Legislature(2013 - 2014)HOUSE FINANCE 519
04/09/2014 06:00 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB287 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 138 | TELECONFERENCED | |
| += | SB 191 | TELECONFERENCED | |
| += | HB 287 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 9, 2014
6:06 p.m.
6:06:08 PM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 6:06 p.m.
MEMBERS PRESENT
Representative Alan Austerman, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Mia Costello
Representative Bryce Edgmon
Representative Les Gara
Representative David Guttenberg
Representative Lindsey Holmes
Representative Cathy Munoz
Representative Steve Thompson
Representative Tammie Wilson
MEMBERS ABSENT
Representative Mark Neuman, Vice-Chair
ALSO PRESENT
Joe Balash, Commissioner Designee, Department of Natural
Resources; Doug Chapados, CEO and President, Petro Star
Inc.; James Tangaro, Vice President, Kenai Refinery,
Tesoro; Representative Mike Chennault.
PRESENT VIA TELECONFERENCE
Tara Sweeney, Vice President, External Affairs, Arctic
Slope Regional Corporation.
SUMMARY
HB 287 APPROVE TESORO ROYALTY OIL SALE
HB 287 was HEARD and HELD in committee for
further consideration.
6:06:35 PM
Co-Chair Stoltze discussed the agenda.
HOUSE BILL NO. 287
"An Act approving and ratifying the sale of royalty
oil by the State of Alaska to Tesoro Corporation and
Tesoro Refining and Marketing Company LLC; and
providing for an effective date."
6:07:12 PM
JOE BALASH, COMMISSIONER DESIGNEE, DEPARTMENT OF NATURAL
RESOURCES, discussed that HB 287 had been introduced by the
governor to approve the sale of royalty oil to Tesoro (one
of the instate refineries). He spoke to an amendment that
he hoped would be offered by members.
Co-Chair Stoltze noted that the amendment had been proposed
by Representatives Thompson and Wilson.
Commissioner Balash discussed that the sales contract with
one of the state's six instate refineries highlighted the
value the facilities provided to the state's economy.
Co-Chair Stoltze asked for verification that the amendment
had been provided to the public. [His staff Daniel George
nodded in verification.]
Commissioner Balash continued to discuss the legislation.
He stressed the importance of a healthy instate refining
industry and ensuring that Alaskans had energy security. Of
the state's six refineries, four made products for consumer
markets and provided more than 900 jobs in Valdez, North
Pole, Nikiski, and in other communities. He stated that
keeping the refineries open was good business for the
state. He remarked that unfortunately it appeared the state
would lose one [Flint Hills Refinery]. He relayed that the
operation of refineries in Alaska was good for the state's
business and its national security; having a ready source
of jet fuel was critical for the state's military strategic
infrastructure at various locations throughout the state.
He emphasized that if the state wanted a shot at basing F-
35s in Alaska it needed to have a secure source of jet fuel
available. He communicated that due to a variety of factors
the refineries' margins were severely diminishing. The
largest problem related to the jet fuel market. He detailed
that the Ted Stevens International Airport in Anchorage
operated as one of the busiest air cargo hubs in North
America. As a result a large demand was created for the
supply of refined product; it provided additional scale for
the operations that made the manufacture of gasoline,
diesel, home heating fuel, and marine fuels more cost
effective and efficient. He stated that without the air
cargo business the costs for refinery products used in
Alaska would increase. The biggest challenge the refineries
faced in competing for the jet fuel market related to
pricing. He elaborated that the feed stock into refineries
was priced on a basis that was tied to the ANS West Coast
deliveries; in the last ten years there had been a dramatic
change in the pricing structure. He expounded that ten
years earlier ANS had been priced at a $2.00 discount to
West Texas Intermediate (WTI); however, currently ANS
traded roughly at a $10 premium to WTI. He explained that
the "bizarre phenomenon" in the market place was driven in
many ways by oil production the mid-continental U.S.
6:13:31 PM
Commissioner Balash anticipated that in the long run things
would even out and a narrowing of pricing would occur. In
the meantime the cost disadvantage was impairing the
state's oil refineries from competing in the jet fuel
market. The department had heard from Interior refineries
(particularly in North Pole) about challenges they faced
since the pricing change had occurred and due to federal
actions on pipeline tariffs and other. Beginning in 2012
the state had been in discussions with the refinery
ownership. He relayed that the state had negotiated a new
contract for the sale of its royalty to Flint Hills in the
prior year; the contract had made a significant move on
price for the sales. Additionally, the state had been in an
ongoing conversation with Petro Star (the entity did not
purchase royalty oil) related the effect of Quality Bank
issues and other cost pressures that were eliminating
margins. Representatives from Petro Star would share their
concerns with the committee. The department had hoped that
the problem would correct itself through normal market
forces; however, the announcement in February that Flint
Hills was closing its North Slope facility had changed the
conversation. Since the Flint Hills announcement a subset
of the governor's cabinet had begun meeting regularly on
the issues as a whole. He spoke to a small pipeline between
the Trans-Alaska Pipeline System (TAPS) and North Pole
refineries that was owned by the Golden Valley Electric
Association. He explained that a pair of pipelines ran to
and from TAPS connecting crude to the two North Pole
refineries. The revenue requirement on the two pipelines
was $4.5 million in 2013; the cost was split 85 percent to
15 percent between Flint Hills and Petro Star respectively.
The consequence of the impending Flint Hills closure was
that the full cost would be borne solely by Petro Star. Due
to concerns about the potential cost increase to Petro Star
the department had reached out to the entity to determine
whether it had plans to close. Petro Star had relayed that
it did not intend to close at present, but that the
possibility was real if something did not change. The
department had considered various options including selling
the state's royalty at a discount to mirror pricing like
WTI; it had also considered a discount for select sales.
However, after conversing with the Department of Law the
department had been convinced that federal U.S.
Constitutional questions around the Interstate Commerce Act
and equal protection clauses could require the state to
sell or value all of its royalty at the discounted price.
He reasoned that at the current 85,000 barrels of
production per day the price tag could be measured in the
$100 to $200 million range. Therefore, the department was
not willing to consider the option.
6:19:34 PM
Commissioner Balash relayed that the consequences of the
closure of additional refineries and the potential effect
of military basing decisions by the U.S. Department of
Defense and the continued viability of the Eielson Air
Force Base were being taken seriously by the
administration. He elaborated that aside from the valuation
issues the scenario put the state in the position of
picking winners and losers; the state had a limited supply
of royalty to go around and production would need to come
from some of the private producers as well. The
administration had worked to create a package of provisions
to determine a defined value that would not be fungible
that could be provided for a finite period of time. The
package would also offer incentives to make additional
investments in the facilities to increase efficiency,
profit, and ability to compete for the jet fuel market and
the manufacture of other products used in Alaska. He
provided highlights on the proposal. First, the package
included a royalty valuation provision similar to the one
used for the sale of Cook Inlet natural gas to utilities.
Second, it included an investment incentive for capital
investments in the refinery infrastructure. Third, it
included a credit that was modeled in part on the small
producer credit for the oil and gas production tax system.
He detailed that the two tax provisions would be available
for the upcoming five years; the credits would also include
specific limitations to ensure that the state was providing
a value that could be used to ensure that refineries
continued to operate and provide economic benefits, jobs,
and energy security in Alaska.
6:22:57 PM
Co-Chair Stoltze pointed to the amendment.
Representative Wilson MOVED to ADOPT Amendment 1 (28-
GH2862\A.3, Nauman, 4/9/14)(copy on file).
Co-Chair Stoltze OBJECTED for discussion.
Representative Wilson explained the amendment. Section 2
included a $15 million tax credit for any refinery in the
state selling to a third-party (it did not apply to
refineries on the North Slope producing and using their own
oil). She detailed that a company could receive the money
in cash if it was not able to take the entire $15 million
in a tax credit. She relayed that some of the funds could
come from an oil and gas tax credit fund that currently
held $90 million. Section 3 included a tax credit in the
amount of $50 million; no single entity would take over $5
million of the credit. She noted that Section 3 would not
include North Slope refineries unless they decided to sell
to a third party at some point in the future. Section 1
allowed a company to sell barrels for a discount. She
explained that if a company had 8,000 barrels to sell the
discount would be required to apply to all 8,000 barrels.
The provision would enable companies to sell extra oil to
another market. She asked for verification that her
understanding of Section 1 was accurate.
Co-Chair Stoltze noted that the royalty contract was
inalterable by the legislature and that it was unusual to
add ancillary language to a royalty contract. He observed
that the provision in Amendment 1 was a departure from the
norm. He could not recall another time that a royalty
contract had a substantive amendment.
6:26:14 PM
Commissioner Balash agreed. He detailed that historically
royalty contracts had been approved as standalone measures;
however, the state constitution allowed for a measure to
include multiple features provided that they were all on
the same subject.
Co-Chair Stoltze understood. He suspected the actions
resulted from the urgency of the situation. Commissioner
Balash agreed. He spoke to the need to take action that
would stabilize the industry and give confidence to
decision makers in Washington, D.C.
Representative Wilson added that the amendment included a
five-year sunset. She had asked what would change in five
years. She had been told that upgrades to increase
efficiencies would occur. She believed the primary issue
was the difference between ANS West Coast and WTI pricing.
She hoped pricing would even out. She observed that there
were some strange dynamics occurring that would hopefully
dissipate in the upcoming five years.
Representative Thompson pointed to Section 3, page 5, line
19 of the amendment. He referred to language specifying
that a qualified infrastructure expenditure was an
expenditure directly attributable to the in-state purchase.
He asked if the language was referring to the Flint Hills
Refinery or to equipment upgrades that would increase
efficiency.
Co-Chair Stoltze asked for clarification about the
reference to Flint Hills.
Representative Thompson wondered if the credit would be
available to a company wanting to purchase the Flint Hills
Refinery. Commissioner Balash replied in the negative. The
language did not pertain to the purchase of refineries.
Rather, it was in reference to the tangible personal
property referred to on page 5, line 20 of the amendment.
6:29:26 PM
Representative Guttenberg asked about the current refinery
capacity for producers on the North Slope. Commissioner
Balash believed the two North Slope refineries had a per
day capacity of 15,000 and 10,500 barrels.
Representative Guttenberg was concerned that the amendment
may allow a company to move production away from the North
Slope and to repurchase it from a separate entity in order
to qualify for the credit.
Commissioner Balash replied that there was a two-part test
including the volumetric limitation, which would require a
company to make a significant change in its capacity in
order to qualify. The second related to the manner in which
a company did business; the question was whether or not a
company sold primarily to third parties in arm's length
transactions. He pointed to page 3, line 3 of the amendment
specifying that a refinery's primary function was the
manufacturing and sale of products to third parties in
arm's length transactions. He detailed that an arrangement
where a company sold to a third party and repurchased
products at a later time did not qualify as an arm's length
transaction.
Representative Guttenberg asked if a company would qualify
for the credit if it leased a facility and bought the
products produced at the facility. Commissioner Balash
believed that there would be a practical consequence and
limitation on the practice if it occurred; he noted that it
would be noticed quickly.
Representative Guttenberg asked if the department would be
alerted to the situation when the company applied for the
tax credit. Commissioner Balash replied in the affirmative.
6:32:27 PM
Co-Chair Austerman asked if the amendment had been written
by the administration. Commissioner Balash replied that an
amendment had been drafted by the administration and passed
through Legislative Legal Services.
Co-Chair Austerman asked how the $15 million and other
credits had been selected for the amendment. Commissioner
Balash replied that the figures had been arrived at by a
"backing in process." He detailed that the department had
used the price differential that would be required to
achieve a pricing close to WTI and had looked at
calculating the value from a royalty perspective. The
number was then shifted to a defined tax credit.
Co-Chair Austerman pointed to page 3, lines 20 through 21
that allowed a company to carry the credit forward for five
years if it had tax credits in excess of actual taxes. He
asked for verification that subsection (d) would entitle a
company to receive payment in cash from the state at the
end of a five-year period if it had not used all of its tax
credits.
Commissioner Balash replied in the affirmative; the credits
were intended to be refundable. He detailed that similar to
other credits, a company would be eligible for a tax credit
refund through the Department of Revenue (DOR) if its
corporate income tax liability was not as large as the tax
credit.
Co-Chair Austerman asked whether other credits provided to
the oil industry were refundable. Commissioner Balash
replied that certain production tax credits were eligible
for a refund.
Co-Chair Austerman asked if the credit was limited by the
number of refineries. He believed three refineries
currently fell under the amendment. He wondered whether
other refineries could be eligible if companies used the
infrastructure credit to bring them up to speed.
Commissioner Balash did not believe the scenario was likely
or feasible. He elaborated that there were currently four
refineries that would qualify including the Flint Hills
Refinery; however, because the credits would not be
available until January 1, 2015 he expected that there
would only be three facilities that would qualify [due to
the pending closure of the Flint Hills Refinery].
Representative Gara asked if there was a $15 million total
cap on the amendment.
6:36:26 PM
Commissioner Balash referred to page 3, line 18 of the
amendment. The total cap for a one-year period was $20
million. The investment incentive credit was capped at $5
million and the refinery credit was $15 million.
Representative Gara asked if the total credit for the three
refineries could be $60 million per year for five years.
Commissioner Balash replied in the affirmative.
Representative Gara pointed to language on page 3, line 14
of the amendment that specified the tax credit could not
reduce a tax payer's liability below zero. He thought
Commissioner Balash had indicated that an entity could
still receive the credit if its tax liability was below
zero.
Commissioner Balash answered that a company could not have
a liability below zero; however, any unused credit
available to a company could be refunded. He used a company
beginning with a tax liability of $2 million as an example.
He elaborated that if the company had earned the $5 million
investment incentive credit it would be required to apply
the credit against its $2 million liability. The remaining
$3 million could be refunded, but not used to take the
company's tax liability below zero.
Representative Gara thought it sounded like the liability
was below zero.
Co-Chair Austerman replied that the liability could not be
below zero on the books, but the credit could be carried
forward for a refund in the future.
6:39:11 PM
Representative Holmes asked for clarification that the cash
refund could be received by a company in any given year.
Co-Chair Austerman replied in the affirmative, but a
company could also choose to carry the credit forward.
Co-Chair Stoltze asked Commissioner Balash to clarify.
Commissioner Balash answered that a tax payer could choose
to carry the credit forward, but he believed it was
unlikely. He detailed that a company could receive the
refund each year [during the five-year period].
Co-Chair Austerman pointed to the language on page 3, line
14.
Representative Wilson spoke to the $5 million and reminded
members that $50 million of investment in a refinery would
be required in order to receive the tax credit. She asked
for verification that at the end of the five-year period
the three refineries would have invested $750 million to
qualify for the credit. Commissioner Balash replied in the
affirmative.
Representative Wilson asked about the current balance and
purpose of the oil and gas tax credit fund. Commissioner
Balash answered that the oil and gas tax credit refund fund
had been established in 2007. The decision had been to move
away from transferrable credits, which had put companies
that had earned a tax credit in the position of selling the
credit at a discount. He explained that the legislature had
established the fund because the impact on the treasury was
the same and the goal was to see the value of the credit
realized by the party making the investment. The fund had
enabled companies to avoid selling the credits at a
discount to another company with a tax liability.
Representative Wilson wondered how the money was deposited
into the fund. Commissioner Balash replied that the fund
was capitalized by the legislature in its appropriations
process. He relayed that the fund was currently in use and
in operation by DOR. He was uncertain of the current
balance.
Representative Wilson remarked that the commissioner of DOR
had reported that the fund contained $90 million at
present. She believed a specified amount of money was
deposited into the fund from each barrel of royalty oil.
6:43:12 PM
Commissioner Balash deferred to DOR on the fund details.
Representative Wilson wanted to ensure that the account
funds were not limited to general fund appropriations and
that money was deposited specifically for tax credits.
Co-Chair Stoltze invited presenters to address the
committee. He relayed that a more robust discussion would
continue at a later time.
6:44:01 PM
TARA SWEENEY, VICE PRESIDENT, EXTERNAL AFFAIRS, ARCTIC
SLOPE REGIONAL CORPORATION (via teleconference), read from
a prepared statement:
Good evening Co-Chair Stoltze, Co-Chair Austerman and
distinguished members of the Committee. I am Tara
Sweeney, Senior Vice President of External Affairs for
Arctic Slope Regional Corporation. Co-presenting with
me this evening is Doug Chapados, president and CEO of
Petro Star Inc. Thank you for the opportunity to speak
before you today.
By way of background, Arctic Slope Regional
Corporation ("ASRC") was established pursuant to the
Alaska Native Claims Settlement Act of 1971 ("ANCSA").
Our corporate headquarters are located in Barrow,
Alaska, and we have administrative and subsidiary
offices across the state. We are owned by
approximately 11,000 Iñupiat shareholders, many of
whom live in the villages of Point Hope, Point Lay,
Wainwright, Atqasuk, Barrow, Nuiqsut, Kaktovik, and
Anaktuvuk Pass.
From very humble beginnings, ASRC has grown to become
the largest locally-owned and operated business in
Alaska. ASRC has five diverse lines of business,
including the only Alaska-owned refining and fuel
marketing operation in the state known as Petro Star.
We have approximately 10,000 employees nationwide, and
our family of companies has nearly half of our
employees working across Alaska - in Barrow,
Fairbanks, Anchorage, Kenai, Kodiak, Dutch Harbor,
Valdez and across the North Slope oil fields. The
remainder of our employees work in the lower 48.
Ms. Sweeney referred to a PowerPoint presentation titled
"Arctic Slope Regional Corporation Path to a Sustainable
Refining Industry" dated April 2014 (copy on file). She
turned to slide 2 and continued reading from a statement:
Our presentation today will focus on the current shape
of in-state refining in Alaska and why we support the
Governor's proposal to stabilize the refining
industry.
The recent announcement that Flint Hills Resources is
shutting down its refinery in June has sent shock-
waves throughout the state, but Flint Hills' economic
problems are not unique. Alaska refineries that are
dependent upon drawing ANS crude from TAPS are
fighting to remain in business in this state.
Leadership from this committee and the legislature is
needed to help this vital industry to ensure that
petroleum products Alaskans need are refined here in
Alaska, from Alaska crude oil.
Ms. Sweeney directed attention to slide 3 and read from
prepared remarks:
What this slide indicates is that ASRC is committed to
Alaska. By the nature of our ownership, we intend to
be in Alaska for the long-term. As you can see we have
a presence across the state in employing all facets of
Alaskan society from engineers to equipment operators,
payroll technicians to attorneys, the five North Slope
crafts, to lending officials.
In 2013 alone we invested over $36 million in Alaska
infrastructure projects; provided over $2 million in
charitable contributions and over $380 million in
wages to Alaskans. These numbers are real, tangible
and meaningful to the people the legislature is
assembled to represent.
6:47:50 PM
Ms. Sweeney moved to slide 4 titled "Introduction to Petro
Star." She read from her remarks:
ASRC was one of the original investors in Petro Star
Inc., and ASRC's support has been crucial to making
Petro Star a viable refiner in Alaska. Since 2007,
ASRC has reinvested over $280 million in Petro Star's
operations. This includes the ASRC Board of Directors'
2008 decision to invest over $150 million to build the
facilities necessary for the Petro Star Valdez
Refinery to produce EPA-mandated ultra-low sulfur
diesel fuel (ULSD). This was, and remains, the single
largest investment in ASRC's history and established
Petro Star as one of only two instate refiners capable
of producing that essential fuel. At this time I would
like to turn it over to Doug Chapados.
DOUG CHAPADOS, CEO AND PRESIDENT, PETRO STAR INC., turned
to an overview of Petro Star on slide 5 and read from a
prepared statement:
Good evening Co-Chair Stoltze, Co-Chair Austerman, and
members of the Committee. I am Doug Chapados,
president & CEO of Petro Star Inc. Petro Star is a
wholly-owned subsidiary of Arctic Slope Regional
Corporation. This slide provides the committee with
additional background on our company. Petro Star is
the only locally-owned refiner in the state of Alaska
with two refineries; one located in North Pole and the
other in Valdez.
We are one of two refiners in Alaska that provide
ultra-low sulfur diesel to the Alaskan market, and we
also produce and supply jet fuel, marine diesel and
home heating oil.
Petro Star's North Pole and Valdez refineries were
commissioned in 1985 and 1993, and have a combined
crude processing capacity of 82,000 barrels per day -
nearly equal to the capacity Flint Hills is now
shutting down. Refined products from Petro Star's
refineries can be found in consumer fuel tanks and
equipment across the state. In addition to refining,
much of Petro Star's production is sold through
company owned marine terminals and heating oil
distributorships located in Valdez, Kodiak, Unalaska,
and the Interior.
Currently, 100% of the Alaska military jet fuel demand
at JBER, Eielson AFB, Ft. Wainwright, and Coast Guard
Air Station Kodiak is produced and delivered by Petro
Star. In 2013 alone, Petro Star worked with 750 in
state vendors, generated 282 million gallons in fuel
sales, and provided products and services to over
14,000 customers.
Petro Star thus plays an important role throughout
Alaska, especially within the communities in which it
does business.
6:51:06 PM
Mr. Chapados spoke to the company's two refineries on slide
6:
Valdez Refinery
· 60,000 barrel/day crude distillation unit
· 12,000 barrel/day distillate hydrotreater and
associated process units
· 270 million gallon annual capacity
· Primary products are commercial and military
specification jet fuels and ULSD
· Only Petro Star simultaneously produces - year
round - both arctic grade and #2 marine/highway
diesel
North Pole Refinery
· 22,000 barrel/day crude distillation unit
· 95 million gallon annual capacity
· Primary products include commercial and military
spec jet fuels, home heating oil and low-sulfur
diesel
· North Pole also serves as the bulk distribution
point for ULSD sales within the Fairbanks-area
and volumes destined for the North Slope
Mr. Chapados relayed that the 12,000 barrels per day of
ultra-low sulfur diesel produced at the Valdez Refinery
represented half of the state's demand. He added that the
North Pole Refinery was significantly smaller than the
Valdez Refinery and was directly adjacent to the Foot Hills
Refinery in North Pole. The North Pole Refinery served as
the bulk distribution point for volumes headed for the
North Slope and other communities.
Mr. Chapados moved to slide 7 titled "Petro Star's 2013
Contribution to the Alaska Economy." He read from prepared
remarks:
While the numbers are aggregated to include our
Anchorage operations, you can see the breakdown within
the Interior, Valdez, Kodiak, and Unalaska. An
important takeaway is that Petro Star, alone, has
invested nearly $300 million in capital projects in
the state over the last seven years.
Mr. Chapados read from slide 7:
· Provided 304 full time positions in Alaska,
including:
o 151 in Fairbanks/North Pole
o 66 in Valdez
o 25 in Kodiak
o 25 in Unalaska
· Paid salaries and wages of $28 million, including
o $10.5 million in Fairbanks/North Pole
o $7.8 million in Valdez
o $1.5 million in Kodiak
o $1.8 million in Unalaska
· Produced 270 million gallons of refined products
o 65 million gallons at the North Pole
Refinery
o 205 million gallons at the Valdez Refinery
o Supplies 100% of Alaska's military jet fuel
demand (JBER, Eielson AFB, Ft. Wainwright,
Coast Guard Air Station Kodiak) and 100% of
USCG MGO (marine diesel fuel) demand in
Kodiak and Unalaska
· Re-invested approximately $300 million in capital
projects in Alaska, over the last seven years
Mr. Chapados expounded that most of the 66 Valdez employees
were engaged in the refinery operation. The Kodiak
employees operated a marine terminal and fuel distribution
point. The 25 employees in Unalaska were divided between
three marine terminals. He noted that the refineries had
the total capacity to produce over 360 million gallons per
year; the company was currently producing 270 million
gallons per year. Petro Star had significant reserve
capacity to meet demand that would not be met in the future
given the Flint Hills Refinery closure.
6:54:54 PM
Mr. Chapados provided additional 2013 statistics on slide
8:
Engaged 750 vendors statewide, including:
· Interior 250
· Valdez 100
· Kodiak 70
Generated fuel sales of 282 million gallons,
including:
· Interior 82 million
· Valdez 40 million
· Kodiak 15 million
· Unalaska 30 million
Provided products and services to more than 14,100
customers, including:
· Interior 8,000+
· Valdez 1,100+
· Kodiak 4,000+
· Unalaska 200+
Other significant Kodiak facts:
· Petro Star supplies 50% of the Kodiak's diesel,
heating oil, and gasoline demand
· Petro Star provides 100% of the fuel requirements
for Kodiak Electric Association, the City of
Kodiak and Kodiak Island Borough School District
· Petro Star is the only propane distributor on
Kodiak Island
Mr. Chapados expounded that total fuel sales included
products the company bought and resold from other
refineries. Most customers in the Interior, Valdez, and
Kodiak primarily purchased heating oil. The company sold a
significant volume of marine diesel to the fishing fleets
in Kodiak and Unalaska.
Mr. Chapados turned to slide 9 titled "Current Challenges"
and read from a statement:
It is critical for this committee to understand that
the challenges facing the in-state refining industry
are not new. Two years ago ASRC and Petro Star
approached the State of Alaska highlighting warning
signs of a weak refining industry, and the discussions
for a solution have been on-going.
In short there are two major challenges facing in-
state refining. The first is the high cost of ANS
crude. ANS is one of the most expensive in the United
States despite being of lower quality than lighter,
sweeter crude from fields like the Bakken in North
Dakota - which currently sells at a large discount
compared to ANS.
Several key takeaways are that the failure of any of
the remaining in-state refineries would decrease
competition within Alaska fuel markets, and remove
most of the existing brakes on prices.
Failure of the Interior refineries would eliminate any
local source of military jet fuel for Eielson AFB and
of commercial jet fuel for the Fairbanks International
Airport.
Mr. Chapados relayed that Petro Star's North Pole Refinery
had been visited by the defense logistics agency to
determine how the Flint Hills Refinery closure would impact
Petro Star. The officials were interested in the company's
status and its future ability to supply product for
Eielson. He continued to address slide 9 in a prepared
statement:
The second major challenge is the Quality Bank
methodology, which is unique to refineries that draw
crude oil from, and return oil to, TAPS.
The TAPS Quality Bank is regulated principally by the
Federal Energy Regulatory Commission (FERC) and to a
lesser extent by the Regulatory Commission of Alaska
(RCA). In 2002, when the Quality Bank was litigated in
a months-long proceeding, the FERC ultimately settled
on a Quality Bank methodology that made the TAPS
refiners pay shippers more than any party requested at
the hearing and the RCA concurred. This led directly
to the excessive Quality Bank penalties that are
imposed on the TAPS refiners today.
Petro Star has paid over $525 million in penalties
over the last nine years, and nearly half that amount
in the past three years alone: The Quality Bank is
getting worse at the same time market conditions are
getting worse for Alaska refiners and its effects are
devastating. Over these past three years, most of the
margin between Petro Star's crude oil price and the
price it received for its refined products like
commercial jet fuel was paid out in Quality Bank
penalties.
Faced with the combination of exorbitant Quality Bank
fees and high crude costs, Petro Star and ASRC have
had to put on hold capital projects that would grow
Petro Star's business in Alaska and benefit consumers
statewide just when these are needed most.
7:00:12 PM
Mr. Chapados provided a look at the governor's proposal
from a refinery perspective on slide 10:
Royalty Oil
· Benefit to in-state refiners because it expands
the potential pool of available ANS crude.
In-State Refinery Tax Credit
· This provision is equitable because it is done on
a per refinery basis, and aims to mitigate the
high price of ANS crude.
Qualified In-State Refinery Infrastructure
Expenditures Tax Credit
· This provision spurs reinvestment into the
industry by in-state refiners with a reasonable
cap. If refiners make significant infrastructure
investments they are responsible for at least 90%
of the total project cost.
Mr. Chapados elaborated on slide 10. He relayed that the
royalty oil benefit was an expansion of the potential
suppliers of ANS crude oil to the instate refineries. He
stated that as the volumes of oil in TAPS had diminished it
was becoming increasingly difficult to source crude oil for
sale to instate refineries. The company expected to be
interested in talking to the state about purchasing royalty
oil in the future. The provision offered another method to
get oil to instate refiners specifically through instate
producers. Petro Star believed the instate refinery tax
credit was equitable because it was done on a per refinery
basis; it aimed to mitigate the high cost of ANS crude oil
and addressed the fact that not all refiners were
purchasing oil from the state at present.
Co-Chair Stoltze made a joking comment about the
confidentiality note at the bottom of the presentation.
Mr. Chapados concluded his remarks. Petro Star viewed the
qualified instate refinery infrastructure expenditure tax
credit as a mechanism to spur reinvestment into the
industry by instate refiners with a reasonable cap. He
stated that if refiners made significant commitments to
infrastructure investments they would be responsible for 90
percent of the costs. He relayed that Petro Star had spent
over $150 million on its ultra-low sulfur diesel facility.
He wanted the company to qualify for the $5 million in
credits, but he did not believe it would happen.
7:02:34 PM
Ms. Sweeney provided concluding remarks:
As you know ASRC has deep roots in Alaska and by the
nature of our mission and our structure we will
continue to be an economic driver in this state and a
strong advocate for fair and meaningful business
development policy. As stated earlier, we have grown
from very humble beginnings into Alaska's largest
locally owned company and an employer of choice for
thousands of Alaskans.
We make disciplined business decisions focused on our
mission. The investments we have made were based on
Alaska's future potential, not because they qualified
for state subsidies, tax credits, or financing.
Rather, they were grounded in ASRC's commitment to
this state and its residents.
While we will continue to operate in Alaska with the
long-term on the horizon, uncertainties surrounding
the continued viability of refining in Alaska makes us
question whether we should employ our assets
elsewhere.
The stark economic realities that face the Alaska
refining industry have required ASRC to suspend major
new capital investments in refining and fuel
distribution. ASRC has been compelled to put on hold a
significant multi-million dollar capital project that
is necessary for the long-term health of both of our
refineries. This particular project would have
benefitted Alaskans in South Central and the Interior
as well as organizations like the Alaska Railroad.
We fully support the governor's proposal because it
remedies one of the outstanding threats to instate
refiners. Please know that neither Petro Star nor ASRC
are looking for an exit strategy. We are seeking the
stability that is necessary to justify long-term
investment and maintain a viable refining industry in
Alaska. Thank you. Quyanaqpak.
7:04:57 PM
Co-Chair Austerman asked about Petro Star's tax liability
in order to get an idea what the $15 million credit would
do. Mr. Chapados preferred to not share the figure. He
noted that it would have been miniscule in 2013. He relayed
that for the current year the company did not have a tax
liability year to date.
Co-Chair Austerman asked for clarification. Mr. Chapados
explained that the company would have needed to generate a
profit in order to have a tax liability.
Co-Chair Austerman referred to earlier testimony by
Commissioner Balash related to unused tax liabilities and
carry forward. He asked whether the removal of the language
related to making cash payment to companies if they had
enough tax to not fulfill credits would impact Petro Star's
business plans.
Ms. Sweeney asked for the amendment sections Co-Chair
Austerman was referring to.
Co-Chair Austerman pointed to page 3, line 14 of the
amendment. He wondered how Petro Star's business plans
would be impacted by the removal of language on page 3,
line 14 related to the carry forward of unused tax credits
in a five-year period and on lines 19 through 21 pertaining
to a refund of an unused portion of the credit.
Ms. Sweeney replied that the removal of the language would
have a significant impact on Petro Star's viability
(especially the removal of language on line 19).
Co-Chair Austerman surmised that without a tax liability it
would be difficult to receive a tax credit unless it could
be carried forward. Ms. Sweeney believed that under the
section a company with zero tax liability was eligible for
a refund.
Co-Chair Austerman explained that the company did not have
a liability, but money would come out of someone's pocket
to pay it to do business to help make it profitable. He had
a problem creating a profit for a company out of a no tax
situation and giving the company money.
7:09:17 PM
Ms. Sweeney pointed to ASRC's ownership in Petro Star. She
elaborated that they would not be having the discussion
with the committee if they did not feel that there were
issues related to the viability of the refining industry in
Alaska. She did not believe the provisions would create a
windfall for the organizations, but it would help the
industry stabilize and determine ways to grow. She referred
to the five-year sunset date on the provision; during the
time she was hopeful Petro Star would be positioned for
growth.
Representative Thompson remarked on the railroad's
declining business. He wondered about Petro Star's role and
how the railroad's business could increase in the future.
Mr. Chapados answered that Petro Star had been in extensive
conversations with the Alaska Railroad Corporation on plans
to install rail loading and offloading facilities to move
Petro Star's product to market more efficiently and in
larger volumes. The facilities would address the finite
amount of trucking capacity in the state. He could not
provide further information given that the details were
covered by a non-disclosure agreement. He relayed that both
organizations were excited about the potential.
Co-Chair Stoltze commented on the railroad.
7:12:20 PM
Representative Guttenberg pointed to slide 9 that
identified the Quality Bank as a profit center for royalty
owners and shippers and a burden on Petro Star. He asked
for further detail.
Mr. Chapados answered that Petro Star believed that the
Quality Bank was currently the product of a flawed judge's
decision at the Federal Energy Regulatory Commission (FERC)
level. He relayed that the decision was increasingly
impacting the company. He detailed that in the past month
the combined cost of ANS crude oil plus the Quality Bank
had exceeded the sale value for jet fuel Petro Star
delivered to the Anchorage market. He explained that the
Quality Bank was used to compensate shippers for the
degradation that their oil underwent when TAPS refiners re-
injected oil back into the pipeline; it also adjusted for
the varying qualities of crude oils on the North Slope. He
relayed that 2013 had been Petro Star's worst year in terms
of profit from ongoing operations; it had paid $72 million
to the Quality Bank. The four major recipients of the
payment were the three major oil producers and the state.
Representative Gara asked for verification that the prior
year was Petro Star's worst year for profits and that the
company was on track for a loss in the current year. Mr.
Chapados responded in the affirmative.
Representative Gara noted that a company would receive the
proposed $15 million credit even if it had no tax
liability. He looked at the $5 million credit (page 5,
lines 2 through 4) and observed that a company could claim
the credit if it made enough investments. He asked if the
company would receive the $5 million credit even if it made
no profit.
Mr. Chapados replied in the affirmative.
Representative Gara remarked on the state's difficult
fiscal environment. He provided a hypothetical scenario
where the company's had a $2 million loss and the state
gave it $20 million. Under the scenario, the state gave the
company an $18 million profit; $15 million of which the
company did nothing for and $5 million of which was
reimbursement for qualified expenditures on capital. He
wondered why the bill should not be more closely tailored.
Mr. Chapados answered that the amendment had been developed
by the administration in response to the challenges the
company had presented to the governor. He spoke to the $18
million in profit from Representative Gara's scenario. He
detailed that in order to receive the money Petro Star and
ASRC would need to invest $50 million in one year. He
believed the figure was representative of the company's
commitment in prior years and what it would like to have in
the coming years. Petro Star saw the credits as a mechanism
that would allow the refining industry to weather the
current storm.
7:18:01 PM
Representative Gara was uncomfortable with Section 3 of the
amendment. He wondered if there was something the state
could do to help Petro Star avoid the Quality Bank
penalties. He wondered if an infrastructure upgrade could
be more narrowly tailored that would not require the state
to spend as much money.
Mr. Chapados replied that FERC ultimately decided the
methodology related to the Quality Bank. He elaborated that
more than 20 years earlier the Regulatory Commission of
Alaska (RCA) had disagreed with the FERC ruling. In recent
years the RCA had concurred with FERC's decision. He did
not believe the state could significantly adjust for the
increased penalties Petro Star paid. Petro Star had made a
request to the administration for the entities to work with
other parties to the ongoing Quality Bank proceeding to
determine if a settlement was possible; a settlement that
would forestall additional litigation and to make the
Quality Bank more reasonable. He underscored that Petro
Star did not believe the Quality Bank should be zero; it
appreciated that it was having an impact on the quality of
crude oil in the pipeline; however, Petro Star did not
believe its current payment of $72 million was reasonable.
7:20:27 PM
Representative Edgmon understood the importance of the
refinery. He wondered about the five-year transition plan
and what Petro Star would do to improve its economics
during that time. He spoke from the perspective of a
village corporation chairman; the corporation had shut down
a couple of its subsidiary companies, which had been
painful. He noted that the implications related to
refineries were larger statewide.
Ms. Sweeney replied that the bill represented a step in the
right direction for the companies. She relayed that ASRC
deployed its assets with a disciplined approach. She
detailed that ASRC had a congressional mandate to provide
benefits back to its shareholders through ANCSA. The
company had to look at its business lines and investment
opportunities dispassionately when it looked at what fit
its business portfolio. She stated that it was the
company's fiduciary responsibility to manage the assets
appropriately on behalf of its shareholders. She
communicated that with provisions such as the ones included
in the amendment, the company could work to stabilize Petro
Star so that ASRC could look at reinvesting its money into
the organization to enable it to grow.
7:23:18 PM
Representative Edgmon asked for verification that the five-
year proposal had been offered by the governor. Ms. Sweeney
replied in the affirmative.
Representative Edgmon asked if ASRC had originally wanted
the time period to be longer. Ms. Sweeney replied in the
affirmative.
Mr. Chapados added that the refining industry was very
capital intensive. He elaborated that investments were not
typically made on a five-year timeframe; typically Petro
Star was looking out 10 to 20 years or longer. He spoke to
making a return on investment and referred to the ultra-low
sulfur diesel investment; the investment did not pay off in
a short period of time, but the company had made the
commitment to produce the product. He shared that Petro
Star had projects in the queue including at least one rail
transportation project. The bill would factor into ASRC's
decision to invest in the project. He stressed that
efficiency was important to Petro Star; over the years the
company had made extensive efforts to increase fuel and
electricity efficiency at the plant. The company believed
increasing efficiency was the one way it could compete with
larger competitors, while remaining viable. He detailed
that it had been a recipe for success in terms of high
energy costs experienced in Alaska; the company used crude
oil as fuel; therefore, it had incentive to maximize
efficiency and minimize the volume of energy consumed.
7:26:08 PM
JAMES TANGARO, VICE PRESIDENT, KENAI REFINERY, TESORO,
relayed that Tesoro had testified in support of the
legislation in the past. He observed that the bill had
changed.
Co-Chair Stoltze noted that the bill would potentially
change given a pending amendment.
Mr. Tangaro communicated that the Tesoro Kenai Refinery had
started in 1969 during Alaska's original oil boom; it
continued to process oil from the Swanson River, Cook
Inlet, North Slope, and other sources. The refinery
employed approximately 210 people and had the capability of
processing 72,000 barrels per day. The company had about 30
full-time contractors and approximately 515 employees
statewide. He stated that the most important component of
the bill was the royalty oil contract; the contract
extension would provide a stable supply of ANS crude while
giving the company the volumetric flexibility to
accommodate seasonal fluctuations in its run rates. The
availability, flexibility, and stability offered by the
contract extension would have a positive effect on Tesoro's
ability to maintain operations at the Kenai Refinery.
Mr. Tangaro referred to the proposed amendment and relayed
that the company appreciated the governor's acknowledgement
that Alaska continued to be a challenging location for the
refining industry and that the refining jobs were critical
to Alaskan communities. He relayed that maintaining the
refineries had many statewide benefits. He observed that
refining was a complicated business. He spoke to the
importance of maintaining a level playing field for all
participants in Alaska's refining business. He noted that
the company's prior testimony on the legislation was on
record from a past hearing.
Co-Chair Stoltze apologized for the short timeframe. He
thanked Mr. Tangaro for his testimony.
HB 287 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
7:29:53 PM
The meeting was adjourned at 7:29 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 287 ASRC Committee Remarks.pdf |
HFIN 4/9/2014 6:00:00 PM |
HB 287 |
| HB 287 ASRC Presentation HFIN 04.09.14.pdf |
HFIN 4/9/2014 6:00:00 PM |
HB 287 |
| HB 287 ASRC Press Release 3-31-2014.pdf |
HFIN 4/9/2014 6:00:00 PM |
HB 287 |
| HB 287 ASRC PSI Letter to GSP 3-2-2014.pdf |
HFIN 4/9/2014 6:00:00 PM |
HB 287 |
| HB 287 ECE Whitepaper 2-19-2014.pdf |
HFIN 4/9/2014 6:00:00 PM |
HB 287 |
| SB 191 Extract from HB 65.pdf |
HFIN 4/9/2014 6:00:00 PM |
|
| SB 191 Alaska Public Debt book DOR 2013-2014 FINAL_web.pdf |
HFIN 4/9/2014 6:00:00 PM |
SB 191 |
| SB 191 Extract from HB 65.pdf |
HFIN 4/9/2014 6:00:00 PM |
SB 191 |
| HB 287 Amendment 1 Thompson&Wilson.pdf |
HFIN 4/9/2014 6:00:00 PM |
HB 287 |