9:00:00 AM
SB 86
SB59_SFIN Areawide_Approvals_4-1-2013.pdf SFIN 4/1/2013 9:00:00 AM
SB 59
SB 18 Public Testimony - Weld.doc SFIN 4/1/2013 9:00:00 AM
SB 18
Ann Yadon letter 2012.pdf SFIN 4/1/2013 9:00:00 AM
SB 18
FW Northern Susitna Institute CAPSIS request.msg SFIN 4/1/2013 9:00:00 AM
SB 18
FW Tsunami debris cleanup funding testimony.msg SFIN 4/1/2013 9:00:00 AM
SB 18
Mayor DeVilbiss letter.pdf SFIN 4/1/2013 9:00:00 AM
SB 18
McKinley View support.pdf SFIN 4/1/2013 9:00:00 AM
SB 18
Public Testimony 4 1 13 Senate Finance Committee.pdf SFIN 4/1/2013 9:00:00 AM
SB 18
Ruth Wood's Letter.pdf SFIN 4/1/2013 9:00:00 AM
SB 18
Sassan Mossanen support letter.pdf SFIN 4/1/2013 9:00:00 AM
SB 18
SB 18 Johnson Retirement Liability.pdf SFIN 4/1/2013 9:00:00 AM
SB 18
SB18_4113.pdf SFIN 4/1/2013 9:00:00 AM
SB 18
TAT support.pdf SFIN 4/1/2013 9:00:00 AM
SB 18
TCC support.pdf SFIN 4/1/2013 9:00:00 AM
SB 18
Testimony SB 18 ALPAR Sen Fin.pdf SFIN 4/1/2013 9:00:00 AM
SB 18