03/06/2014 12:00 PM House RESOURCES
| Audio | Topic |
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| Start | |
| HB287 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| *+ | HB 287 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
March 6, 2014
12:05 p.m.
MEMBERS PRESENT
Representative Peggy Wilson, Vice Chair
Representative Mike Hawker
Representative Craig Johnson
Representative Kurt Olson
Representative Paul Seaton
Representative Geran Tarr
MEMBERS ABSENT
Representative Eric Feige, Co-Chair
Representative Dan Saddler, Co-Chair
Representative Scott Kawasaki
OTHER LEGISLATORS PRESENT
Representative Andrew Josephson
COMMITTEE CALENDAR
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."
- MOVED HB 287 OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
BILL: HB 287
SHORT TITLE: APPROVE TESORO ROYALTY OIL SALE
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
01/29/14 (H) READ THE FIRST TIME - REFERRALS
01/29/14 (H) RES, FIN
03/03/14 (H) RES AT 1:00 PM BARNES 124
03/03/14 (H) Scheduled But Not Heard
03/05/14 (H) RES AT 1:00 PM BARNES 124
03/05/14 (H) Scheduled But Not Heard
03/06/14 (H) RES AT 12:00 AM BARNES 124
WITNESS REGISTER
JOE BALASH, Commissioner
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: On behalf of the administration, introduced
HB 287.
KEVIN BANKS, Petroleum Market Analyst
Division of Oil & Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Answered questions regarding HB 287.
JAMES TANGARO, Vice President Kenai Refinery
Tesoro Alaska Company
Kenai, Alaska
POSITION STATEMENT: Testified in support of HB 287.
ACTION NARRATIVE
12:05:18 PM
REPRESENTATIVE MIKE HAWKER called the House Resources Standing
Committee meeting back to order at 12:05 p.m. Representatives
Tarr, Seaton, Olson, P. Wilson, Johnson, and Hawker were present
at the call back to order. Representative Josephson was also
present.
HB 287-APPROVE TESORO ROYALTY OIL SALE
12:05:50 PM
REPRESENTATIVE HAWKER announced the only order of business is
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."
REPRESENTATIVE HAWKER noted HB 287 was introduced by the House
Rules Standing Committee at the request of the governor. He
said the intention is to move the bill today following testimony
and any amendments.
12:06:46 PM
JOE BALASH, Commissioner, Department of Natural Resources (DNR),
introduced HB 287 on behalf of the administration. He said he
has a slide pack ready for presentation but proposed to instead
provide a summary and answer the committee's questions.
REPRESENTATIVE HAWKER agreed to Commissioner Balash's proposal,
saying committee members are well aware of what are royalty-in-
kind sales and members are only looking for an explanation of
why HB 287 is before the committee.
12:07:26 PM
COMMISSIONER BALASH explained that in fourth quarter 2013 the
Division of Oil & Gas, Department of Natural Resources, entered
into a sales contract with Tesoro to provide between [5,000] and
15,000 barrels per day of Alaska North Slope supply to Tesoro's
Nikiski refinery. Because the contract was for less than one
year, it could be executed without going through a legislative
review. However, in further discussion, the operator expressed
a desire to extend the contract, and legislative approval is
needed to extend it beyond one year. The price terms for this
particular sale are different than the ones that were before the
committee last year when it considered the much larger volume
for sale to "Flint Hills" in North Pole. A reason for that
difference is driven in part by the lack of specific special
commitments. Some special commitments were made in the Flint
Hills case and therefore Flint Hills received a higher deduction
off of the total price than is seen here with Tesoro; it is a
difference of about 20 cents. The other terms are largely the
same, with the exception of the volumes. Commissioner Balash
said the Tesoro refinery in Nikiski has been operating since
1969 and is the largest and most sophisticated refinery in
Alaska. The refinery manufactures ultra-low-sulphur diesel
(ULSD), and while it is not the only refinery making this
product, it makes the most. The Tesoro refinery has a diverse
product line that includes jet fuel to the Ted Stevens Anchorage
International Airport, a lot of gasoline, as well as the ULSD.
The Nikiski plant provides more than 200 high-paying jobs, so it
is a good opportunity to add value to one of Alaska's resources.
He said refining is a business that he hopes will remain a part
of Alaska's economy for some time.
12:10:28 PM
REPRESENTATIVE HAWKER, regarding [DNR's] October 24, 2013, best
interest finding for the sale of Alaska North Slope (ANS)
royalty oil to Tesoro Refining and Marketing Company, LLC, noted
that a public comment period of at least 30 days was held and
was closed on September 23 for which no public comment was
received. It is therefore presumed that no one is challenging
this best interest finding by the department.
COMMISSIONER BALASH confirmed that is correct, saying that under
the statutes of "183," a hearing was conducted with the [Alaska
Royalty Oil and Gas Development Advisory Board] that also
recommended the approval of this particular sales contract.
12:12:09 PM
REPRESENTATIVE TARR inquired whether closure of the Flint Hills
refinery will have any impact on this contract in terms of
volume. For example, whether more than 15,000 barrels per day
would be available for the Tesoro contract.
COMMISSIONER BALASH responded the specific negotiation on the
volume for this contract was somewhat limited because of the
sale of royalty to Flint Hills. Both contracts have a proration
clause in the event that the state, for whatever reason, winds
up short on royalty production -- the state is able to reduce
the volume it is selling to either or both refineries. As
information related to the Flint Hills closure continues to be
understood, it is important to note that the contract approved
for Flint Hills is a larger volume and is still in place. The
first notification of a zero barrel requirement under the
contract has been received. After the receipt of three zero
barrel monthly nominations in a row, the contract terminates.
So, it would be mid to late second quarter 2014 that the Flint
Hills contract would run its natural course and terminate,
freeing up those royalty barrels for selling to a different
party, perhaps even Tesoro.
12:14:07 PM
REPRESENTATIVE P. WILSON understood the current initial quantity
range included a clause that the quantity may be adjusted after
12 months with commissioner approval. She asked whether the
contract was just for 12 months.
COMMISSIONER BALASH confirmed the initial contract was for 12
months. Responding further, he explained this is an extension
and further authorization, and the department is presently
investigating with Tesoro whether and how the volumes can be
increased if additional royalty volumes become available, but
nothing in that regard has been closed yet.
REPRESENTATIVE P. WILSON inquired whether she is correct in
understanding that this is another contract for another year.
COMMISSIONER BALASH believed this contract runs through 2016, so
it would be approximately one additional year.
REPRESENTATIVE P. WILSON surmised the provision saying the
commissioner can change those amounts after 12 months is moot.
COMMISSIONER BALASH replied that, in this case, what would be
looked at is an opportunity after the first year to make a
change in the second year because this is, in effect, now a two-
year contract. He explained that the initial contract was just
one year. A new contract is being entered into which extends
that initial contract by one year and includes the latitude to
increase the volume after the first 12 months. He deferred to
the Division of Oil & Gas to provide further information.
12:17:19 PM
KEVIN BANKS, Petroleum Market Analyst, Division of Oil & Gas,
Department of Natural Resources (DNR), confirmed the initial
contract period was for one year, as stated by Commissioner
Balash. A term in that one-year agreement talks about re-
adjusting the volumes; this term is something of a vestige of
the contract the state has with Flint Hills. In the Flint Hills
case, it was intended to give Flint Hills an opportunity to
reduce volumes because that seemed to be a bigger issue for that
company. In this case with Tesoro, it is a clause that actually
does not have effect in a one-year term. Now that the division
would like to be able to add a second term, it will give the
opportunity to adjust the volumes up or down depending on the
needs expressed by Tesoro.
REPRESENTATIVE P. WILSON said she wants to ensure that it is not
being automatically said that the contract is going to renewed
again for one year and have all the wording the same in the
contract. She asked whether she is correct in understanding
that the contract is being renewed for one year, but some of the
language in the contract has been changed.
MR. BANKS responded the only difference in the new one-year-
addition contract is the language that changes the date. The
original contract and all of the terms are identical except for
the dates that the contract will run.
REPRESENTATIVE HAWKER understood that HB 287 authorizes an
extension of the existing contract. So, instead of it being the
one year that could be entered into without legislative
approval, the contract is being extended beyond that first one-
year, which requires legislative approval and is what is before
the committee.
MR. BANKS replied correct.
12:19:42 PM
REPRESENTATIVE P. WILSON noted she has not seen the contract
itself but understands it may be adjusted after 12 months with
commissioner approval. She expressed her concern that "they
would be able to do that." While she knows it is understood
that way, it is sometimes understood one way but it does not say
that -- it says it may be adjusted after 12 months with
commissioner approval. It does not say when that 12 months
starts. If the same contract is being done here, and it is up
for starting to continue, it does not say "we're going back to
the first contract at the beginning and saying ... 12 months ...
have gone by and so we can do it now." Some attorney may say
this contract has been extended and so from the date the
legislature has extended it perhaps it says it may be adjusted
after 12 months. She said she wants to ensure that it says
"what we intend it say," adding she does not have a question
with what it says, but wants to ensure there are not unintended
consequences because of that.
REPRESENTATIVE HAWKER requested Mr. Banks to clarify the change
provision that is in the contract and whether it does say what
the division intends it to say.
MR. BANKS, reading from the language in the contract, spoke as
follows:
The buyer may elect to reduce the initial sale oil
quantity by giving notice. The initial sale oil
quantity shall remain as stated for 12 months after
the ... day of first delivery.
MR. BANKS continued, explaining the 12-month period that
Representative P. Wilson is concerned about is triggered by the
delivery of oil under the existing original contract. Any
change to reduce the amount of oil would occur after January 1,
2015, and the commissioner has the right to approve or deny
that. It is specifically built into the contract to reduce the
amount, not necessarily to increase it. He said he thinks it is
saying exactly what should resolve the concerns raised by
Representation P. Wilson.
REPRESENTATIVE P. WILSON agreed it sounds like her concerns are
addressed.
12:23:16 PM
REPRESENTATIVE TARR surmised that when the contract with Flint
Hills is eliminated in three months there will be royalty oil to
get to somebody else. She asked whether the contract is written
in such a way that it would delay until 1/1/15 the opportunity
to make adjustments, although she allowed that the state could
look for somebody else during that time period.
COMMISSIONER BALASH responded the opportunity of that gap will
likely require the department to enter into a second contract
with Tesoro for the state to be able to sell additional volume
to Tesoro above 15,000 barrels per day because the adjustment
provision only allows for going down.
12:24:23 PM
REPRESENTATIVE HAWKER opened public testimony on HB 287.
12:24:45 PM
JAMES TANGARO, Vice President Kenai Refinery, Tesoro Alaska
Company, said Commissioner Balash hit most of the key points
contained in his March 3, 2014, letter to the committee
[included in the committee packet]. He stated that Tesoro
supports HB 287 and urges the committee to support it as well.
The refinery has existed for 45 years, has no plans to be
elsewhere, and is a big part of the community. He said HB 287
extends the contract and gives Tesoro a firm supply of Alaska
North Slope crude and the flexibility to operate the refinery
efficiently. The bill is important to Tesoro, he said.
REPRESENTATIVE HAWKER related his staff has reviewed DNR's best
interest findings, which state that the Tesoro refinery supplies
35 percent of the jet fuel used at Ted Stevens Anchorage
International Airport.
MR. TANGERO replied it is 35 percent or a little higher.
REPRESENTATIVE HAWKER further shared that DNR's best interest
findings state that the Tesoro refinery provides 60 percent of
the gasoline consumed by Alaskans, indicating the importance of
the commercial service provided by the refinery to Alaskans.
MR. TANGERO answered thank you.
12:27:00 PM
REPRESENTATIVE HAWKER closed public testimony after ascertaining
that no one else wished to testify.
12:27:26 PM
REPRESENTATIVE P. WILSON moved to report HB 287 out of committee
with individual recommendations and the accompanying fiscal
note.
REPRESENTATIVE HAWKER observed it is an indeterminate revenue
fiscal note because the value of the resource is unknown over
time because the price fluctuates with the open market.
There being no objection, HB 287 was reported from the House
Resources Standing Committee.
12:28:04 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 12:28 p.m.
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