Legislature(2021 - 2022)SENATE FINANCE 532

04/05/2022 01:00 PM Senate FINANCE

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Audio Topic
01:02:07 PM Start
01:02:31 PM SB239 || SB240
01:38:05 PM Public Testimony: Sb 239
01:41:17 PM SB240
01:41:47 PM Public Testimony: Sb 240
01:48:45 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ SB 239 APPROVE PETRO STAR INC. ROYALTY OIL SALE TELECONFERENCED
Heard & Held
-- Invited & Public Testimony --
-- <Time Limit May Be Set> --
+ SB 240 APPROVE MARATHON PETRO ROYALTY OIL SALE TELECONFERENCED
Heard & Held
-- Invited & Public Testimony --
-- <Time Limit May Be Set> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                       April 5, 2022                                                                                            
                         1:02 p.m.                                                                                              
                                                                                                                                
1:02:07 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Bishop called the  Senate Finance Committee meeting                                                                    
to order at 1:02 p.m.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Click Bishop, Co-Chair                                                                                                  
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Lyman Hoffman                                                                                                           
Senator Donny Olson                                                                                                             
Senator Natasha von Imhof                                                                                                       
Senator Bill Wielechowski                                                                                                       
Senator David Wilson                                                                                                            
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Jhonny Meza,  Commercial Analyst,  Division of Oil  and Gas,                                                                    
Department of Natural Resources.                                                                                                
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Adi Chaobal,  Commercial Analyst,  Division of Oil  and Gas,                                                                    
Department  of  Natural   Resources;  Chalinda  Weerasinghe,                                                                    
Commercial Analyst,  Division of Oil and  Gas, Department of                                                                    
Natural  Resources; Doug  Chapados,  President, Petro  Star;                                                                    
Casey  Sullivan,  Government  and  Public  Affairs  Manager,                                                                    
Marathon Petroleum.                                                                                                             
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
SB 239    APPROVE PETRO STAR INC. ROYALTY OIL SALE                                                                              
                                                                                                                                
          SB 239 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
SB 240    APPROVE MARATHON PETRO ROYALTY OIL SALE                                                                               
                                                                                                                                
          SB 240 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
SENATE BILL NO. 239                                                                                                           
                                                                                                                                
     "An Act approving and ratifying the sale of royalty                                                                        
     oil by the State of Alaska to Petro Star Inc.; and                                                                         
     providing for an effective date."                                                                                          
                                                                                                                                
SENATE BILL NO. 240                                                                                                           
                                                                                                                                
     "An  Act approving  and ratifying  the sale  of royalty                                                                    
     oil  by  the  State  of Alaska  to  Marathon  Petroleum                                                                    
     Supply and  Trading Company LLC;  and providing  for an                                                                    
     effective date."                                                                                                           
                                                                                                                                
1:02:31 PM                                                                                                                    
                                                                                                                                
Co-Chair Bishop  relayed that it  was the first  hearing for                                                                    
SB  239  and  SB  240.  The  committee  would  hear  a  bill                                                                    
introduction and a presentation.                                                                                                
                                                                                                                                
1:03:47 PM                                                                                                                    
                                                                                                                                
JHONNY MEZA,  COMMERCIAL ANALYST,  DIVISION OF OIL  AND GAS,                                                                    
DEPARTMENT   OF  NATURAL   RESOURCES,  explained   that  the                                                                    
department  had  prepared  a  presentation  summarizing  the                                                                    
royalty in-kind contracts  for the sale of  royalty oil from                                                                    
the North  Slope to in-state  refineries Marathon  and Petro                                                                    
Star.  He noted  that there  had  been close  to an  8-month                                                                    
period  that  the  department  had  carefully  followed  the                                                                    
language of the regulations  and statutes governing the sale                                                                    
of  royalty   oil  from  the  North   Slope.  Following  the                                                                    
regulatory  and   statutory  requirements,   the  department                                                                    
maintained the process open to  the public, and also allowed                                                                    
for  public comment  through  publication  of a  preliminary                                                                    
best-interest finding.                                                                                                          
                                                                                                                                
Mr.  Meza discussed  the presentation  "The Process  for the                                                                    
Sale   of  ANS   Royalty  Oil   In-Kind  and   the  Proposed                                                                    
Contractors with  Marathon and  Petro Star -  SB 239  and SB
240," (copy on file).                                                                                                           
                                                                                                                                
Mr. Meza  showed slide 2,  "CONTRACT TERMS FOR  MARATHON and                                                                    
PETRO STAR.                                                                                                                     
                                                                                                                                
1:05:03 PM                                                                                                                    
                                                                                                                                
Mr. Meza  turned to  slide 3,  "CONTRACT TERMS  FOR MARATHON                                                                    
AND  PETRO  STARb-  OVERVIEW  OF  RECENT  AND  PROPOSED  RIK                                                                    
CONTRACT  TERMS,"  which  showed  a table  listing  the  two                                                                    
currently  proposed contracts  at the  bottom: Marathon  for                                                                    
2022  and Petro  Star for  2022,  and also  the most  recent                                                                    
contracts  the  state had  entered  since  2016. The  second                                                                    
column  showed  duration of  the  contracts,  with the  most                                                                    
recent being  for three  and five  years. He  explained that                                                                    
the  duration   of  the  contracts  was   important  because                                                                    
statutory  language  determined  that  for  every  long-term                                                                    
contract  that the  Department  of  Natural Resources  (DNR)                                                                    
entered for  the sale of royalty  oil, it must look  for the                                                                    
approval  of the  legislature  before  the commissioner  can                                                                    
execute the contracts. He noted  that there was an exception                                                                    
if the  contracts lasted one  year and were entered  for the                                                                    
purpose of relieving storage or  market conditions, which is                                                                    
what DNR did for the one-year contracts seen on the table.                                                                      
                                                                                                                                
                                                                                                                                
Senator Wielechowski thought it  looked as though the Tesoro                                                                    
royalty  in-kind (RIK)  contract expired  the previous  July                                                                    
and wondered where Tesoro was getting its oil currently.                                                                        
                                                                                                                                
Mr. Meza  stated that the  best interest  findings published                                                                    
by DNR  detailed how  much oil  the Kenai  refinery obtained                                                                    
from  the North  Slope  and Cook  Inlet  combined, which  he                                                                    
thought was  about 80 percent.  He thought the  remaining 20                                                                    
percent of  the oil  was obtained  from foreign  sources and                                                                    
the Lower 48.                                                                                                                   
                                                                                                                                
Senator Wielechowski asked if there  was a reason Tesoro did                                                                    
not use 100 percent of its  oil from Alaska. He asked if Mr.                                                                    
Meza knew the source of the foreign oil.                                                                                        
                                                                                                                                
Mr.  Meza detailed  that the  department, when  offering its                                                                    
royalty oil,  published a solicitation of  interest in order                                                                    
to gauge  the refineries  demand for  royalty oil.  He noted                                                                    
that  Alaskas  oil  was subject  to competitive  forces, and                                                                    
the  refineries  compared   prices  from  different  sources                                                                    
including foreign sources of crude.  He thought the refinery                                                                    
sporadically obtained  the foreign  sources of  crude rather                                                                    
than  on a  long-term basis.  He did  not know  the specific                                                                    
regions from which the foreign oil was obtained.                                                                                
                                                                                                                                
Co-Chair Bishop understood  that the state did  not know the                                                                    
source of the  foreign oil and whether it  was from offshore                                                                    
from the United States or other countries.                                                                                      
                                                                                                                                
Mr. Meza relayed  that the department had not  asked for the                                                                    
information.                                                                                                                    
                                                                                                                                
Senator  Wielechowski  asked if  any  of  the oil  was  from                                                                    
Russia.                                                                                                                         
                                                                                                                                
Mr. Meza did not know.                                                                                                          
                                                                                                                                
Co-Chair Bishop stated that the committee would find out.                                                                       
                                                                                                                                
1:08:33 PM                                                                                                                    
                                                                                                                                
Mr. Meza continued  to discuss slide 3. He  pointed out that                                                                    
the third column  showed royalty barrels that  were for sale                                                                    
throughout  the contracts,  and  observed that  some of  the                                                                    
older contracts had sold about  20,000 to 25,000 barrels per                                                                    
day, which  had been  declining and may  be a  reflection on                                                                    
the  particular  demand  for   royalty  oil.  The  currently                                                                    
proposed  contracts  were  for  the sale  10,000  to  15,000                                                                    
barrels  per day  for Marathon;  and for  Petro Star  12,500                                                                    
barrels  per day  for  the first  three  years, and  between                                                                    
10,000 and  12,500 barrels per  day for the  remaining three                                                                    
years.                                                                                                                          
                                                                                                                                
Mr.  Meza   continued  to  address  slide   3.  He  directed                                                                    
attention to  the column  that showed the  way that  DNR and                                                                    
the royalty oil  buyers had agreed in  determining the value                                                                    
of royalty oil  in kind at the field. He  continued that DNR                                                                    
sold the  royalty oil  at the field  and explained  that the                                                                    
valuation process  needed to be  done in a  more transparent                                                                    
way. He  discussed deductions and adjustments  and mentioned                                                                    
the RIK differential. He described  a  net back  methodology                                                                    
and noted that  the price of oil was determined  on the U.S.                                                                    
West  Coast, and  it  was  how both  parties  had agreed  to                                                                    
arrive at  the value  of the  oil. He  noted that  the final                                                                    
column gave  information on the  RIK differential.  He noted                                                                    
that the  contracts for  2016 were  at $1.95/bbl,  which had                                                                    
increased  to $2.23/bbl  for Marathon  and  $2.25 for  Petro                                                                    
Star.                                                                                                                           
                                                                                                                                
Mr. Meza spoke to slide  4, "CONTRACT TERMS FOR MARATHON AND                                                                    
PETRO STAR -  RIK DIFFERENTIAL IS THE SOURCE  OF THE PREMIUM                                                                    
OF RIK OVER  RIV," which showed two flow  charts providing a                                                                    
graphical comparison  of how  the value  of royalty  oil was                                                                    
determined, whether  the state  chose to  value the  oil in-                                                                    
value  or  when  it  selected  the oil  to  be  in-kind.  He                                                                    
highlighted that the  left side of the  slide showed royalty                                                                    
in-value.  He noted  that  most of  the  Alaska North  Slope                                                                    
(ANS) oil was sold on the  U.S. West Coast. He discussed the                                                                    
state taking  a share  of the  proceeds from  lessees, after                                                                    
assessing   the  oil   at  the   field   and  deduction   of                                                                    
transportation casts and  adjustments for differing quality.                                                                    
He made  note of  the numbers  presented as  an illustrative                                                                    
example.                                                                                                                        
                                                                                                                                
Mr. Meza  continued to  address slide 4  and the  graphic on                                                                    
the right which showed how the state priced royalty oil in-                                                                     
kind. There was a similar  net-back methodology, but the oil                                                                    
was  no  longer  physically  transported to  the  U.S.  West                                                                    
Coast.  In   substitution  for  the   marine  transportation                                                                    
allowance,  DNR  used  the  RIK  differential.  The  example                                                                    
showed all elements were at the  same value save for the RIK                                                                    
differential. He made  note of the numbers  presented in the                                                                    
example.                                                                                                                        
                                                                                                                                
1:13:46 PM                                                                                                                    
                                                                                                                                
Senator  Wielechowski considered  slide  3  and thought  the                                                                    
total the state  was putting out for RIK  was between 20,000                                                                    
to 30,000  barrels per day.  He was curious about  the total                                                                    
amount of barrels available.                                                                                                    
                                                                                                                                
Mr. Meza  relayed that the  total royalty that  DNR expected                                                                    
to obtain  from ANS  production was  a range  between 40,000                                                                    
barrels  per day  and 70,000  barrels per  day. He  reminded                                                                    
that the  number was dependent upon  the production forecast                                                                    
and different royalty rates in the leases.                                                                                      
                                                                                                                                
Senator  Wielechowski asked  if there  was a  public bidding                                                                    
process for RIK oil.                                                                                                            
                                                                                                                                
Mr.  Meza explained  that DNR  published  a solicitation  of                                                                    
interest, and  mentioned that the statutory  language stated                                                                    
that  the default  for  the RIK  oil sales  should  be on  a                                                                    
competitive basis.  He detailed that in  the solicitation of                                                                    
interest   the  department   invited  responses   by  market                                                                    
participants in royalty oil. In  the current iteration there                                                                    
were only two interested responses.                                                                                             
                                                                                                                                
Senator Wielechowski  asked if Marathon and  Petro Star were                                                                    
the only two companies that had  requested a bid, and if the                                                                    
amount of oil requested was listed on the slide.                                                                                
                                                                                                                                
Mr. Meza  relayed that the  initial requirements  had varied                                                                    
slightly. Through  the negotiation process, DNR  was able to                                                                    
obtain higher volume of sales of  royalty oil for one of the                                                                    
buyers.                                                                                                                         
                                                                                                                                
1:16:09 PM                                                                                                                    
                                                                                                                                
Senator  Wielechowski thought  the state  had anywhere  from                                                                    
20,000 to 40,000 additional barrels  that would be sold down                                                                    
the pipeline.                                                                                                                   
                                                                                                                                
Mr. Meza  agreed, unless the state  submitted a solicitation                                                                    
of interest for a second time.                                                                                                  
                                                                                                                                
Senator Wielechowski  assumed that  the amounts  shown would                                                                    
be maximum  amount of oil  that would be needed  by Marathon                                                                    
and Petro Star.                                                                                                                 
                                                                                                                                
Mr. Meza stated  that the amounts were the  maximum that the                                                                    
companies would need from the state.                                                                                            
                                                                                                                                
Senator Wielechowski  asked if  Tesoro was getting  a better                                                                    
deal from producers directly to  replace the oil it got from                                                                    
the state.                                                                                                                      
                                                                                                                                
Mr. Meza explained  that the Kenai refinery  was operated by                                                                    
Marathron, which obtained 80 percent  of its crude oil needs                                                                    
from  a   combination  of  ANS  producers   and  Cook  Inlet                                                                    
producers,  private  producers,  including the  royalty  oil                                                                    
from the state.                                                                                                                 
                                                                                                                                
Co-Chair  Bishop thought  that the  committee could  inquire                                                                    
directly to Marathon through invited testimony.                                                                                 
                                                                                                                                
Mr.  Meza addressed  slide 5,  "CONTRACT TERMS  FOR MARATHON                                                                    
AND  PETRO STAR  - RIK  DIFFERENTIAL  IS THE  SOURCE OF  THE                                                                    
PREMIUM OF RIK OVER RIV":                                                                                                       
                                                                                                                                
     • There is a consistent difference between the marine                                                                    
        transportation allowance and the negotiated values                                                                      
        of the RIK differential.                                                                                                
     • Why, for the proposed RIK contracts, is the RIK                                                                        
        differential higher?                                                                                                    
          o When the in-state refineries buy ANS oil from                                                                       
             North Slope producers, they use a similar                                                                          
             netback methodology for arriving at the price                                                                      
             of ANS oil at the field.                                                                                           
          o In    doing   so,    they   use    a   "location                                                                    
             differential."                                                                                                     
          o DOR publishes the weighted average of these                                                                         
             location differentials for all contracts for                                                                       
            the sale of ANS oil within Alaska.                                                                                  
          o From the perspective of the RIK buyer, the                                                                          
             royalty oil in-kind needs to be as competitive                                                                     
             as other sources of crude oil from the North                                                                       
             Slope.                                                                                                             
                                                                                                                                
Mr.  Meza explained  that  the graph  on  slide 5,  entitled                                                                    
 Marine  transportation,  RIK   differential,  and  location                                                                    
differential,   provided   historical  information   on  the                                                                    
comparison  highlighted  on  previous slides.  The  distance                                                                    
between between  the marine transportation cost  (blue line)                                                                    
and  the  RIK  differential   (grey  line)  represented  the                                                                    
premium that  DNR obtained  by selling  its royalty  oil in-                                                                    
kind  versus receiving  it in-value.  He explained  that the                                                                    
dotted line on the graph  represented what the Department of                                                                    
Revenue published every year,  known as the weighted average                                                                    
differential,  which   signified  a  deduction   that  third                                                                    
parties used when selling ANS  oil within the state. At that                                                                    
point in the  sale, the oil was not used  outside Alaska and                                                                    
transportation deductions were not  taken. He noted that the                                                                    
purpose of showing the dotted line  in the graph was to have                                                                    
an indication of  where the market for ANS  oil sales within                                                                    
the state was going. He pointed out the upward trend.                                                                           
                                                                                                                                
Co-Chair Bishop  summarized that  Mr. Meza  had communicated                                                                    
that  regarding the  weighted average  on  the DOR  location                                                                    
differential, because of the  increased production the state                                                                    
had more RIK oil to offer on the market.                                                                                        
                                                                                                                                
Mr. Meza agreed.                                                                                                                
                                                                                                                                
1:20:10 PM                                                                                                                    
                                                                                                                                
Senator Wielechowski asked if it  would lower the tariff for                                                                    
everyone if there was more  oil in the pipeline, which would                                                                    
bring  the state  more tax  revenue. He  was curious  if the                                                                    
matter had been considered.                                                                                                     
                                                                                                                                
Mr. Meza  answered "yes." He affirmed  that the relationship                                                                    
that  Senator  Wielechowski   highlighted  was  correct.  He                                                                    
affirmed  that the  more through-put  the state  had in  the                                                                    
Trans-Alaska   Pipeline   System  (TAPS),   the   per-barrel                                                                    
transportation costs  would be  lower and the  proceeds from                                                                    
the sale  of royal  oil in-kind would  be greater.  He noted                                                                    
that DNR  focused on total  proceeds as well  as incremental                                                                    
revenue.                                                                                                                        
                                                                                                                                
Co-Chair  Stedman thought  the topic  came up  every several                                                                    
years.  He  asked  Mr.  Meza  to  highlight  the  difference                                                                    
between  the  current  proposal for  RIK  oil  currently  as                                                                    
compared  to previous  versions.  He wondered  if there  was                                                                    
anything the legislature should  be paying special attention                                                                    
to.                                                                                                                             
                                                                                                                                
Mr. Meza went back to slide  3 and noted that one purpose of                                                                    
the table was  to compare the current terms  of the proposed                                                                    
contracts  with the  contracts seen  in the  past. One  main                                                                    
difference  that could  be seen  was  the value  of the  RIK                                                                    
differential, which  had increased  from $1.95 to  $2.23 and                                                                    
$2.25, which signified  a further reduction in  the value of                                                                    
royalty oil  by approximately $.30. The  slide that followed                                                                    
showed  evidence of  why DNR  believed  that increasing  the                                                                    
deduction  still   corresponded  to  what  the   market  was                                                                    
assessing,  but  also  allowed  DNR  to  obtain  incremental                                                                    
revenue  versus the  other  option  of royalty-in-value.  He                                                                    
noted  that future  slides  would  continue showing  current                                                                    
contracts compared to previous contracts.                                                                                       
                                                                                                                                
1:23:05 PM                                                                                                                    
                                                                                                                                
Mr.  Meza addressed  slide 6,  "CONTRACT TERMS  FOR MARATHON                                                                    
AND PETRO  STAR - FLEXIBILITY  FOR BUYER AND  SELLER," which                                                                    
showed a  table showing a  comparison of contract  terms. He                                                                    
noted that  throughout the contracts beginning  in 2016, the                                                                    
RIK  buyer (the  refinery  in  Alaska) obtained  significant                                                                    
flexibility that  perhaps they might  not be able  to obtain                                                                    
through  other contracts  with  third  parties from  private                                                                    
suppliers.  One  of the  provisions  was  that the  refinery                                                                    
could ask  for no barrels  for up to two  consecutive months                                                                    
or for three months with  using the  turnaround clause.  The                                                                    
clause  was   something  to  use  if   there  was  scheduled                                                                    
maintenance of  facilities and  no need  to buy  royalty oil                                                                    
in-kind.  The  refinery  could   also  request  a  permanent                                                                    
reduction of the nominations of  royalty oil, subject to the                                                                    
approval of the DNR commissioner.                                                                                               
                                                                                                                                
Senator Wielechowski assumed  that if there was  a period of                                                                    
time  in  which  no  barrels were  nominated,  the  oil  got                                                                    
shipped down the pipeline and sold royalty in-value.                                                                            
                                                                                                                                
Mr. Meza answered in the affirmative.                                                                                           
                                                                                                                                
Mr. Meza  continued to address  slide 6. He  reiterated that                                                                    
the  contracts provided  flexibility for  the buyer  and the                                                                    
state. He added that if for  some reason the producers had a                                                                    
lower  expectation for  production, there  was less  royalty                                                                    
oil  for  sale  and  the   state  would  not  be  harmed  by                                                                    
guaranteeing any amount. There was  a provision by which the                                                                    
department could limit its delivery  of royalty oil up to 95                                                                    
percent.  There was  no guarantee  related  to the  quality,                                                                    
quantity, or the source of  royalty oil to the buyers, which                                                                    
would take whatever the state  received. If there was excess                                                                    
royalty to  be offered  and the buyers  had the  demand, the                                                                    
contract would allow for incremental sale.                                                                                      
                                                                                                                                
1:26:22 PM                                                                                                                    
                                                                                                                                
Senator Wielechowski  asked about the marketing  for royalty                                                                    
in-value oil, and whether the state paid a fee.                                                                                 
                                                                                                                                
Mr.  Meza informed  that the  state did  not pay  a fee.  He                                                                    
expanded that DNR looked at  contracts and received proceeds                                                                    
subject  to  other  provisions  in the  oil  and  gas  lease                                                                    
contracts that  allowed for  the state to  arrive at  a fair                                                                    
market valuation of the royalty oil.                                                                                            
                                                                                                                                
Senator Wielechowski  asked if  there had  been any  sort of                                                                    
look-back to  see how the  states  prices compared  to those                                                                    
of major producers.                                                                                                             
                                                                                                                                
Mr. Meza affirmed that DNR  did perform a look-back exercise                                                                    
and thought  that in the  final best interest  finding there                                                                    
was  a chart  showing how  much more  revenue the  state has                                                                    
obtained  by  selling its  royalty  oil  in-kind versus  the                                                                    
alternative. On average the state  had received a premium of                                                                    
$.93 for each barrel of royalty oil in-kind it sold.                                                                            
                                                                                                                                
Senator Wielechowski  was curious how the  state compared to                                                                    
producers.                                                                                                                      
                                                                                                                                
Mr.  Meza informed  that the  $.93 was  a comparison  of the                                                                    
price of royalty oil that  the state obtained by selling via                                                                    
its contracts for royalty oil  in kind versus what the state                                                                    
would  receive from  lessees or  producers as  proceeds from                                                                    
contracts by the sale of their own equity oil.                                                                                  
                                                                                                                                
Senator Wielechowski  thought the amount was   really good.                                                                     
He wondered how  it was possible that the  state was getting                                                                    
such a high premium in the oil industry.                                                                                        
                                                                                                                                
Mr.  Meza relayed  that the  success was  mainly due  to the                                                                    
fact  that the  oil was  not being  transported to  the U.S.                                                                    
West  Coast,   and  there  was   no  deduction   for  marine                                                                    
transportation. In place  of the deduction, the  state had a                                                                    
much lower negotiated deduction (RIK differential).                                                                             
                                                                                                                                
1:29:10 PM                                                                                                                    
                                                                                                                                
Mr. Meza advanced  to slide 7, "CONTRACT  TERMS FOR MARATHON                                                                    
AND PETRO STAR - OTHER  PROVISIONS," which showed a table of                                                                    
contract   comparisons  which   focused  on   the  financial                                                                    
assurance of contracts. He mentioned  the risk of default by                                                                    
the   buyer  (the   refinery  or   its  parent   company  or                                                                    
guarantor), which was  an area the state  paid attention to.                                                                    
He described  that in the provisions,  the guarantor offered                                                                    
the state the options of a  letter of credit, a surety bond,                                                                    
or an  opinion letter  by a  financial analyst  attesting to                                                                    
the quality  of the guarantor. He  discussed the calculation                                                                    
for  a  financial assurance  amount,  which  had varied  for                                                                    
different  refineries and  was  an  outcome of  negotiations                                                                    
between DNR and the refineries.                                                                                                 
                                                                                                                                
Mr.  Meza  continued that  there  was  also a  retroactivity                                                                    
provision, because  once the invoice  was sent to  the buyer                                                                    
calculating the  value of royalty  oil and the amount  to be                                                                    
paid,  there could  be further  changes to  elements in  the                                                                    
calculation. Both  the buyer and  seller had the  ability to                                                                    
request  a recalculation  based on  new information  such as                                                                    
Federal   Energy  Regulatory   Commission  (FERC)   mandated                                                                    
revisions or  quality adjustments.  There was  an eight-year                                                                    
period  that allowed  for such  readjustments,  even if  the                                                                    
contract was terminated before that  time. Lastly there were                                                                    
other provisions  encouraging the buyer to  use commercially                                                                    
reasonable  efforts to  manufacture the  refined product  in                                                                    
the state.  As stated  in the  final best  interest finding,                                                                    
the  refineries  primarily   provided  refined  products  to                                                                    
Alaska, and only  a minor part of production  went to Canada                                                                    
or  the   Pacific  Northwest.   He  mentioned   a  provision                                                                    
encouraging the employment of Alaska residents.                                                                                 
                                                                                                                                
Senator Wielechowski asked if Mr.  Meza knew how many Alaska                                                                    
residents were  hired by  Marathon and  Petro Star  and what                                                                    
percentage the hires represented.                                                                                               
                                                                                                                                
Mr. Meza thought his colleagues  would have a precise number                                                                    
to answer Senator Wielechowski's question.                                                                                      
                                                                                                                                
1:32:22 PM                                                                                                                    
                                                                                                                                
ADI CHAOBAL,  COMMERCIAL ANALYST,  DIVISION OF OIL  AND GAS,                                                                    
DEPARTMENT  OF   NATURAL  RESOURCES   (via  teleconference),                                                                    
addressed Senator  Wielechowski's question. He  relayed that                                                                    
Marathon   reported   220   full-time   employees   and   60                                                                    
contractors  hired   from  within   Alaska  for   its  Kenai                                                                    
refinery. Marathon also reported  an additional 40 employees                                                                    
at terminals in Anchorage and North Pole.                                                                                       
                                                                                                                                
Co-Chair Bishop asked about  Marathons  percentage of Alaska                                                                    
hire.                                                                                                                           
                                                                                                                                
Mr.  Chaobal  relayed  that  Marathon  had  not  provided  a                                                                    
percentage for its Alaska hire.                                                                                                 
                                                                                                                                
Co-Chair Bishop asked Mr. Chaobal  to provide the percentage                                                                    
information at a later time.                                                                                                    
                                                                                                                                
Senator  Wielechowski  asked if  Mr.  Chaobal  had the  same                                                                    
information related to Petro Star.                                                                                              
                                                                                                                                
1:34:09 PM                                                                                                                    
                                                                                                                                
CHALINDA  WEERASINGHE, COMMERCIAL  ANALYST, DIVISION  OF OIL                                                                    
AND    GAS,   DEPARTMENT    OF   NATURAL    RESOURCES   (via                                                                    
teleconference),  relayed that  Petro Star  had reported  80                                                                    
full-time  high paying  positions  at  both refineries,  and                                                                    
employed  275  positions  companywide. Petro  Star  reported                                                                    
that the  refineries were 100  percent staffed  by residents                                                                    
of  Alaska, and  99 percent  of the  company was  staffed by                                                                    
Alaskan residents.                                                                                                              
                                                                                                                                
Mr.  Meza addressed  slide 8,  "CONTRACT TERMS  FOR MARATHON                                                                    
AND PETRO STAR  - CONTRACTS ARE IN THE BEST  INTEREST OF THE                                                                    
STATE," which  showed a table  comparing contract  terms and                                                                    
focusing  on  the  addition  of  revenue  that  state  would                                                                    
obtain.  He highlighted  that beginning  with a  contract in                                                                    
2016,  the  state  obtained an  additional  $31  million  in                                                                    
incremental revenue. Had the state  received the barrels in-                                                                    
value,  it  would not  have  obtained  the $31  million.  He                                                                    
listed revenue  amounts from the contracts  listed on table,                                                                    
which  were  in  addition  to  what  the  state  would  have                                                                    
received  if it  had  elected  to take  100  percent of  its                                                                    
royalty  oil in-value.  For contracts  that had  not expired                                                                    
there were  estimates with a  range of  possible incremental                                                                    
revenues.                                                                                                                       
                                                                                                                                
Senator  Wielechowski  referenced  many  disputes  over  the                                                                    
years related  to tariff costs  with producers.  He wondered                                                                    
if the  state had similar  legal disputes or  other disputes                                                                    
over what the RIK should be.                                                                                                    
                                                                                                                                
Mr.  Meza had  not seen  any legal  disputes with  buyers of                                                                    
royalty oil in-kind.                                                                                                            
                                                                                                                                
1:36:47 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
1:37:06 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Senator  Wielechowski requested  copies of  the bid  packet,                                                                    
the best interest  finding, and copies of  the contracts the                                                                    
state had  approved. He asked  if there were  any dissenting                                                                    
votes on the royalty board in approving the contracts.                                                                          
                                                                                                                                
Mr.  Meza   affirmed  that   the  best   interest  findings,                                                                    
responses  to  solicitation  of interest  and  the  proposed                                                                    
contracts were all public, and  the department would provide                                                                    
them  to Senator  Wielechowski  directly.  He informed  that                                                                    
there  were no  dissenting  votes and  the  board had  given                                                                    
unanimous recommendations of approval of the contracts.                                                                         
                                                                                                                                
SENATE BILL NO. 239                                                                                                           
                                                                                                                                
     "An Act approving and ratifying the sale of royalty                                                                        
     oil by the State of Alaska to Petro Star Inc.; and                                                                         
     providing for an effective date."                                                                                          
                                                                                                                                
^Public Testimony: SB 239                                                                                                     
                                                                                                                                
1:38:05 PM                                                                                                                    
                                                                                                                                
Co-Chair Bishop OPENED public testimony on SB 239.                                                                              
                                                                                                                                
1:38:21 PM                                                                                                                    
                                                                                                                                
DOUG CHAPADOS,  PRESIDENT, PETRO STAR  (via teleconference),                                                                    
testified in  support of SB  239. He  shared that he  was in                                                                    
support  of  Petro  Stars  proposed  five-year  royalty  oil                                                                    
contract.  He shared  that  Petro Star  was  a wholly  owned                                                                    
subsidiary of the Arctic Slope  Regional Corporation and was                                                                    
the states  only Alaskan-owned refiner.  In addition to fuel                                                                    
distribution   terminals  located   in  Anchorage,   Valdez,                                                                    
Kodiak, Dutch  Harbor, and Interior Alaska,  Petro Star also                                                                    
operated  two of  the  states  three commercial  refineries,                                                                    
both  of  which  drew  crude  oil  directly  from  TAPS.  He                                                                    
emphasized that TAPS  was Petro Stars  only  source of crude                                                                    
oil, which  meant that the  contracts such as the  one being                                                                    
considered were crucial to operation.                                                                                           
                                                                                                                                
Mr.  Chapados continued  his  testimony.  He described  that                                                                    
Petro Star  produced a  variety of  products from  crude oil                                                                    
including jet fuel for commercial  airlines, as well as over                                                                    
90 percent  of the  jet fuel consumed  at the  United States                                                                    
Department  of   Defense  and  United  States   Coast  Guard                                                                    
installations   located   across   the  state.   He   listed                                                                    
additional  products including  heating  oil, diesel  fuels,                                                                    
asphalt oil  for road paving,  and specialized fuel  for two                                                                    
Alaskan  electrical  associations.  He referenced  the  best                                                                    
interest  finding, which  concluded  that  the contract  was                                                                    
good  for the  state  in maximizing  revenues from  Alaskas                                                                     
royalty  oil  share and  would  help  maintain the  in-state                                                                    
petroleum  refining  industry while  preserving  competition                                                                    
within  the   states   fuels   market.  He   encouraged  the                                                                    
committee to approve the royalty oil contract.                                                                                  
                                                                                                                                
Co-Chair  Bishop  commented  that  congratulations  were  in                                                                    
order regarding Petro Stars Alaska hire numbers.                                                                                
                                                                                                                                
Mr.  Chapados cited  that Petro  Star had  approximately 275                                                                    
employees, and all but two were located in the state.                                                                           
                                                                                                                                
Co-Chair Bishop CLOSED public testimony for SB 239.                                                                             
                                                                                                                                
SENATE BILL NO. 240                                                                                                           
                                                                                                                                
     "An  Act approving  and ratifying  the sale  of royalty                                                                    
     oil  by  the  State  of Alaska  to  Marathon  Petroleum                                                                    
     Supply and  Trading Company LLC;  and providing  for an                                                                    
     effective date."                                                                                                           
                                                                                                                                
1:41:17 PM                                                                                                                    
                                                                                                                                
^Public Testimony: SB 240                                                                                                     
                                                                                                                                
Co-Chair Bishop OPENED public testimony for SB 240.                                                                             
                                                                                                                                
1:41:47 PM                                                                                                                    
                                                                                                                                
CASEY  SULLIVAN,  GOVERNMENT  AND  PUBLIC  AFFAIRS  MANAGER,                                                                    
MARATHON  PETROLEUM   (via  teleconference),   testified  in                                                                    
support of  SB 240. He  detailed that the bill  would ratify                                                                    
the  three-year  contract  between the  state  and  Marathon                                                                    
Petroleum.  He  commented that  the  contract  would have  a                                                                    
positive impact  and would optimize operations  at the Kenai                                                                    
refinery.  He   described  that  Marathon  was   a  leading,                                                                    
integrated  downstream  energy  company  that  operated  the                                                                    
nations   largest refining  system. He  noted that  Marathon                                                                    
had a  sister company,  NPLX, that  was a  midstream company                                                                    
that operated  gathering, processing, and other  aspects. He                                                                    
reminded that  Marathon had  merged with  Endeavor (formerly                                                                    
Tesoro) in October of 2018.                                                                                                     
                                                                                                                                
Mr. Sullivan  recalled that the  company had  been operating                                                                    
the  Kenai  refinery since  1969  and  was one  of  Alaskas                                                                     
longest   in-state  manufacturers   that  produced   quality                                                                    
transportation fuels for the state.  He cited that the Kenai                                                                    
refinery could  produce about  868,000 barrels  per calendar                                                                    
day,  and   the  primary  focus   was  on  jet   and  diesel                                                                    
production, followed  by gasoline, heavy fuel  oil, propane,                                                                    
and asphalt. He  cited that Marathon was one  of the primary                                                                    
providers for jet  fuel for the Anchorage  airport. He added                                                                    
that  Marathon  had  terminals   in  Nikiski,  the  Port  of                                                                    
Anchorage, and  in North Pole,  via which it  moved products                                                                    
to communities.                                                                                                                 
                                                                                                                                
Mr.  Sullivan  continued  his  testimony.  He  relayed  that                                                                    
Marathon  was one  of  the largest  taxpayers  in the  Kenai                                                                    
Peninsula  Borough, it  provided approximately  250 jobs  at                                                                    
the refinery with an additional  50 full time contracts that                                                                    
worked year-round.  Marathon also employed an  additional 37                                                                    
Alaskan  operators that  worked  at  terminals. He  reported                                                                    
that the  company's Alaska  hire was  100 percent  for full-                                                                    
time   employees.   He   commented   on   multi-generational                                                                    
employees.                                                                                                                      
                                                                                                                                
Mr. Sullivan noted that he  had provided written comments to                                                                    
the  committee  (copy  on  file).  He  summarized  that  the                                                                    
legislation  was the  result  of  constructive dialogue  and                                                                    
productive  negotiations   between  DNR  and   Marathon.  He                                                                    
appreciated the professionalism of DNR  at all stages of the                                                                    
process.  He  commented  on the  positive  outcomes  of  the                                                                    
contract, including revenue for the state.                                                                                      
                                                                                                                                
1:46:43 PM                                                                                                                    
                                                                                                                                
Co-Chair Bishop asked  if Mr. Sullivan had  heard an earlier                                                                    
question about the  source of 20 percent of  oil obtained by                                                                    
Marathon.                                                                                                                       
                                                                                                                                
Mr. Sullivan  stated it was  Marathons  general  practice to                                                                    
not  discuss its  crude  oil sourcing.  He  shared that  the                                                                    
large  majority  of  crude  run  by  Marathon  was  Alaskan-                                                                    
produced  crude. Over  the five-year  average, Alaska  crude                                                                    
was close  to accounting for 90  percent of what was  run in                                                                    
Alaska. He  acknowledged it was true  that Marathon utilized                                                                    
a  small portion  of  imported crude  in  order to  optimize                                                                    
production,  which  could  come   from  a  wide  variety  of                                                                    
domestic or international markets.                                                                                              
                                                                                                                                
Co-Chair Bishop asked  if it was safe to say  the portion of                                                                    
crude oil was not coming from Russia.                                                                                           
                                                                                                                                
Mr. Sullivan affirmed that it was  safe to say the crude was                                                                    
not coming from Russia.                                                                                                         
                                                                                                                                
Co-Chair Bishop CLOSED public testimony for SB 240.                                                                             
                                                                                                                                
SB  239  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
SB  240  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
Co-Chair Bishop discussed the agenda  for the following day.                                                                    
He reminded  that bills  previously heard  could come  up on                                                                    
the agenda at any time.                                                                                                         
                                                                                                                                
ADJOURNMENT                                                                                                                   
1:48:45 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 1:48 p.m.                                                                                          
                                                                                                                                

Document Name Date/Time Subjects
SB 239 Sponsor Statement 3.23.22.pdf SFIN 4/5/2022 1:00:00 PM
SB 239
SB 239 Sectional Analysis 3.31.22.pdf SFIN 4/5/2022 1:00:00 PM
SB 239
SB 239 AOGA Comments SB239 3.31.22.pdf SFIN 4/5/2022 1:00:00 PM
SB 239
SB 239 and SB 240 DNR Presentation RIK 4.5.22.pdf SFIN 4/5/2022 1:00:00 PM
SB 239
SB 240
SB 240 Sectional Analysis 3.31.22.pdf SFIN 4/5/2022 1:00:00 PM
SB 240
SB 240 Sponsor Statement 3.23.22.pdf SFIN 4/5/2022 1:00:00 PM
SB 240
SB 240 AOGA Comments SB240 3.31.22.pdf SFIN 4/5/2022 1:00:00 PM
SB 240
SB 240 RIK Contract Letter_SOA_PSI_Sen. Bishop.pdf SFIN 4/5/2022 1:00:00 PM
SB 240
SB 240 Letter of Support Marathon Petroleum SEN FIN.pdf SFIN 4/5/2022 1:00:00 PM
SB 240