Legislature(2013 - 2014)BUTROVICH 205
02/08/2014 09:00 AM Senate RESOURCES
Audio | Topic |
---|---|
Start | |
SB146 | |
SB109 | |
SJR15 | |
SJR16 | |
Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
*+ | SB 146 | TELECONFERENCED | |
*+ | SB 109 | TELECONFERENCED | |
*+ | SJR 15 | TELECONFERENCED | |
*+ | SJR 16 | TELECONFERENCED | |
SB 146-APPROVE TESORO ROYALTY OIL SALE 9:01:08 AM CHAIR GIESSEL announced SB 146 to be up for discussion. JOE BALASH, Commissioner-designee, Department of Natural Resources (DNR), said SB 146 intends to seek the legislature's approval of a royalty sale with Tesoro that is lasting more than one year. He explained that in 2013, the DNR entered into a royalty sale contract with Tesoro that was for less than one year and now they want to extend the terms beyond one year and that requires legislative approval. As owner of the oil and gas on state land, the state gets a royalty interest in the production of the hydro carbon and has a choice of taking it in kind (RIK) or in value (RIV). Statutes direct the department to take royalty in kind unless the state's interest is better served to take it in value, but the state is then restricted on how to go about disposing of or selling that royalty to achieve value. COMMISSIONER BALASH said the state tends to stay in value for the most part, benefiting from the lessee's expertise in being able to manage the disposition and custody transfers. When taking in kind they do it at the unit or lease boundary, and in the case of oil, typically, that custody is immediately transferred to the buyer of oil right there. 9:04:13 AM The sale process is governed by a few interwoven statutes, the first one being AS 38.05; and AS 38.05.182 directs the department to take it in kind if they are able to determine it is in the state's best interest to sell to folks in state for refining purposes, hopefully, and to accomplish that through a competitive process (with some exceptions). Keeping that in mind, in 2012, he sent out an informal letter to a variety of parties when it became apparent that Flint Hills, in particular, was interested in additional volume for sale. Those letters went out to producers, refiners, both in state and out of state and generally went out through media and trade publications. They received expressions of interest from Tesoro and Flint Hills, and instead of continuing down the competitive auction process, they negotiated non-competitive contracts with each party to serve their respective needs or interests. 9:05:42 AM SENATOR FAIRCLOUGH asked if other places would have competed. COMMISSIONER BALASH answered their effort to test the waters with this expression of interest and solicitation was intended to see whether or not an auction process or competitive bid system would generate enough interest to generate additional revenue over and above what he would receive in an RIV context, and based on the responses they received, they determined that a large number of parties would not be interested in bidding for royalty sales. 9:07:11 AM SENATOR FAIRCLOUGH asked if the department had ever done a full- blown RFP or search for a competitive bid. COMMISSIONER BALASH answered yes, and showing a graph of RIK sales history explained that the department did some nominations and auctions back in the early 80s when it had a lot more royalty and was in the throes of litigation over its value. SENATOR FAIRCLOUGH noted that it looked like that stopped in 2004. COMMISSIONER BALASH said specific terms in this contract were taken from a contract that originally was for less than one year, and those deliveries had begun earlier in the month. The current contract doesn't directly reference the RIV versus RIK calculations, rather it relies on a pricing formula that averages together an ANS spot price and reported prices with a $1.95 deduction and a tariff allowance (intended to capture not only the cost of moving the hydrocarbon oil from the Valdez marine terminal to the refinery, but also to reflect the difference in the location depending on which destination it's going to) for a marine differential. It also has adjustments for the pipeline tariff, the quality bank, and a line loss factor. Ultimately that kicks out a price that Tesoro will pay the state for the value of its royalty. 9:09:05 AM SENATOR DYSON asked him to explain "quality price adjustment." COMMISSIONER BALASH relied that the quality bank adjustment is a mechanism intended to keep all parties whole when various qualities of crude are co-mingled in the pipeline. He explained that the North Slope has fields that produce different grades of petroleum and when it all comes into the TransAlaska Pipeline System (TAPS) it mixes up and at the other end you get a barrel of crude that is different than what was put in. In the case of some Interior refineries, because they are pulling TAPS quality crude off and recovering some of the higher value products and returning the residual, they actually have to pay into the quality bank. That is not a big factor for Tesoro, because they don't put anything into the pipe, but for reporting purposes they have to make sure the quality bank differential is getting tracked from top to bottom. COMMISSIONER BALASH said the quantity for this particular contract is dependent upon the nomination made by the buyer with a certain amount of notice so that the department can nominate in turn through its lease prerogatives the taking of the volume. It ranges from 5,000-15,000 barrels/day and may be adjusted so long as that is done through the commissioner's office. The contract can be terminated by the refinery or if they fail to nominate for three consecutive months it terminates automatically. He said there is an allowance for refinery turnaround, so in the event they do need to do major maintenance or an upgrade it doesn't count against them in that three-month period. And similar to the Flint Hills contract, reserves are included in the event of some sort of default so that the state is not stuck as a distressed seller of crude that it has taken in kind. 9:13:04 AM When the commissioner makes a decision to sell the state's royalty, he said that AS 38.05.183(e) guides the process and it interconnects with the Royalty Board's contract evaluation process, especially when it is one that goes for more than one year. COMMISSIONER BALASH said generally speaking they are guided by the principal of ensuring that the state is going to receive at least the same value it would have had the royalty been taken in value. Because this contract is going beyond the one year term, the state's Royalty Board met and reviewed it and the findings. It then considers a list of eight things that try to take into account the various opportunities that in-state refining, in particular, or any other in-state use might have on the broader community, so that more than just the cash value can be considered. Their economists work very closely with applicants from this year and prior years, relying on Department of Labor and Workforce Development (DOLWD) statistics to understand the jobs impact and try to get a handle on impacts in the market pricing for the products that come out. Some of that is difficult because of the unregulated nature of refined products like diesel, gasoline, and home heating fuel. It's not like natural gas that has a fairly transparent system to track value from a producing field to a consumer. 9:15:32 AM SENATOR FAIRCLOUGH asked in consideration of the projects' additional costs and responsibilities, which could be imposed on the state and affect political subdivisions by the developments related to this transaction, how Tesoro is gaining access to the crude and if they are responsible for the transportation costs. COMMISSIONER BALASH replied that when the state makes these sales, they do so at the lease boundary; in this case that means Tesoro is responsible for gaining and managing the capacity in whatever lines are needed to the oil from the field all the way down to the end of TAPS. An allowance for those costs is provided in the pricing formula. The state position in negotiations with this buyer, as well as others, is to not take custody risk or the obligation to secure capacity in any of the lines. He explained that if the sales point would be at the Valdez Marine Terminal (VMT), then there would be a much higher burden on the division's staff to take on the task of obtaining and managing capacity in those lines to get from the field all the way to the VMT. SENATOR FAIRCLOUGH asked if the point the state chooses to sell from would affect the tariff. 9:17:47 AM COMMISSIONER BALASH replied if the point of sale were moved further south, it wouldn't necessarily affect the tariffs but it would have to be included in the price formula a different way. CHAIR GIESSEL asked if Tesoro gets the oil in Valdez and puts it in one of their vessels and transports it to Nikiski where it gets refined, and the oil that they can't process because of their refinery configuration is then put on another ship and gets sent down to the Lower 48, does that mean they have a zero liability in the quality bank allowance. COMMISSIONER BALASH replied in their case, that was correct, but the quality bank differential varies over time depending on what is going in at the top, what is going on midstream in the Interior, and what is going on with the quality bank in the North Pole. It probably has more of an impact on the competition between refineries in the state, he thought, but then said someone from Tesoro could answer that specifically. 9:19:44 AM He said slide 10 showed the history of the state's royalty sales program. Historically, there have not been a tremendous number of sales to industries or buyers other than the state's Interior refineries. Some sales have happened to Tesoro in the past and hopefully, they will become a long term customer. He said that Tesoro is also in the process of running the regulatory process to construct a pipeline from the west side of Cook Inlet to their location on the east side in Nikiski, and they hope to see some good developments on the west side that helps keep them supplied with Alaskan crude as opposed to imports. SENATOR MICCICHE asked if the RIK contract price on page 5 was similar to all of the other prior purchases beginning soon after construction of the pipeline. COMMISSIONER BALASH replied that the methods the state uses to value its oil have evolved over time since the startup of TAPS. He explained that in the course of the litigation during the 1980s the state sought to sell much more of its royalty, in part, because we weren't certain we were getting the full value from the lessees. As the settlements around those valuation disputes occurred, beginning in the early 90s, the state felt less of a need to sell its royalty in order to get full value for it. And as time moved on, there were also changes in the way the TAPS tariffs were calculated and the marine differentials were accounted for. He explained that TAPS tariffs were governed by a settlement until the early mid-2000s when FERC was asked to adjudicate them and then there was a fully adjudicated tax tariff value. So, in some ways things have gotten to be much more transparent for the state and for potential buyers. 9:23:50 AM COMMISSIONER BALASH explained there is about a 20 cent difference in the price per barrel for the volumes it is selling to Tesoro. Part of the difference has to do with the considerations that were included in that other contract. In that case, they agreed to do certain things that the state determined were valuable to the local population and market, the big deal being price parity for gasoline that the Interior gets relative to sales in the Anchorage market. But in this case, the state is not receiving the benefit of any special commitments from Tesoro and so the price is a little higher than the one with Flint Hills last year. CHAIR GIESSEL said Flint Hills had recently announced their closure and that means that the royalty oil sold to them will now become available and asked if that would affect this agreement. COMMISSIONER BALASH answered that as someone who grew up in North Pole he was shocked at the Tuesday announcement and didn't think the last shoe had dropped. He said that Flint Hills initially had approached the state about a second ten-year contract and looking at projections for declining production on the North Slope, he wasn't certain of having sufficient royalty volumes. But if Flint Hills shuts down and another buyer doesn't reopen the refinery, the state will have a larger volume of royalty available to sell. A combination of the Flint Hills and Tesoro volumes in the next couple of years gets to be a pretty high percentage of the state's royalty overall. In fact, both contracts contain pro-ration clauses in the event the state is short. 9:27:42 AM COMMISSIONER BALASH said in some ways those issues become less of a concern in the Tesoro case if Flint Hills is not taking royalty. He said they will talk to the Royalty Board about disposition of royalty volumes. Their first interest is to see whether or not there is an opportunity to supply an Interior refinery so that the one remaining with Petro Star continues to operate. 9:28:12 AM SENATOR FAIRCLOUGH asked if the loss of Flint Hills is going to affect the ability to reheat the crude that is moving through the pipe. COMMISSIONER BALASH answered that he asked that question of Alyeska immediately through the State Pipeline Coordinator's Office and Admiral Barrett assured him that they will have the ability to get heat into the system but it will cost more and that Flint Hills received some value for the heat they were putting back into the line. COMMISSIONER BALASH said maintaining the stability of the Nikiski facility and supporting jobs in the Kenai should have a positive effect on the state overall. The Nikiski facility began operations in 1969 and it is the most sophisticated refinery in Alaska making ultralow sulphur diesel including a significant piece of the overall market for jet fuel and a large role in gasoline production, heating oil to a lesser extent. They make a variety of products and employ 200 Alaskans in high paying positions; they have a variety of retail outlets and filling stations. Petro Star's facility in Valdez either does or will manufacture low sulfur road diesel. 9:31:36 AM SENATOR MICCICHE asked why the fiscal note is not negative. COMMISSIONER BALASH answered that the fiscal note reflects a zero cost to the agency for this contract. The revenue line is indeterminate because they think this will ultimately return more value to the state than staying RIV. Assuming maximum volumes, it's about a 20 cent/barrel benefit to the treasury or $1 million per year. 9:32:44 AM SENATOR DYSON asked why the state doesn't give a discount to refineries that are producing fuel for instate use, because Alaskans have to pay more at the pump than people in the Lower 48. COMMISSIONER BALASH replied that the refining and motor fuels industries are unregulated and have very little transparency and it would be hard to rely on the fact that a discount would flow through to the benefit of the purchasing public. Because the price realized at the fuel pump is a function of competition, supply and demand, and a variety of factors, if the state would consider selling its royalty oil to instate refineries at a discounted price, the first question he would be asked is "Why?" because a $5 difference in the state's royalty value would add up to tens if not hundreds of millions of dollars depending on the volumes sold in less revenue to the treasury. If one can demonstrate that it is being passed on to the consumer ultimately, that calculation could be evaluated and answered, but some of the buyers of crude oil in the state have zero appetite to provide transparent accounting for a price break flowing through to the consumer. SENATOR DYSON added that they would also be giving a benefit to only a portion of the state's citizen to the detriment of others and impacting deposits to the Permanent Fund. COMMISSIONER BALASH said he was correct on both points. 9:36:29 AM CHAIR GIESSEL noted that the Royalty Oil and Gas Development Advisory Board is comprised of citizens that are volunteering their services to the state of Alaska and are often invisible and asked who they are. COMMISSIONER BALASH said the Chair is Bob Roses (intending to resign); Steven Menard, Chuck Wiegers, Dana Pruhs, and Steve Selvaggio are public members; the cabinet members include himself at the DNR, the commissioner of the DOR whose designee is Bruce Tangeman, and the commissioner of the Department of Commerce, Community and Economic Development (DCCED) Susan Bell's designee (vacant). He said when the board reviewed the Flint Hills contract last year they expressed a desire to meet more frequently than just to review a contract, so they had many meetings educating them on royalty management history, including disputes that lead to practices they use today. The board's history suggests that it can hire its own staff to be a check against the Division of Oil and Gas and the department generally, although it's been over 20 years since they had staff. CHAIR GIESSEL thanked them for volunteering their services to the state. 9:39:14 AM MATT GILL Senior Manager, External Affairs, Tesoro Corporation Operations in Alaska and the Pacific Northwest, Anchorage, Alaska, supported SB 146. He said Tesoro Corporation is an independent refiner and marketer of petroleum products. They started refining in Alaska in 1969; the Kenai refinery has capacity to produce up to 72,000 barrels per day and is primarily focused on jet diesel production followed by gasoline and gasoline blend stocks, heating oil, heavy fuel oils, propane, and asphalt. They operate a 68-mile common carrier products pipeline that transports jet fuel, gasoline, and diesel to the Port of Anchorage and the Anchorage International Airport. The wholesale delivery of their products occurs through their terminals at Kenai, Anchorage, the Nikiski dock, and the Port of Anchorage. In addition to being the largest tax payer in the Kenai Peninsula Borough, Mr. Gill said the refinery provides about 210 family wage jobs along with about 30 full time contractors who are working in and around the refinery year round. They are able to employ another 200-plus employees around the state at their 31 company-owned Tesoro-To-Go retail outlets, as well as the operators that work at their terminals at the Port of Anchorage and Nikiski. He said Tesoro is a major supporter of the Cook Inlet Regional Citizens Advisory Council (CIRCAC) and the largest member of the Cook Inlet Spill Prevention and Response Team (CISPRE). They actively support a wide range of local events and programs from employee contributions and fund raising efforts for the United Way to local youth sports programs. Each year they sponsor all the 5th and 6th grade classes on the Kenai Peninsula to conduct a mission at the Kenai Challenger Learning Center and they are now the signature sponsor of the Caring for the Kenai Program. MR. GILL said he supported SB 146 and said it is a result of constructive dialogue and productive negotiations between the Department of Natural Resources (DNR) and the Tesoro Corporation as described in the presentation. Their original negotiations resulted in a one-year contract beginning this month and ending in January 2015. The original contract received best interest findings, was approved unanimously by the State Royalty Board, and was signed by both parties in October 2013. On further analysis of their future needs, they sought this amendment to the contract to add one more year using identical terms that would deliver royalty oil until January 2016. A new final best interest finding was produced by DNR, and the State's Royalty Board again voted unanimously for approval. MR. GILL said the state understands their issues and they arrived at a mutually beneficial agreement that is a win/win for both parties. The state will continue to receive a price for its RIK oil that exceeds the price it would have received if it elected to keep its royalty oil in value and this contract will provide Tesoro with a stable supply of ANS crude while also giving them the volumetric flexibility to help accommodate seasonal fluctuations in demand for refined products. The availability, flexibility, and stability this contract offers will have a positive impact on Tesoro's ability to maintain its ongoing operations at the Kenai refinery. 9:44:06 AM JAMES TANGARO* Vice President, Tesoro Corporation* Manager, Tesoro Refinery* Kenai, Alaska* said he was available to answer questions on SB 146. SENATOR BISHOP asked how much asphalt the refinery can produce and what that would do to Department of Transportation and Public Facilities (DOTPF) pricing on building lane miles in the state and if Tesoro would be able to meet the demand. MR. TANGARO said they usually make asphalt as needed and had not maxed capacity and they will do everything they can to make sure the supply is there. SENATOR FAIRCLOUGH asked if they have sufficient resources to pick up Flint Hill's shortfall in jet fuel supply at the Anchorage International Airport. MR. GILL answered yes; between their Kenai refinery and their West Coast operations they would be able to supply the jet fuel needs for the state. CHAIR GIESSEL asked him where his supply of crude comes from. MR. GILL replied that it comes from TAPS and everything that is being produced in Cook Inlet, and they were excited about the uptick in production there. On occasion foreign crudes from the spot market have been brought in. MR. TANGARO said ANS and Cook Inlet make up 90 percent on an annual basis of what they run in the refinery but they shop on a world market looking for opportunities. SENATOR MICCICHE commended Tesoro for keeping unit costs as low as possible and if some of that is supplemented with foreign product that is just the way the business works. The reality is that too many jobs and too many community benefits depend on their success and he hoped to see some expansion considerations in the future. 9:48:18 AM MR. GILL added that they take possession of the ANS crude at the top of the TAPS and buy a quality 10; if it goes through the Flint Hills refinery they process it and put back in a lesser product, which means that the product coming out of the pipeline at Valdez is a lesser quality than what they bought, and that is where the quality bank adjustment comes in to make sure they are getting the value for what they bought at the top of the pipe. Answering another question he said that Petro Star produces ultra-low sulphur diesel at their Valdez refinery. CHAIR GIESSEL opened public comment; hearing none, she closed it. SENATOR FAIRCLOUGH moved to report SB 146, version A, from committee to the next committee of referral with attached fiscal note and individual recommendations. There were no objections and it was so ordered.