Legislature(2013 - 2014)BARNES 124
04/16/2014 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HCR22 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | HCR 22 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
April 16, 2014
1:06 p.m.
MEMBERS PRESENT
Representative Eric Feige, Co-Chair
Representative Dan Saddler, Co-Chair
Representative Mike Hawker
Representative Craig Johnson
Representative Paul Seaton
Representative Scott Kawasaki
Representative Geran Tarr
MEMBERS ABSENT
Representative Peggy Wilson, Vice Chair
Representative Kurt Olson
OTHER LEGISLATORS PRESENT
Representative Doug Isaacson
COMMITTEE CALENDAR
CS FOR HOUSE CONCURRENT RESOLUTION NO. 22(RES)
Urging the governor, the commissioner of natural resources, and
the attorney general to seek resolution of TAPS quality bank
disputes before January 1, 2015, in a manner that will provide
long-term quality bank stability and reduce the cost of quality
bank adjustments paid by in-state refiners of Alaska North Slope
crude oil.
- MOVED CSHCR 22(RES) OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
BILL: HCR 22
SHORT TITLE: IN-STATE REFINERIES
SPONSOR(s): REPRESENTATIVE(s) T.WILSON
02/26/14 (H) READ THE FIRST TIME - REFERRALS
02/26/14 (H) RES
03/17/14 (H) RES AT 1:00 PM BARNES 124
03/17/14 (H) Heard & Held
03/17/14 (H) MINUTE(RES)
04/16/14 (H) RES AT 1:00 PM BARNES 124
WITNESS REGISTER
REPRESENTATIVE T. WILSON
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: As sponsor of HCR 22, explained the changes
made in the proposed committee substitute, Version C.
JOE BALASH, Commissioner
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: During the hearing on HCR 22, provided
information and answered questions.
DOUG CHAPADOS, President/CEO
Petro Star Inc.
Anchorage, Alaska
POSITION STATEMENT: Testified regarding HCR 22.
MERRICK PEIRCE
Fairbanks, Alaska
POSITION STATEMENT: Testified regarding HCR 22.
ACTION NARRATIVE
1:06:30 PM
CO-CHAIR DAN SADDLER called the House Resources Standing
Committee meeting to order at 1:06 p.m. Representatives Hawker,
Tarr, Seaton, Feige, and Seaton were present at the call to
order. Representatives Johnson and Kawasaki arrived as the
meeting was in progress. Representative Isaacson was also
present.
HCR 22-IN-STATE REFINERIES
1:06:53 PM
CO-CHAIR SADDLER announced that the only order of business is
HOUSE CONCURRENT RESOLUTION NO. 22, Urging the governor to take
all action necessary to keep in-state oil refiners in operation
and to keep oil refining operations in the state competitive.
1:07:24 PM
CO-CHAIR FEIGE moved to adopt the proposed committee substitute
(CS), Version 28-LS1536\C, Bullock, 4/16/14, as the working
document.
REPRESENTATIVE SEATON objected for explanation of the changes.
1:07:53 PM
REPRESENTATIVE T. WILSON, Alaska State Legislature, as sponsor
of HCR 22, explained the changes made in the proposed committee
substitute. She said Version C removes the sulfolane provision
because the legal appeal of this issue has changed since the
committee last heard HCR 22. While the resolution mentions the
problems of the Flint Hills and Petro Star refineries, Version C
speaks more to it being an in-state refinery issue rather than
an Interior refinery issue. The resolution would direct some of
the major issues being faced right now, the quality bank being
one of those. Although the quality bank is run by the federal
government, the State of Alaska receives some of those funds.
Alaska North Slope (ANS) oil is about $6 a barrel more than the
[West Texas Intermediate (WTI)] price. This big gap results in
Alaska's crude starting out higher, so for some facilities there
is a very high energy cost for refining. Version C addresses
more of what the administration needs to do so that during the
interim a look can be taken at what other things can be done.
1:09:49 PM
REPRESENTATIVE SEATON removed his objection. There being no
further objection, Version C was before the committee.
1:10:30 PM
JOE BALASH, Commissioner, Department of Natural Resources (DNR),
noted that some of the issues have been worked on since Flint
Hills announced last February that it is closing its doors. In
particular, a subset of the governor's cabinet has been very
actively working the sulfolane issues with regard to cleanup
standards of the Department of Environment Conservation (DEC)
and the issues associated with the responsibility for cleanup.
Some of the issues identified in the original version of the
resolution have therefore fallen away. The administration would
like to see expeditious handling of the quality bank dispute
that is ongoing at the Federal Energy Regulatory Commission
(FERC) because it is a critical step to keeping Petro Star
operating. A pair of pipelines runs from the Trans-Alaska
Pipeline System (TAPS) to both the Flint Hills and the Petro
Star facilities. The revenue requirement for that pipeline
system in 2013 was about $4.5 million. The split in the load
between the two facilities was 85 percent Flint Hills and 15
percent Petro Star. This year that revenue requirement is very
likely to be much larger for Petro Star and will be even larger
in 2015 when Petro Star is the sole customer of that pipeline.
COMMISSIONER BALASH said the administration's approach on the
quality bank dispute is one where the state has an interest in
ensuring that the value of the crude oil that goes into the
system at the top is accurately reflected in the royalty
payments received by the state. However, an imbalance in these
in-state charges would cause the state to be benefitting
disproportionately than any other party, so the state has the
most to gain or lose in such a resolution. He said HCR 22 has
been redrafted with key points to: 1) address the statewide
perspective that the co-chairs had expressed interest in during
the first hearing; and 2) give some very specific direction to
the administration on seeking resolution of the quality bank
matters in front of FERC by the first of next year. Given that
this is a communication from the legislature to the executive
branch, a concurrent resolution is the appropriate vehicle. He
said he feels a little conspicuous in that this message urges
the governor and the attorney general to seek resolution, so he
would be happy to have DNR added if the committee thinks it
appropriate because of the royalty interest affected.
1:14:33 PM
REPRESENTATIVE SEATON drew attention to the whereas clause on
page 2, lines 9-11, of the CS regarding the higher cost in
Alaska of obtaining crude. Noting there has been talk about the
price differential between Brent Crude and WTI, he asked whether
adopting something that says "we are going to sell some of our
oil at WTI" would cause problems in negotiating prices for
selling the rest of Alaska's crude. He inquired how selling in-
state at one price and selling out of state at another price can
be handled so it does not become a liability for lowering the
price of all Alaska crude.
COMMISSIONER BALASH replied this point was considered earlier
this year. When the closing of Flint Hills was announced, [the
administration] began conversations with Petro Star and gave
hard consideration to selling royalty oil to Petro Star at a
discounted price, but federal constitutional concerns kept [the
administration] from exercising that option. So, Version C does
not urge the administration to sell royalty oil at a discounted
price. Currently, imported jet fuel is effectively competing
against Alaska's in-state refined products, which is putting a
lot of the negative pressure on overall cash flow and balance
sheets in this state. This Whereas clause calls out that the
price differential and the quality bank charges are causing
competitive problems for in-state refineries and is
substantiation for the resolve clause on page 2, lines 22-25.
1:17:25 PM
CO-CHAIR FEIGE asked whether the competing import is coming from
the US West Coast or Asia. While the [current] WTI price is
about $6 below ANS crude, that difference has been narrowing, he
related. At one point the WTI was significantly lower than ANS
crude, but the WTI price has been gradually coming up.
COMMISSIONER BALASH responded correct, saying the differential
at one point was in excess of $15 per barrel, but more recently
it was in the range of $10 per barrel, and right now it is in
the single digits, which is good. In the long run it is
believed there will be a return to normalcy wherein ANS crude
will price similar to WTI. It is thought that will occur as
infrastructure moves more mid-continent oil to the west and east
coasts and becomes part of the fungible liquid market that crude
oil trades in. Regarding the sources of jet fuel that are
competing in Alaska, he said some is from the West Coast and
some from overseas refineries. Those overseas refineries get to
bring in their product on non-Jones Act vessels and West Coast
refineries come in on Jones Act vessels, so Alaska is primarily
seeing stronger competition from those overseas outlets.
1:19:34 PM
REPRESENTATIVE TARR related an article in Petroleum News for the
week of 2/16/14 reports that the Flint Hills complaint was
dismissed and an independent investigation is being done. She
understood the goal in passing HCR 22 is to send a message
regarding the independent investigation.
COMMISSIONER BALASH believed this correct. He understood that
the specific complaint and remedy sought by Flint Hills was
dismissed by an administrative law judge (ALJ) and an
investigation was underway, potentially an action. Exactly what
happens next depends on the full commission, he said, not the
ALJ decision. Procedurally this will spin out for many months
if not years. Since waiting years cannot be afforded, seeking a
settlement by the parties is one way to circumvent that clock
and hopefully get a fair resolution sooner rather than later.
1:21:13 PM
REPRESENTATIVE KAWASAKI inquired what the sponsor means by
"settlement and resolution" as stated on page 2, line 23.
REPRESENTATIVE T. WILSON replied she wants to ensure [the state]
is sitting at the table and being proactive, whether it is a
settlement or a resolution. While she is unsure what the state
can do at this point, she does know the state benefits from the
quality bank and can therefore be part of the conversation that
is currently ongoing. So, it leaves the options open.
REPRESENTATIVE KAWASAKI asked what Commissioner Balash thinks a
"settlement and resolution" is, as defined in the resolution.
COMMISSIONER BALASH responded settlement suggests a conclusion
will be reached on this matter sooner than would the process.
Procedurally, something like this could take upwards of another
18 months. [The administration] does not think that is the
right timeframe in which to get a decision and ultimately a
resolution of this matter. A methodology is being sought to be
employed in the quality bank for points south of Pump Station 1,
so that Alaska's in-state refineries are not paying more than
they ought to for the degradation of the crude oil stream that
results from their refining processes.
1:23:10 PM
REPRESENTATIVE KAWASAKI inquired whether the state has argued to
the point at which there is a number in place or a type of
valuation system in place from which to go forward. He said he
is unsure about the process at FERC and how that works and is
therefore confused with what the resolution does.
COMMISSIONER BALASH replied the quality bank is a complicated
system intended to keep all parties economically whole.
Production on the North Slope includes multiple fields that have
multiple varieties and qualities of crude. For example, the
crude produced at Alpine is extremely high quality and is the
most valuable crude produced on the North Slope. However, to
get to market, that oil must go into TAPS where it joins the
slop from Milne, which has a much lower American Petroleum
Institute (API) gravity. The idea is that everybody is getting
the same quality crude down at the Valdez Marine Terminal.
Those who bring higher quality crude to the table at Pump
Station 1 are being harmed economically and those bringing the
lower quality crude are benefitting. The quality bank is
supposed to be a system where the low quality players pay in and
the high quality payers take out, keeping everything even.
Taking that a step further, when the refineries in Alaska pull
the crude off of TAPS, take out the high-end products of diesel,
home heating fuel, and gasoline, and put the residual back into
TAPS, they have degraded that stream further, only they have
degraded it for all of the other players in the system. So, the
bank system uses a formula that looks at the specific components
of the crude stream and the market values associated with each
of those components. The refineries contend that the specific
formula and pricing mechanisms are out of balance and do not
reflect the market realities, especially on the West Coast in
which these particular barrels are being traded; that they have
been contaminated, if you will, by pricing metrics and formulas
that are more relevant to the mid-continent where the glut is
taking place. The administration's goal is to see that a fair
system be in place. The administration wants to protect the
state's interest, the state's value, in the crude that is put in
at the North Slope. To the extent that the quality bank is
extracting more than it should from the refineries, the state
treasury is benefitting to the tune of 40 or 50 percent of those
overcharges into the quality bank. That is caused by two
things. First is the state's royalty interest at 12.5 percent
and second is the state's marginal tax rate on production tax
value, which is 35 percent of the remaining 87.5 percent.
Altogether, [the state] is somewhere between 45 and 50 percent
of the benefit that might be paid into the quality bank by these
refineries. [The administration] pegs that total impact at
around $50 million for 2013.
1:27:52 PM
CO-CHAIR SADDLER observed Version C states on page 1, line 12,
that the refineries change the temperature of the crude in TAPS
by adding heat. He asked whether the quality bank or another
factor accounts for that differential in temperature and the
benefit to the state.
COMMISSIONER BALASH answered he does not believe the quality
bank specifically recognizes that value, but he understood there
is a least one commercial agreement in which the TAPS owners
compensate a refinery for the heat returned to the pipeline.
1:28:27 PM
REPRESENTATIVE SEATON, regarding the $4.5 million [cost for
getting oil to the Petro Star refinery], inquired who owns the
pipeline and who gets that money.
COMMISSIONER BALASH responded Golden Valley Electric Association
owns that pipeline. Because it is a regulated facility, the
association receives a return on its original cost plus a little
bit of profit.
REPRESENTATIVE SEATON asked whether that is calculated on a per-
barrel basis or on the investment and costs.
COMMISSIONER BALASH understood there is a revenue requirement,
meaning there is an annual allocation for depreciation of the
original investment made by Golden Valley, plus a return and the
variable operating costs, which adds up to $4.5 million. That
$4.5 million is recovered as the cost of service. The number of
barrels going through can vary, so the charge might be a little
higher or lower in any given year depending upon the demand of
the refineries. With Flint Hills going from a very large number
to zero in the second half of 2014, the per-barrel charge to
Petro Star is going to go up by a rather large percentage.
1:30:22 PM
CO-CHAIR FEIGE inquired whether the formula for the quality bank
is a national formula or an Alaska-specific formula.
COMMISSIONER BALASH understood there are various components of
the formula, or products. Pricing for some of those products
relies on national indices as opposed to West Coast indices.
CO-CHAIR FEIGE asked what the cost would be for the state to
purchase the pipeline from Golden Valley Electric Association.
COMMISSIONER BALASH responded he has not inquired.
CO-CHAIR FEIGE remarked it was just a random thought.
1:31:24 PM
REPRESENTATIVE TARR understood the original resolution was more
specific to resolving the issue at Flint Hills whereas Version C
addresses things in a more comprehensive way by focusing on how
the quality bank methodology impacts in-state refineries.
REPRESENTATIVE T. WILSON replied it was two things. One was
reacting to the closure of Flint Hills and whether there were
more actions that could be taken immediately to find someone to
buy the refinery sooner rather than later. The refinery portion
of the facility is currently set to close June 1, 2014. Since
then, it has come to light that Flint Hills is not seeking a
buyer for the refinery and will instead be importing refined
product and selling it through the refinery for the Interior.
The refinery also supplies the Anchorage airport and will now
import that fuel directly to the airport, which cuts down on the
refinery's transportation costs. How Petro Star is reacting to
this was also looked at. Normally when a competitor closes
there is opportunity for that other entity, but here there is
not because [Flint Hills] plans on meeting its obligation.
Thus, there have been no new contracts for Petro Star to be able
to take advantage of and now it is being asked to compete with
an import business. The question is what the problem really is
and why there is this unevenness as far as competition goes.
The quality bank rose to the top because it is one of the
biggest payments, as is the payment for the two [Golden Valley]
pipelines. Another payment is the railroad since Flint Hills
was the major entity. Thus, Version C is not as broad as the
original resolution and is saying [for the state] to be at the
table and to do something now to prevent closing.
1:34:59 PM
REPRESENTATIVE SEATON recalled that in the TAPS settlement the
state got stuck losing about $6 billion because it was a
settlement and therefore the state could not change it. As was
stated by the commissioner, the situation has changed because
the Brent crude and WTI "are quite different the other way."
When prior administrations were thinking about making a
settlement they were not trying to create a large windfall for
other companies at a loss to the state. If the state pursues a
settlement in this issue, the legislature will not have any
impact on it and will be unable to change the settlement. He
inquired how the long-term financial health of the state will be
protected given the resolution is open ended.
COMMISSIONER BALASH observed the language in Version C, page 2,
lines 23-24, states "to seek a settlement and resolution ... in
a manner that will provide long-term quality bank stability".
For something to be stable over the long term, he said, it must
be fair to all parties and may require adjustment from time to
time. Adjustment could be a broad re-opener or simply a re-
calibration of some of the indices or pricing mechanisms within
the quality bank itself. He imagined it could work similar to
how the state's royalty settlement agreements function, which
have big broad re-openers every 10 years or so, but specific re-
openers every couple of years on things like marine
transportation. These agreements are on a three-year rotation
so only one per year is dealt with. He said the aforementioned
is how he would interpret the direction being given here.
1:38:22 PM
REPRESENTATIVE SEATON noted the language also states "before
January 1, 2015". He expressed concern that there will be no
involvement by the legislature for ratification or agreement.
The resolution calls for the administration to negotiate
something to keep somebody in business. He said this is almost
a legislative appropriation because it is talking about money
that the state is not going to have, given the $50 million in
the quality bank may possibly be reduced by an unknown amount
for a long time or perhaps permanently. Plus, it is not just
one refinery, it is all refineries. He requested Commissioner
Balash to address whether legislative approval should be
requested.
COMMISSIONER BALASH answered if the two remaining refineries on
TAPS were to shut down the state would not receive that monetary
benefit anymore anyway. He pointed out that the nature of state
government settlements is that they generally do not come back
to the legislature for approval or ratification. If there is a
transfer of value or payment required by the state, then
typically those require an appropriation to support them and he
cannot imagine a scenario where that would be the case. January
1, 2015, would be taken by the administration as a very strong
suggestion but not a requirement. Many other parties are being
dealt with in this case, so even if the state has some urgency
those parties will not necessarily have the same urgency. The
overarching message in the resolution is "to get with it and try
to get done because of the impact it is having on the remaining
refineries." He believed the cycle for annual renewal of
purchase contracts for crude oil occurs at the end of the first
quarter each year, so trying to target that timeframe in the
calendar would be most helpful for the decisions that those
operations would need to make.
1:42:02 PM
CO-CHAIR SADDLER expressed his support for the goals of this
resolution. He said there is a compelling interest to ensure
that there is refining capacity for providing jet fuel to supply
the military bases, as well as to supply the Interior.
1:42:37 PM
CO-CHAIR SADDLER moved to adopt Amendment 1 as follows:
Page 1, line 1, after "governor":
Insert "commissioner of the department of natural
resources"
Page 2, line 22, after "governor"
Insert "commissioner of the department of natural
resources"
There being no objection, Amendment 1 was adopted.
CO-CHAIR SADDLER passed the gavel to Co-Chair Feige.
1:43:19 PM
REPRESENTATIVE T. WILSON, addressing Representative Seaton's
earlier question, agreed the monies that come to the state are
important. However, in her opinion, the reason legislators are
sitting here today is due to the state's actions to ensure that
the biggest bang for the buck comes to the state. A royalty oil
contract ended up not being the best for the entity it went to;
it did not keep that entity economical so that entity then found
a different way to be able to still get contracts and therefore
closed [its refinery]. The question is how important an in-
state refinery is to the State of Alaska. Given military bases
and security reasons, does Alaska really want to be an import
state? Does Alaska want to export all of its resources just to
import the rest of it? She understood not wanting to give money
away, but said the state is losing in the meantime because it is
so focused on that bottom dollar for state government at the
expense of others. If both refineries stay open, the state will
be good. If one closes and there is just the import, prices
will stay low for a while but eventually the price will rise
because there is only "one game in town." It is unknown whether
the state will get back this lost industry and it must be
ensured that no more is lost.
1:45:34 PM
REPRESENTATIVE SEATON said he wants to ensure this is looked at
holistically. The railroad has had a hard problem because of
the lack of refining and the fuel being imported for Anchorage.
Care must be taken by the legislature to not get inside
businesses to make them profitable only to have them turn around
and import outside fuel anyway because it is cheaper than
retooling the refinery. He emphasized he is not against in-
state refining, he is always for in-state value-added products,
but the question here is how to get there. As he stated
earlier, he is worried about settlements and the state being
stuck for years. The TAPs settlement was a loss to the state of
at least $6 [billion]. He suggested that "settlement and" be
deleted from page 2, line 23, and that only a resolution be
sought to avoid possible problems with seeking a settlement in
which the legislature is not involved. He inquired whether the
sponsor and commissioner would be comfortable with including re-
openers for a settlement or leaving out the settlement and just
calling for a resolution.
The committee took an at-ease from 1:47 p.m. to 1:49 p.m.
1:49:27 PM
REPRESENTATIVE SEATON moved to adopt Amendment 2 as follows:
Page 2, line 23, after "a":
Delete "settlement and"
There being no objection, Amendment 2 was adopted.
1:50:00 PM
REPRESENTATIVE JOHNSON suggested the word "a" be removed from
page 2, line 23, because there may be more than one resolution.
REPRESENTATIVE T. WILSON agreed this suggestion makes sense
because tying the hands of DNR or the governor is not wanted and
the date of 1/1/15 is included because it needs to be sooner
rather than later since later may not make a difference.
1:50:45 PM
REPRESENTATIVE JOHNSON moved to adopt Amendment 3 as follows:
Page 2, line 23, after "seek":
Delete "a"
There being no objection, Amendment 3 was adopted.
1:51:05 PM
REPRESENTATIVE HAWKER stated that in accepting Amendments 2 and
3, the word "seek" has no connotation of finding a conclusion;
"seek" is to look for. The language "seek resolution" does not
preclude resolving and settling the issues that are in play.
CO-CHAIR FEIGE observed committee members nodding their heads.
He invited a representative of Petro Star [an in-state refiner]
to provide testimony.
1:52:45 PM
DOUG CHAPADOS, President/CEO, Petro Star Inc., testified that
while Petro Star has made payments to the quality bank prior to
nine years ago, is has paid over half a billion dollars to the
quality bank during the past nine years, and half of that amount
was paid in the last three years. He said he is pointing this
out to identify that the quality bank is getting worse at the
same time that Petro Star's market conditions are also getting
worse. The quality bank is currently taking a larger and larger
portion of the gross margins between the products that Petro
Star refines and sells and the raw materials it purchases to
produce those. For example, during the month of March there
were times when Petro Star's raw material cost for Alaska North
Slope (ANS) crude oil, plus quality bank, exceeded the delivered
cost of jet fuel to the Port of Anchorage. This suggests to him
that jet fuel has more value mixed in with the crude oil stream
than it does after Petro Star has refined it and moved it to the
ultimate end user. This situation is strangling Petro Star's
business. Petro Star used to be able to make a very small
profit on very large volumes of jet fuel, but today that is no
longer the case and every gallon is typically selling at a loss.
The quality bank is one reason for that and the other is the
very high cost of ANS crude oil; HCR 22 addresses only the
quality bank.
MR. CHAPADOS noted committee members are recognizing that this
is not just a single impact to a single refiner; it has a ripple
effect throughout the economy. The railroad is experiencing
some difficulties given the smaller volumes that are moving from
North Pole to the Anchorage market. Given its current economic
circumstance, Petro Star has put a project on hold that would
ship product by railroad from both its North Pole and Valdez
refineries. The quality bank getting worse at the same that
Petro Star's market is getting worse is something that Petro
Star cannot control. The complaint filed by Flint Hills goes a
long way toward addressing what Petro Star sees as the flaws in
the current quality bank methodology and is something Petro Star
believes forms the basis of what might be a settlement position
in the future.
1:56:23 PM
REPRESENTATIVE SEATON reiterated his concern about the past
settlement that occurred for a certain set of circumstances, but
then the circumstances changed and caused a loss for many years.
He inquired whether Mr. Chapados will be looking at a system
that is self-correcting for variables or that has a re-opener.
MR. CHAPADOS replied the quality bank is intended to have a
self-correcting process; it values the various components within
the crude oil or values according to market conditions and
pricings in many cases. The basis of the Flint Hills complaint
addresses the valuation for one of those components that does
not have a market price index and so uses a very complex formula
for a determination. Petro Star supports the Flint Hills
complaint which sought to change that and which has now been
turned into an investigation by FERC. He said he thinks a
settlement can be struck that is equitable to all parties and
that corrects what Petro Star sees as a flaw in the existing
quality bank methodology and that would, at the same time,
preserve Petro Star's ability to make a profit on the gallons it
refines as well as appropriately compensate shippers for Petro
Star degrading their crude oil by re-injecting streams from the
refinery after the processing.
1:59:09 PM
REPRESENTATIVE SEATON asked how this would impact the other
refineries in the state.
MR. CHAPADOS answered the other refinery similarly situated to
Petro Star is Flint Hills, so the three refineries are all
treated in the same fashion with respect to the return oil
streams that the refineries send back to TAPS. Tesoro's Nikiski
refinery is not subject to the quality bank, but the quality
bank is reflected in the sales price of royalty crude oil, both
at the wellhead and in terms of royalty-in-kind (RIK) sales to
in-state refineries.
2:00:16 PM
CO-CHAIR FEIGE, in an effort to conform to the previous
amendments, moved to adopt Amendment 4 as follows:
Page 1, line 1, after "seek":
Delete "a settlement and"
There being no objection, Amendment 4 was adopted.
2:01:00 PM
CO-CHAIR FEIGE opened public testimony on HCR 22.
MERRICK PEIRCE testified regarding his concerns with the
original version of HCR 22. He said his concern is the
sulfolane issue and that something is still missing from the
resolution. He drew attention to the "Whereas" on page 2, lines
1-4, of the original resolution, which states:
WHEREAS, if the Department of Environmental
Conservation expeditiously set a reasonable cleanup
standard supported by science for the Flint Hills
Refinery and appropriately allocated the costs of
cleanup to all potentially responsible parties, it is
possible that a new buyer for the refinery could be
found;
MR. PEIRCE said there are two problems with the clause. First,
the governor has already said he would indemnify a future
purchaser of the refinery for the responsibility for the
contamination issue, making the aforementioned statement
illogical. Second, the conclusion by DEC's Division of Water
regarding acceptable contamination levels of an industrial
solvent in drinking water is in error and there is no evidence
to support that conclusion. Of main concern, he said, is
creation of an economic dead zone in this area of contamination.
When two homes are identical in price and size, but one has
contaminated drinking water and the other does not, which one
gets sold? Further, which home can be financed through a bank
mortgage? New homes will not be built here and the owners of
existing homes will find it very difficult to sell and over time
this area will look like Detroit with abandoned homes. This
final "Whereas" is without merit and he is glad it was pulled.
MR. PEIRCE said he also has concern with what is missing from
the CS, which is discussion about what can and should be done to
improve the economics of these refineries. So far the Parnell
Administration has said it wants to engage in corporate welfare
by throwing hundreds of millions of dollars at these private
companies to prop them up at a time with the administration has
created multi-billion-dollar deficits. Rational discussion
would instead place attention on trying to route a gasline
around Fairbanks. Not routing the gasline down the TAPS
corridor means it never gets to Valdez or the Valdez refinery.
The cost of energy is a huge concern for any refiner or any
large energy user. Flint Hills has publically described its
cost of operation as three times higher than other refineries.
All refiners, except Petro Star's North Pole and Valdez
refineries and Flint Hills' North Pole refinery, use natural gas
to run process equipment that heats crude to the requisite
temperatures. A refinery running on expensive ANS crude has an
extreme disadvantage against refineries that run on cheap
natural gas; the difference is roughly $4 per million British
Thermal Units (BTUs) for heat versus $30 per million BTUS. To
address this requires a large-diameter gasline with an economy
of scale that can deliver natural gas with distance-sensitive
rates of around $4 per million BTUs. What is happening with
these refineries illustrates that Alaska competes within the
world markets. The US has three trade agreements with twenty
nations, so Alaska does not look viable long term when
manufacturers can access both cheaper energy and labor overseas
without tariff restrictions. If Alaska's refiners, mines,
manufacturing businesses, and military bases are to compete in
the world markets, then a final whereas would be inserted that
makes note of the benefit of ensuring that these entities have
proximate access to a large-diameter gasline that parallels the
TAPS corridor and delivers the lowest possible cost energy.
2:05:19 PM
CO-CHAIR FEIGE closed public testimony after ascertaining no one
else wished to testify.
REPRESENTATIVE TARR noted she does not disagree with the
contents or problems stated in Version C, but said it is a vast
departure from the original measure and it would have been more
appropriate to do a new resolution.
2:06:12 PM
CO-CHAIR FEIGE opined that keeping a refining industry running
in Alaska has security and strategic benefits to the state. For
example, Russian tanks surprised Crimean citizens, and while he
does not know that that could happen in Alaska, it is a
consideration to always keep in mind. If the sea-borne supply
routes to Alaska are threatened, either up the West Coast of
North America or across the northern Pacific, not having
refineries could be an extreme disadvantage to Alaska as well as
impacting its economy. The economic benefit of refineries in
the state is significant, especially in the Fairbanks area. The
arguments regarding the quality bank are valid issues that can
be resolved and this resolution will go a long ways towards
helping the state, industry, and FERC come to an agreement on
how better to apply the concept of a quality bank.
2:07:55 PM
REPRESENTATIVE SEATON agreed that value-added industry for the
state's raw resources is very beneficial; however, he continued,
it is a world economy and it needs to be ensured that Alaska is
competitive. He said he is happy the resolution does not seek a
cost differential for in-state because he believes that would be
a huge liability for sales of the state's crude to out-of-state
refiners. The quality bank issues are a good portion of
resolving the problems. If Petro Star does not have a heat
contract with Alyeska Pipeline Service Company it should be
another element in addition to the quality bank because adding
heat to the pipeline to keep TAPS running during the winter is a
huge issue and has value and ought to be recognized in
commercial agreements. Otherwise, in-state refineries are being
asked to subsidize Alyeska, although the state does pay part of
that. He said he will be supporting the resolution but does not
think it is the only mechanism for getting greater value for in-
state refineries.
2:10:21 PM
REPRESENTATIVE HAWKER moved to report the proposed committee
substitute (CS), Version 28-LS1536\C, Bullock, 4/16/14, as
amended, out of committee with individual recommendations and
the accompanying fiscal notes. There being no objection, CSHCR
22(RES) was reported from the House Resources Standing
Committee.
The committee took an at-ease from 2:10 p.m. to 2:12 p.m.
2:12:31 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 2:13 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HCR 22 CS Work Draft Version C.pdf |
HRES 4/16/2014 1:00:00 PM |
HCR 22 |