Legislature(1995 - 1996)
04/11/1995 09:11 AM House O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
April 11, 1995
9:11 a.m.
MEMBERS PRESENT
Representative Norman Rokeberg, Chairman
Representative Gary Davis
Representative Bill Williams
Representative Bettye Davis
MEMBERS ABSENT
Representative Scott Ogan, Vice-Chair
Representative Tom Brice
Representative David Finkelstein
OTHER MEMBERS PRESENT
Representative Mike Navarre
COMMITTEE CALENDAR
Informational hearing on the oil royalty contract with Tesoro
Alaska Petroleum Company.
WITNESS REGISTER
JOHN SHIVELY, Commissioner
Department of Natural Resources
400 Willoughby Avenue
Juneau, Alaska 99801
Telephone: (907) 465-2400
KEVIN BANKS, Economist
Department of Natural Resources
Division of Oil and Gas
400 Willoughby Avenue
Juneau, Alaska 99801
Telephone: (907) 465-2400
BERNIE SMITH, Manager
Alaska Government Affairs
Tesoro Alaska Petroleum Company
P.O. Box 3369
Kenai, Alaska 99611
Telephone: (907) 776-8191
JON TILLINGHAST
Tesoro Alaska Petroleum Company
One Sealaska Plaza, Suite 301
Juneau, Alaska 99801
Telephone: (907) 586-2890
ACTION NARRATIVE
TAPE 95-18, SIDE A
Number 000
CHAIRMAN NORMAN ROKEBERG called the House Special Committee on Oil
and Gas to order at 9:11 a.m. Committee members present at the
call to order were Chairman Rokeberg, Representative Bill Williams,
and Representative Bettye Davis. He then stated Representative
Mike Navarre was present to hear the testimony. He stated there
was not a quorum present, but the committee would conduct an
informational hearing, and hopefully other members would come in
soon.
CHAIRMAN ROKEBERG stated there would be an informational hearing on
the oil royalty contract with the Tesoro Alaska Petroleum Company.
He asked Commissioner Shively if he would like to begin his
testimony.
Number 030
JOHN SHIVELY, Commissioner, Department of Natural Resources (DNR),
said with him is Kevin Banks, who is an economist in the Division
of Oil and Gas. He is responsible for doing a lot of the work on
this contract.
COMMISSIONER SHIVELY explained he would like to give an overview of
what the department is doing, and what the legislatures role is.
Then you can either go on and take testimony from Tesoro, or we
will be available to answer your questions.
COMMISSIONER SHIVELY said first of all, it would be appropriate to
apologize to the committee and to the legislature as to the timing
of this action, as you know we do not yet have a bill in yet on
this issue. He stated the bill would be presented to the
legislature around April 24. The reason for this is a series of
timing steps, when the new Administration took over, Tesoro was
just about to begin a one year extension of a previous contract.
He then stated the extension was granted by the previous
commissioner, but there couldn't be more extensions of the contract
without the contract coming before the legislature.
COMMISSIONER SHIVELY continued by saying they thought they might
put the oil up for competitive bid, but in review of this shortly
after he became Commissioner, he felt there were good reasons to
negotiate with Tesoro for this contract. He said he would get into
some of those reasons in a minute.
COMMISSIONER SHIVELY stated it took some time to negotiate the
contract. Once the contract was agreed to, they had a thirty day
comment period. He then mentioned the contract had to go in front
of the Royalty Board as well as the legislature. At this time, he
stated the Royalty Board unanimously agreed with the contract. He
said once the public comment period is closed, which he believed
was on the 22nd, they will review those comments, do a final best
interest finding and get the members a piece of legislation. He
then stated they do have a draft available if the members of the
committee would like to review it.
COMMISSIONER SHIVELY continued by stating Tesoro has had a series
of contracts with the state of Alaska for royalty oil. The one
which we are proposing to the legislature would be their seventh.
The first contract was signed in 1980. We have one other existing
contract on royalty oil right now with Mapco. That was a very long
term agreement which ends in the year 2003. He then stated they
are proposing to sell to Tesoro 40,000 barrels, per day, from the
Prudhoe Bay unit which is about 30 percent of the oil, and would
still leave us with 108,000 barrels of royalty oil, per day, to
sell to other people, or to continue to have sold by BP who markets
our oil at this time. The contract is for three years, it would
begin January 1, 1996.
COMMISSIONER SHIVELY then commented on price stating the price is
basically equal to West Coast price. He continued stating they
have several ways of establishing the price as a result of the
various settlements. They have chosen to use the Exxon price for
the royalty oil. In addition, we are requiring a seventy five day
letter of credit to protect the state if Tesoro can not continue to
pay for the oil. There is a provision stating the seventy five day
letter of credit can be negotiated down to a sixty day letter of
credit.
COMMISSIONER SHIVELY then stated there are several reasons why we
think it makes a lot of sense to proceed with this contract. He
stated there is a long history of selling royalty oil to Tesoro.
He also mentioned Tesoro is a major part of the economy on the
Kenai Peninsula, but also an important part of the economy both in
Southcentral and Fairbanks in terms of providing fuel. They have
189 people directly employed at the refinery, and they employ 552
people statewide. He then stated the impact is not just in the
people, but by having several in state refiners, we really have
made a difference in the pricing of petroleum products both for
Southcentral and Fairbanks. This is because Tesoro does some
refining for Mapco for their Anchorage sales, and Mapco does
refining for Tesoro for their Fairbanks sales. So it impacts both
Southcentral and Fairbanks and if you look recently at fuel prices
here in Southeastern Alaska compared with those of Southcentral and
Fairbanks, you'll see there is about a 30 percent difference in the
prices. We believe this is a direct result of in state refining.
COMMISSIONER SHIVELY stated the refinery is capable of processing
72,000 barrels, per day. They are presently processing about
50,000 barrels, per day. Another issue is the price re-opener
which is in the agreement if the oil export ban is lifted because
that could effect the value of the oil and also new marketing
opportunities. I should also indicate, to the legislature, that
two other companies have expressed some interest in royalty oil
although we are not currently negotiating with either one of them.
He then mentioned Petro Star has some interest for both their
Valdez (indisc.) refining company out of California has expressed
some interest for out of state refining. Neither of those requests
would be before the legislature this year. He then stated he had
reached the conclusion of his opening remarks.
Number 181
CHAIRMAN ROKEBERG asked if there were any questions from the
members of the committee. He then stated for the information of
the Commissioner, he was in Washington D.C. last week and had the
pleasure of meeting the President of Tosco Petroleum. He has been
actively involved and one of the leading voices against lifting the
export ban because of his ownership of a refinery in Ferndale,
Washington, and also in California.
Number 215
COMMISSIONER SHIVELY responded by stating this was an interesting
piece of information. He then mentioned that selling to an out of
state refiner would be breaking new ground. Whether or not we
would even do that in a negotiated deal is unclear to me at this
point, and what kind of premium we would expect is also unclear but
we would get above what we would get in Alaska as a minimum
because, other than us getting more money, there is no reason to
sell to Tosco. We take a certain amount of risk every time we
bring a new purchaser into the equation. I didn't try to indicate
we were close to a deal with them, but I thought it was important
the committee knows they had made a request.
Number 235
CHAIRMAN ROKEBERG stated he was sure that Mr. Renquist, or somebody
in Senator Murkowski's office would be happy to verify that. He
then asked if Tosco is already refining North Slope crude.
Number 238
COMMISSIONER SHIVELY stated they are buying it from British
Petroleum (BP) since they are the biggest producer.
Number 243
CHAIRMAN ROKEBERG stated to the commissioner that he had indicated
there would be a premium; and apparently BP is selling
approximately 100,000 barrels, per day, on the spot market, is that
right? Commissioner Shively stated he did not know the answer to
that. Chairman Rokeberg then asked if this is what he meant when
he mentioned there was 100,000 barrels, per day, available for sale
that is not committed to instate refineries.
Number 252
COMMISSIONER SHIVELY stated they have, at this point, close to
200,000 barrels, per day, available to us in royalty oil. He then
said about 18,000 barrels, per day, is set aside to pay for the
fuel costs. Mapco has a long term contract for 35,000 barrels, per
day. We are proposing another 40,000 barrels for Tesoro which is
approximately what they are taking now. This leaves about 108,000
barrels which BP is presently marketing. I'm not sure they are
marketing on the spot market, I didn't indicate that, they are just
selling as they sell (indisc.).
Number 267
CHAIRMAN ROKEBERG state that was his term, and he was curious about
the selling on the spot market, and he asked the commissioner how
this works.
Number 265
COMMISSIONER SHIVELY stated this is a long term deal. One of the
reasons we have the letter of credit with Tesoro, in order to ask
BP to sell additional oil for us, we would have to give them at
least a ninety day notice, or they can take a premium from us. He
then stated this is a long term deal and not a spot market deal and
they know well in advance how much oil they will have to market.
Number 278
CHAIRMAN ROKEBERG then asked what the advantage of this arrangement
is to the state.
Number 280
COMMISSIONER SHIVELY stated they are acting as a broker. He then
mentioned the last time the state went out to go out in a
competitive sale ourselves, nobody showed up to bid, so somebody
has to sell our royalty oil and we have chosen BP to do that.
Number 282
KEVIN BANKS, Economist, Division of Oil and Gas, Department of
Natural Resources, then stated as part of the BP (indisc.), Exxon
and ARCO are also taking our oil and shipping it to the West Coast.
He then stated the calculations for the spot price of that oil is
the spot price of the Alaska North Slope (ANS) crude oil so we do
capture the spot price of crude oil in California when the oil is
shipped there on our behalf.
Number 295
CHAIRMAN ROKEBERG asked if this was as opposed to a bargained for
contractual price, as we have with Mapco, and now with Tesoro.
Number 297
MR. BANKS responded by stating, in the Tesoro and the Mapco
agreement, because the pricing mechanism is based on the same
settlement agreements which we have with the North Slope producers,
the element of a monthly calculated spot price is incorporated in
these agreements.
Number 302
CHAIRMAN ROKEBERG asked if Mr. Banks could refresh the committee
members' memory on what the Exxon pricing basket was.
Number 308
MR. BANKS stated the pricing basket is the same as the BP basket
with a couple of differences. He said we start out with a basket
of crude oils, which includes North Slope crude, a few California
crude oils, and some crude oil which are traded internationally,
there are spot prices reported for each of these crude oils and it
is the average monthly price for each of these crude oils which are
lumped into the basket to give us a destination value for royalty
oil. He continued by stating from that number, we subtract a
transportation computant, and in the Exxon case, that amounts to
about $1.25, and then from that, the TAPS tariff, and other charges
so that we price the oil for Tesoro at pump station one. We start
at the destination, make a few deductions to come up with the pump
station one price for Tesoro. That is the same number which our
royalty value is established or lifted by BP, ARCO, or Exxon and
the other producers on the North Slope. He then stated the only
difference between the BP and Exxon West Coast value is that BP
relies on an actual cost of the marine transportation component
which is subject to readjustments over a long period of time, and
is a rather uncertain number.
Number 335
There being no further questions from the other members, CHAIRMAN
ROKEBERG stated he wanted to follow up on two items. He stated, as
he understood it, in the course of the protracted negotiations with
the prior Administration and perhaps even with yourselves, two of
the sticky points were the letter of credit, and the volume. He
then asked how the commissioner was able to come to terms with
those two items.
Number 345
COMMISSIONER SHIVELY stated he did not know if there was ever a
substantial disagreement about the volume. He then said what they
did was because there was a situation with declining (indisc.) we
did provide for an adjustment so Tesoro gets a percentage of what
is available which, he said, was about 27 percent.
Number 349
MR. BANKS then stated that is the current, but what we are
proposing will be 30 percent.
Number 350
COMMISSIONER SHIVELY then stated he did not think there was a lot
of disagreement over that. The letter of credit did cause
substantial disagreement, and they have yet to resolve that. He
went on to say Tesoro prefers a 60 day letter of credit and, as you
know, a letter of credit really does effect their ability to
borrow. We previously had a 90 day letter of credit which was
first established in an agreement with Petro Star. Continuing, he
said we settled on 75 days in this contract with an agreement that
if we could come to a future agreement assuring us there was
transportation available to send the oil to the West Coast, we
could bring the letter of credit down.
Number 370
REPRESENTATIVE MIKE NAVARRE asked if Tesoro's history of royalty
oil purchases since 1980, up until last year, had a letter of
credit for 60 days.
COMMISSIONER SHIVELY stated Representative Navarre was correct.
REPRESENTATIVE NAVARRE then asked if they have ever failed to honor
the contract.
COMMISSIONER SHIVELY said, "No."
REPRESENTATIVE NAVARRE then asked if any oil has ever been
purchased under a 90 day letter of credit.
MR. BANKS responded to the question stating (indisc.) the Petro
Star agreement (indisc.).
Number 379
REPRESENTATIVE NAVARRE referred to negotiating a 60 day letter of
credit, versus a 75 or 90 day letter of credit, and asked is the
outstanding Tesoro has to the state ever considered as a factor in
this.
Number 381
COMMISSIONER SHIVELY stated it was not. The outstanding liability
they have to the state is secured by their refinery in Kenai.
Number 387
REPRESENTATIVE NAVARRE asked if the value of the refinery in Kenai,
and their ability to borrow under the 75 day letter of credit,
doesn't that effect the ability of the refinery to continue
economic operation.
Number 395
COMMISSIONER SHIVELY stated he didn't know if it directly effects
their ability to operate, but it does effect their economics. We
may dispute what they think they need and what the state thinks
they need. But clearly, it has an economic impact which is one of
the reasons we left an ability to negotiate it back down to 60
days.
Number 402
REPRESENTATIVE NAVARRE then stated his point is that they have been
pretty good customers.
Number 405
COMMISSIONER SHIVELY stated he agreed with that assessment. He
then mentioned that people who do not believe the department does
not know how to negotiate with the industry should read the booklet
put out by Tesoro. He then stated the department did not take
advantage of Tesoro even though Tesoro might see that in a
different way. What this points out, he said, is the people in the
Division of Oil and Gas are highly professional people who keep the
state's best interest uppermost in their minds. He then said
people sometimes concentrate on commissioners who come and go, and
in this department there has been a rapid coming and going for the
last eight years, but the real strength for the state in terms of
what happens to our assets, is people like Kevin, Ken Boyd, and
Patrick Coughlin. Those people do have a very good understanding
of what the state's best interest is.
Number 425
CHAIRMAN ROKEBERG asked about the Petro Star refinery in Valdez,
and then asked where they were buying their oil if they are not
buying it from instate.
Number 430
COMMISSIONER SHIVELY stated they are buying their oil from the
producers though he did not know which one. It is a commercial
deal which they make with either one or more of the producers.
Number 435
CHAIRMAN ROKEBERG asked if there was a reason why we are not
selling to them in kind.
Number 437
COMMISSIONER SHIVELY told the Chairman he would have to ask them
that question. He then stated they had a deal with them, they
never took any oil under that deal, and they have now come back to
us stating they want to buy state royalty oil. He then mentioned
they will be discussing that with them next year, and if we come to
some agreement, it would be a contract which you would see in the
next legislative session. He continued by stating, clearly the
agreement which we had with them for royalty oil which we signed
before the first refinery was built, helped them with their
financing. They used it to show the lending institutions they had
a supply of oil. Apparently, they were able to negotiate an equal
or better deal with the producers.
Number 450
REPRESENTATIVE NAVARRE stated he thinks part of that is related to
the fact that they can buy directly since they are on the line
without any risk of transportation liability which the producers,
or at least one of the producers, indicated they were unwilling to
risk sale to Tesoro.
Number 455
COMMISSIONER SHIVELY stated that was a good point and he would like
to follow up on it. He then said one of the other reasons we think
this contract is in the state's best interest is because it is not
clear, if we did not sell to Tesoro, whether they would be able to
buy oil. One of the major producers has told Tesoro they would not
sell oil form Valdez because they are afraid if there is an oil
spill, the liability would go back to them. He then stated this is
a major difference between Petro Star and Tesoro. He also
mentioned that Tesoro pointed out in their review of the contract,
this is one of the competitive disadvantages they have with Mapco
and Petro Star.
Number 465
CHAIRMAN ROKEBERG asked if there were any further questions from
the members of the committee. Hearing none, he asked if Mr. Smith
would like to come forward and present his testimony.
Number 470
BERNIE SMITH, Manager, Alaska Government Affairs, Tesoro Alaska
Petroleum Company, asked Jon Tillinghast to join him at the table.
He stated that Commissioner Shively and Kevin Banks gave a pretty
good overall view of Tesoro's situation. He then stated he would
like to read a couple of paragraphs out of their summary to get it
into the record.
"The Department of Natural Resource is proposing the sale of 30
percent of the state royalty from Prudhoe Bay, or about 27 percent
of the overall North Slope royalty oil to Tesoro Alaska Petroleum.
Roughly 40,000 barrels, per day, would be available to Tesoro under
this contract. The terms would be for three years and would
require at least 80 percent of this production be processed at
Tesoro's Nikiski refinery. The contract requires legislative
approval under AS 38.06.055. Royalty oil has been, and remains the
principal feed stock for Tesoro's refinery, and under the proposed
contract delivers about 80 percent of the refineries crude supply.
There are no other stable long term sources of crude for the
refinery, and Tesoro's current one year contract with the state
royalty expires December 31, 1995. As a result, if the legislature
is unable to act on this proposed contract before it adjourns from
the 1995 session, Tesoro would loose about 80 percent of its crude
oil supply, and continued operations of the Nikiski refinery would
be in peril.
"Because the contract must be reviewed by the Alaska royalty oil,
gas and development advisory board before being presented to the
legislature, the contract would be introduced about April 24th.
This is the reason have asked for these informational hearings, to
review any information which the legislature may have prior to the
actual committee hearings so we can get these questions answered.
MR. SMITH then mentioned one thing he would like to talk about is
the price. Tesoro is obligated, under the contract, to pay a
substantial premium above the price the state receives from the
North Slope producers and other in-state refineries. In the month
of January, 1995, the premium would have been 19 cents per barrel,
or about 2.7 million dollars, annually. He continued by stating he
wanted to let the members know the state has definitely had the
state's best interest in mind while negotiating this contract. In
short, it is virtually at every turn the DNR has had a considerable
bargaining advantage, and this will be as favorable a contract,
from the states perspective, as any which has ever been delivered.
Nonetheless, this contract does meet Tesoro need for a stable
source of crude for three years, and the contract does deserve
legislative approval. That ends my opening statement.
Number 530
CHAIRMAN ROKEBERG Thanked Mr. Smith for his comments and asked if
there are questions from the members of the committee.
Number 534
REPRESENTATIVE NAVARRE stated he would like to thank Chairman
Rokeberg for allowing these informational hearings to take place
even though we do not have a bill to work with.
Number 536
CHAIRMAN ROKEBERG thanked Representative Navarre and Mr. Smith for
attending the meeting. He then stated he did have one question of
Mr. Smith. He asked if he could explain the substantial premium,
and why he thinks that was done.
CHAIRMAN ROKEBERG then stated he did not want to embarrass Mr.
Smith, and that he understood this was a difficult issue. Mr.
Smith asked Mr. Tillinghast to address that issue.
Number 550
JON TILLINGHAST, Tesoro Alaska Petroleum, said he would like the
members to look at the copy of the a booklet entitled, "An Analysis
of the Department of Natural Resources Proposed Three Year Contract
for the Sale of Prudhoe Bay Royalty Oil to Tesoro Alaska Petroleum
Company, March 29, 1995," which they provided. He requested the
members look at the chart. He then stated the chart depicts prices
based on January, 1995, reported prices. The first one is British
Petroleum's reported prices, which I think is important to point
out because those prices would include the spot market sales which
the Chairman mentioned. The yellow board is the volume weighted
average of all of the Prudhoe Bay sales to the West Coast and the
Gulf Coast. This is the price which Mapco pays, and Petro Star
would have paid had they taken deliveries under their 1992
contract. Lastly, is the Exxon price of $1.10, per barrel, which
is what Tesoro is going to pay. If January, 1995, is
representative of the way the next three years are going to go
that's where you are looking at about a 19 cents per barrel, $2.7
million premium.
MR. TILLINGHAST stated this is a premium because Exxon only sells
on the West Coast and West Coast prices are higher than the Gulf
Coast prices, and therefore, when you are paying on a West Coast
only basis you are paying more than what the state is getting on
average from the North Slope. He continued by stating it is the on
average price which the state calls the royalty oil value.
MR. TILLINGHAST said the Division of Oil and Gas' rationale for a
premium has been, when you take royalty oils in kind and place it
on the West Coast, of which Alaska is a part. This displaces some
other West Coast companies, and in turn they send their oil to the
Gulf Coast so they can get a lower price, and therefore, bring down
your royalty values. This is called the displacement effect. He
continued by stating what concerned Tesoro the last two times DNR
looked at this issue, which was with respect to Tesoro's one year
contract, and Petro Star's long term contract in 1992, in the
findings accompanying those documents DNR concluded the
displacement effect wasn't a problem any more and that the
percentage of the sales going to the gulf coast was diminishing,
and was going to continue to diminish. He then stated these
royalty contracts were for small quantities of oil, and therefore
we shouldn't have a premium. We were getting our premium in terms
of the jobs and increased competition we were selling this oil to
an in-state refinery. The demand for a premium in the displacement
effect resurfaced with respect to this three year Tesoro contract.
He stated he could not explain why because the market hasn't
changed. Obviously, Tesoro believes that DNR has been right over
the last three years, and is wrong here. Be that as it may, Tesoro
needs the oil, and there is no other place to get it.
Number 601
REPRESENTATIVE NAVARRE asked if he could explain the displacement
effect again, or should he ask Mr. Banks.
Number 602
MR. TILLINGHAST stated he should probably let Mr. Banks explain.
Number 605
REPRESENTATIVE NAVARRE asked if the BP price was an adjustable
price.
Number 610
MR. TILLINGHAST stated the price could go either up or down.
Number 613
REPRESENTATIVE NAVARRE asked what would be likely to happen.
Number 614
MR. TILLINGHAST stated the Representative should bear in mind the
price is $10.31 rather than $10.70, or $10.80 because BP does sell
on both coasts so the average price is going to be lower.
Number 617
REPRESENTATIVE NAVARRE stated he had a question for the department.
Number 620
CHAIRMAN ROKEBERG mentioned to Mr. Smith, the commissioner brought
up his evil commissioner theory as an example of which the
foundation of the contract was negotiated. Clearly, we have an
arms length competitive situation, but I get the sense you are not
entirely happy with the contract price but you are willing to
accept it. Mr. Smith stated that was a very fair assumption. He
continued by stating they did not have a good leg to negotiate on
due to the time constraints. He then stated they would probably
start negotiations for extending this contract next year, or the
year after.
Number 636
MR. TILLINGHAST stated the state has an interest in this too.
Fostering in-state refining competition with a portion of North
Slope royalty oil has been one of the great public policy success
stories of the state, and it is amazing we have been able to
accomplish what we have with a relatively small percentage of North
Slope oil. In order to keep this competitive atmosphere between
Tesoro, Mapco, and Petro Star is important to make royalty oil
available under roughly equivalent terms to all three of them. He
then stated if you put one of them under too much of a competitive
disadvantage, you are going to hurt competition, and prices are
going to rise.
Number 645
MR. SMITH then stated they are still in negotiations with the state
on their letter of credit, and they believe they will be able to
furnish a contract with their charter shipping company to guarantee
transportation to the state in case we do go default. That is one
of their major concerns. He continue on stating if they get this
slug of oil, what will happen to it if BP, or another producer
takes it over? Will they have the ships available to transport it
out? If not they would charge a premium which would hurt the
state, but the ship which we chartered would still be available.
Number 657
REPRESENTATIVE BILL WILLIAMS asked if there are ways to get around
the letter of credit.
Number 658
MR. SMITH stated they have worked to get the letter reduced from 90
days to 75 days. He said they had up to three days to pay for
invoicing because of the system which is currently in place. He
stated they have worked ways to reduce the advantage that the state
has over them, and they feel they can reduce it even further with
the sublease of the chartered vessels.
Number 667
REPRESENTATIVE WILLIAMS asked if they got the line of credit from
the bank.
Number 669
MR. SMITH stated they did get the letter of credit from the bank.
He then stated one of the points of this letter of credit, and the
three year contract is the state originally wanted to do a one year
contract or a competitive bid. Our banks would not allow us to
have a one year contract. He then stated they have to have a long
term supply of crude. He stated they were originally asking for an
eight year contract to match Mapco's term, however, we can live
with the three year contract we received. This may not be the best
advantage, but it still works.
Number 679
MR. TILLINGHAST then stated to Representative Williams, the
financial impact of the letter of credit, by moving from 60 to 75
days they are tying up an additional eight or nine million dollars
worth of borrowing capacity. Then there are annual fees because
you have to pay for the letter of credit, and these fees are going
to go up about $150 thousand dollars a year (indisc.)
Number 683
REPRESENTATIVE WILLIAMS asked if there was any other way the
company can (indisc.) other than being there. (Indisc.)
Number 687
MR. SMITH stated they already have their refinery put up as a
letter of credit, so that is not an option for the state to get
into. He then stated a 60 day letter of credit is part of doing
business, however, a 90 day letter would not be acceptable and we
still believe we can get it down to 60 days.
Number 694
MR. TILLINGHAST stated in addition to the letter of credit the
contract also requires (indisc.)
Number 697
CHAIRMAN ROKEBERG asked if he mentioned $850 thousand for the cost
of the credit. Mr. Tillinghast stated it was $780 thousand with
the additional $150 thousand.
Number 700
CHAIRMAN ROKEBERG stated they had to wrap things up fairly quickly,
but Representative Navarre wanted to ask the commissioner a
question. He then thanked Mr. Smith and Mr. Tillinghast.
TAPE 95-18, SIDE B
Number 000
REPRESENTATIVE NAVARRE asked the commissioner about the
displacement theory.
Number 001
MR. BANKS (indisc.) royalty value on the part of those producers
who are lifting oil and carrying it off of the market, and the
impact that has, not only on the royalty but also on the severance
tax. At the moment, only BP is shipping oil to the Gulf Coast. In
the calculation of the value of their royalty oil they calculate
the number of barrels they are moving to each destination. It is
theorized, and I think it's fair assumption to make, that if we
sell oil to Tesoro that is oil which BP may not sell. This means
in calculating the volume of oil in each market, you must deduct
this 40,000 barrel from the producers. This has an effect of
changing the relative rates to the west coast and gulf coast
markets. He then stated BP was currently shipping about 70 percent
of its oil to the West Coast, and 30 percent of its oil to non West
Coast locations. He then stated this may have the impact after
accounting for the 40,000 barrels, per day, going to Tesoro, and of
changing those rates from 69 percent to 31 percent. What this
means is they can increase the rate of a lower value market.
Number 055
REPRESENTATIVE NAVARRE asked if that theory wasn't flawed. He
continued by stating if you took 40,000 barrel away here isn't it
more likely you would increase the percentage of barrels sold at
the West Coast rather than at the Gulf Coast. He continued stating
if you take 40,000 barrels out of the equation, then you are taking
it out of the overall sales.
Number 071
COMMISSIONER SHIVELY stated BP wouldn't ship a drop of oil to the
Gulf Coast unless they had too. So what happens is they fill up
the West Coast, and anything additional goes to the Gulf Coast.
Number 079
REPRESENTATIVE NAVARRE asked why they would want to put a premium
on that. He stated they were getting an advantage because all of
the other 40,000 additional barrels are not going to go to the Gulf
Coast which means they will be sold on the West Coast.
COMMISSIONER SHIVELY stated they were either sold in kind or they
are sold on the Gulf Coast, those are the two options.
Number 087
MR. BANKS then stated his point was that they had to focus on the
percentages, and the impact they have and not on the numbers of
barrels.
Number 092
REPRESENTATIVE NAVARRE asked if we take 40,000 barrels away from
what BP is selling now, is it more likely going to be from the Gulf
Coast, or the West Coast.
COMMISSIONER SHIVELY responded by stating it would be the Gulf
Coast.
REPRESENTATIVE NAVARRE then asked if we were taking the lowest
valued oil.
COMMISSIONER SHIVELY stated that was one way to look at it.
REPRESENTATIVE NAVARRE then stated he sees this as an advantage to
the state by taking the royalty oil.
Number 105
MR. BANKS then stated what he believes is happening is we assume
the West Coast market is a certain number of barrels, and what is
changing is not the number of barrels delivered to either coast,
but the rather who is selling them. That means if we are selling
them, those are barrels BP is not selling, which means we only
change the relative weighing of the barrels which BP is hauling out
of Alaska to favor a larger percentage on the Gulf Coast. He
continued by stating we are not changing the number of barrels
delivered to the Gulf Coast nor to the West Coast.
Number 118
REPRESENTATIVE NAVARRE stated that we certainly were. He stated if
we are taking at the tap, 40,000 barrels away from the equation
there is still the same number which can be used at the West Coast.
As you have said, you assume there is a set amount which has
capacity on the West Coast. If you take 40,000 barrels away from
that equation, which is what you are doing when you sell it here
instead of the lower 48 markets, then you are taking it from the
lowest value oil. In this way you would be changing the equation
in favor of the higher priced oil for the state.
Number 135
MR. BANKS mentioned to Representative Navarre that his way of
looking at this issue would work if Tesoro would not be operating
without a royalty contract, which is a likely possibility. He then
stated when he is referring to the West Coast he is speaking about
all destinations on the West Coast including Alaska. He then
restated his point by saying the volumes on either coast are not
changing, what is changing is who is selling the oil.
Number 143
REPRESENTATIVE NAVARRE asked if we didn't continue the contract,
and Tesoro decided they couldn't afford this, what the impact to
the state would be. He then asked if we would not be selling more
of the states royalty oil on the Gulf Coast. He then said he sees
this as an advantage to the state, we are selling less oil for a
cheap price which drives up the weighted average.
Number 155
COMMISSIONER SHIVELY stated we are making the assumption that the
volume would go to the West Coast no matter what because Tesoro
would buy at a comparable West Coast price for their refinery, or
hire if we went to a competitive sale because they might have to
bid higher in order to protect themselves or somebody else on the
West Coast would buy that oil to bring up here if Tesoro shut down
because there would be a market for those products in Alaska.
These refined products would not come out of the Gulf Coast, they
would come out of the West Coast. I think that is what Kevin is
trying to say, you have to look beyond where the oil goes, you must
also look at where the oil comes back to and where it is used.
Number 171
REPRESENTATIVE NAVARRE then asked if you are going to look at the
rest of this in that equation, shouldn't you also look at the
liability Tesoro has to the state under other agreements, and how
the overall contract impacts Tesoro.
Number 180
COMMISSIONER SHIVELY stated Representative Navarre was correct. He
then said if Tesoro felt they could not operate under this
contract, they would not sign this contract. He then said we could
argue what would be the best for Tesoro, and there is no question
they are competitively better off at a lower price. He then said
there is another issue on this price, which is, because they audit
their transportation cost, it is not a set price and there was some
substantial price risk for Tesoro in the BP price but that risk
goes away with the Exxon price.
Number 197
REPRESENTATIVE NAVARRE asked when the last time the state sold
royalty oil on a competitive bid.
Number 199
MR. BANKS stated the year was 1985.
Number 201
REPRESENTATIVE NAVARRE said he believes he has a hard time
understanding why they value this competitive bid process so
highly.
Number 210
COMMISSIONER SHIVELY said there is another aspect to this. He
stated the theory that as the West Coast markets increase, the gulf
price is going to go away. If that happened we probably wouldn't
be arguing over anything today. The only reason we are arguing is
because BP has an excess they can't sell on the West Coast. This
also might change if the oil export ban is lifted. He then stated
he thinks, given the responsibility they have to get an equal or
better value for the states royalty oil, they did a good job of
negotiating. He stated he does not believe Tesoro is very happy
with it, but it is a fair price. Continuing, Commissioner Shively
said this is basically the bench mark, and they won't find us going
back and giving Petro Star a better pricing deal than the one they
received.
Number 230
CHAIRMAN ROKEBERG stated for the record that Representative Gary
Davis joined the committee some time ago.
Number 232
REPRESENTATIVE WILLIAMS stated he would like to hear the comments
on the letter of credit again.
Number 235
COMMISSIONER SHIVELY stated this was a complicated issue. If
Tesoro stops taking oil because they can no longer pay for it, the
oil industry requires that we give them substantial notice in order
that they pick up the oil and sell it for us. The last time this
happened, they charged us a premium because there were no tankers
available and the oil couldn't be shipped, so we got less for our
oil than wee would have on the market. This letter of credit
protects us from that. However, we do believe there is an
opportunity to take the letter of credit down to 60 days by solving
the transportation problem.
Number 247
CHAIRMAN ROKEBERG asked the commissioner if they considered the
extraordinary burden that is on Tesoro because of their requirement
to transport the oil from Valdez to Nikiski. Also, he asked if
they had taken into account the ad valorem taxes, and the corporate
income taxes.
Number 257
COMMISSIONER SHIVELY stated the taxes they pay are part of the best
interest finding, which is one of the reasons they want to keep the
business alive. It wasn't taken into account, in the sale, as an
economic factor. He then stated they were aware of Tesoro's
competitive disadvantage in having to transport the oil from
Valdez, which has two aspects to it. The first is, they have the
extra transportation cost; and the second is, they can not put
their residual oil back in the line. He then stated they were
aware of those issues, but no credit was given for them.
Number 271
REPRESENTATIVE GARY DAVIS stated he believes the major concern is
on the price and the different weights. Tesoro's competitive
disadvantage can probably be given some weight due to the fact
their competitors have a long term contract already in place, so I
suppose that is where any fluctuations in price are based on how
much weight you give to that.
Number 285
COMMISSIONER SHIVELY stated one competitor has a long term contract
which, if we had to do over again, we wouldn't do it that way.
Number 290
REPRESENTATIVE DAVIS stated that was what he meant. Different
weights in terms of leveling the playing field.
Number 292
COMMISSIONER SHIVELY stated they didn't level the playing field.
Number 293
CHAIRMAN ROKEBERG asked if the length of the three year contract
was a policy call.
Number 300
COMMISSIONER SHIVELY said they would not enter into the type of
long term contract which they have with Mapco because of changing
market conditions. He said they agreed on three years, and they
have a request from Petro Star which goes well beyond the year
2003. The Mapco contract was negotiated at a time when there
wasn't a lot of in-state refining capacity, but this contract is
way too long, and is not in the commissioner's mind in the best
interest of the state.
Number 315
CHAIRMAN ROKEBERG asked if they took into account the financial
requirements of the companies.
Number 317
COMMISSIONER SHIVELY stated they did, and the result of that
consideration was the fact they allowed the contract to run longer
than one year.
ADJOURNMENT
Number 322
CHAIRMAN ROKEBERG thanked the witnesses and adjourned the meeting
at 10:12 a.m.
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