Legislature(2015 - 2016)BUTROVICH 205
03/30/2016 03:30 PM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Confirmation Hearing | |
| SB205 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 205 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
March 30, 2016
3:30 p.m.
MEMBERS PRESENT
Senator Cathy Giessel, Chair
Senator Mia Costello, Vice Chair
Senator John Coghill
Senator Peter Micciche
Senator Bert Stedman
Senator Bill Stoltze
Senator Bill Wielechowski
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
SENATE BILL NO. 205
"An Act approving and ratifying the sale of royalty oil by the
State of Alaska to Tesoro Corporation and Tesoro Refining and
Marketing Company LLC; and providing for an effective date."
- MOVED SB 205 OUT OF COMMITTEE
CONFIRMATION HEARING
Alaska Gasline Development Corporation
Dave Cruz
- CONFIRMATION ADVANCED
PREVIOUS COMMITTEE ACTION
BILL: SB 205
SHORT TITLE: APPROVAL OF SALE OF ROYALTY OIL TO TESORO
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
03/23/16 (S) READ THE FIRST TIME - REFERRALS
03/23/16 (S) RES, FIN
03/30/16 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
DAVE CRUZ, President and CEO
Cruz Companies
Palmer, Alaska
POSITION STATEMENT: Appointee to the Alaska Gasline Development
Corporation (AGDC).
JIM SHINE, Special Projects Assistant
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Presented SB 205.
CORRI FEIGE, Director
Division of Oil and Gas
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Answered questions related to SB 205.
MATT GILL, Senior Manager
External Affairs
Tesoro Alaska
POSITION STATEMENT: Supported SB 205.
CAMERON HUNT, Vice President and Manager
Kenai Refinery
Tesoro Alaska
POSITION STATEMENT: Commented on Tesoro contract details and SB
205.
ACTION NARRATIVE
3:30:09 PM
CHAIR CATHY GIESSEL called the Senate Resources Standing
Committee meeting to order at 3:30 p.m. Present at the call to
order were Senators Stedman, Stoltze, and Chair Giessel.
3:31:02 PM
^Confirmation Hearing
Confirmation Hearing
Alaska Gasline Development Corporation
CHAIR GIESSEL announced the confirmation hearing for Dave Cruz
as a board member to the Alaska Gasline Development Corporation
(AGDC) as the first order of business. She noted that members'
packets had an AGDC fact sheet as well as his application for
appointment. She invited Mr. Cruz to tell them why he wishes to
continue serving on the board.
DAVE CRUZ, President and CEO, Cruz Companies, Palmer, Alaska,
said he was born and raised in Alaskan. He has been an industry
person since 1976 when he was fortunate enough to work on the
pipeline right out of high school. His family has been here for
almost 90 years. He has been a business owner for over thirty
years. Currently he heads up Cruz Companies, construction,
marine, and oil field operations in Alaska, North Dakota,
Washington State, and Fort McMurray, Alberta, Canada.
MR. CRUZ said he had been on the AGDC Board since its
conception. He has served as a board member, the vice chair, the
interim president, and is currently the chairman, and feels the
gas pipeline is essential to the state. Fortunately, he has
never wanted for a job in this state and he wants to pass these
opportunities on to the next generations.
CHAIR GIESSEL asked who the attorney for AGDC is.
MR. CRUZ replied Ken Vassar, who retired at the start of the
year, was the first general counsel. Now John Burns is taking
his place. He had been with AGDC as the board chair and brought
a wealth of experience back to it.
3:33:56 PM
SENATOR WIELECHOWSKI joined the committee.
SENATOR STOLTZE noted that SB 125 had just passed the Senate and
asked if he thought there is a constructive and positive role
for ex-officios on the AGDC board.
MR. CRUZ answered that he had no objection to that. He applauded
the legislature for creating AGDC and felt it provided an
opportunity for the state to be an equal partner in AKLNG, and
if it's the legislature's wish to have two legislative members
sit on the board, he would not oppose it.
3:35:31 PM
SENATOR COGHILL joined the meeting.
SENATOR WIELECHOWSKI asked if he thought the board is more of a
technical working board or more of a policy making board.
MR. CRUZ answered that this board is not a rubber stamp board.
Members are required to be active where they bring expertise to
the committee. For instance, he serves as chair of the
Technology Committee (informally known as the PEC Committee)
that deals mainly with Permits, Engineering and Construction
(PEC).
3:36:27 PM
SENATOR COSTELLO joined the meeting.
MR. CRUZ said being on this board is a big commitment, not just
showing up once a month.
SENATOR WIELECHOWSKI asked if he has experience building
pipelines or LNG plants, or marketing gas.
MR. CRUZ answered, "Yep, I've got a lot of experience." His
companies have built pipelines and performed maintenance for
Alyeska Pipeline. He worked on the original TransAlaska Pipeline
(TAPS) and another company he controls, Alaska Interstate
Construction, has been on every major North Slope pipeline for
the last 30 years. He is past president of Associated General
Contractors of Alaska and understands the relationships in the
contracting community and what capabilities Alaskan contractors
have. He has worked on large plants and at terminal camps under
contract to Alyeska Pipeline, another maintenance project. He
has had lots of opportunity to interface on this type of
project.
SENATOR WIELECHOWSKI asked if the board is lacking in expertise
in any area.
MR. CRUZ said at the initial start of AGDC, they had to bring in
levels of expertise to make this corporation "stand up." Today,
AGDC is a running operating machine. So, it's not requiring all
tech guys, because they have gotten past that point. They
successfully delivered the ASAP project to a class 3 estimate
with a 20 percent contingency factor last year, and that project
is now on hold. AKLNG is a project that is well-planned and
well-funded moving forward. ASAP is just basically being
monitored and adding onto the technical side of AKLNG with cost
saving measures, permits, and data-sharing. He doesn't need a
whole bunch of engineers sitting next to him to facilitate this
project now. He needs people with a commercial and labor
background. The board is well-rounded today and works cohesively
as a group.
3:40:48 PM
SENATOR STOLTZE remarked that Mr. Cruz is the one "constant" on
the AGDC Board, and asked now that it has people who are
standing up for Alaskans instead of a bunch of oil executives
what his take is having served with all the members. Was it
tilted before with views antithetical to the interests of
Alaskans?
MR. CRUZ answered at that time a great wealth of knowledge was
available to deal with some large-scale pipelines like the TAPS.
That was a help at that time. They were sincere. He never felt
any member supported a special interest group. They took an oath
to do what was best for the State of Alaska and that's what they
abided by. He could ask any member of the current board to do
something, anything, even volunteer, and they will do it. He is
happy with the composition of both board memberships. When they
started out everything was new and fresh. They set out with an
initial mission, the ASAP project, and completed it. He is very
proud of that endeavor, because he saw a project get built from
a standup to a class three estimate, which is good enough to go
to bond and good enough to go to bid.
CHAIR GIESSEL recognized Hugh Short, another AGDC board member,
in the audience.
3:42:59 PM
SENATOR STEDMAN asked for a couple minute overview of what is
happening in Alberta, Canada, because it "is very critical to
other things that we do here, and we rarely have the opportunity
to have somebody who has exposure in Alberta to share with us."
MR. CRUZ said the one thing that is very interesting about Fort
McMurray is that the terrain, the trees, everything is very
similar to what one can find in Willow, Alaska. But the
remarkable thing is that Alberta has 100 companies developing
its oil sands, not just three or four. "It's the Saudi Arabia of
North America." Another remarkable thing is that it appears that
when they start talking about a pipeline in September, it's done
by the end of March. The government is not getting in the way
there and is actually facilitating these projects.
He explained that some National Geographic pictures were taken
of the earlier oil sands by someone who is against it. However,
the sheens are being cleaned up and the open pit mine is being
reclaimed. It's hard to tell where the mine was. Another thing
is the addition of a next generation of steam assisted lift
(Steam Assisted Gravity Drainage (SAGD). A pad has 10 vertical
wells and then right behind it a 45-degree well goes down that
is a steam line. The gas coming off is used to generate enough
steam so the heavy oil can be lifted up. The complexes are small
and have a small pad (a couple acres) with a station on it. A
lot of the technology is similar to Alaska's: use of ice roads
and different geotextiles. It's a very positive environment, so
one sees a lot of excitement going forward.
SENATOR STEDMAN asked what the current economic trends are in
Alberta and, maybe in the Dakotas, if he has operations there.
MR. CRUZ answered that Alberta has slowed down quite a bit, but
oil sands investments are long term, a 40 year life-span. The
Dakotas are a different environment. His company went down there
in 2010 because they had slowed down in Alaska, and the first
thing that was apparent was that the Alaska model was the
cleanest and best at working on ice - you can't tell a road was
even there the next year.
However, in North Dakota, it took 80 days to get paid, which
takes too long for his company. So, upon asking one of his
clients what was up he found that it takes him only 60 days to
get oil from drilling to production and they wanted a few extra
days to not get themselves into a cash problem. Mr. Cruz said he
could not believe that the industry had the technical expertise
to do it that fast. Here it takes 10 years, the problems being
permitting and all the other challenges that all Alaska
construction projects face. Folks in Alaska don't see the
industry, but if they were sitting in Dickinson, North Dakota,
they would be looking at five pump jacks out the window. North
Dakota is down right now, but that type of oil field takes a
flick of a switch and it comes back up, unlike Alaska where you
can't let it go cold.
SENATOR STEDMAN said if North Dakota can do it in 60 days, he
wished Alaska could do it in 120 days.
MR. CRUZ added that the permitting agency is different in North
Dakota where one is dealing with a rancher or a farm owner who
is usually welcoming you to their property. They have terms and
conditions just like here; you don't make a mess. But getting
the drilling permit in 2010 took seven days, and you could
probably get it faster.
3:51:00 PM
CHAIR GIESSEL asked how the Alberta government is responding to
the low price environment.
MR. CRUZ answered that the national Canadian government changed
and now has the approach that the industry was making too much
money. So, they changed the tax structure, which didn't help
them out at all. And then the Alberta government changed almost
for the same and created another huge problem, and now there are
some very good deals on oil field equipment in Alberta.
CHAIR GIESSEL asked if companies are paring down.
MR. CRUZ said yes, substantially, because a very strong market
went away. On a bad year in Alberta they drilled 16,000 wells
and Alaska drilled 70.
SENATOR STOLTZE asked how he communicates with the
administration.
MR. CRUZ answered that the State Gasline Team consists of the
AGDC, the Administration, the Department of Natural Resources
(DNR), Department of Revenue (DOR), the Department of Law (DOL),
and that team has a weekly meeting and is constantly interfacing
on different issues. This project has many moving parts and
operates by using a critical path schedule with a
responsibility, accountability, consulted and informed (RACI)
chart. He feels that it is working well. They also have very
good relations in the sponsor meetings in which the heads of
ConocoPhillips, ExxonMobil, BP and the governor show up, along
with the deputy commissioner and himself, as well as the AGDC
interim president; those are day-long meetings.
SENATOR STOLTZE asked if he hears from anyone with a direct line
to the governor who is not on the board. Does the governor have
a defacto designee?
MR. CRUZ answered no, but he can call the governor up and in a
minute and he will get back to him. Nobody has better access to
the governor than the board chair, the vice chair or the
president.
SENATOR WIELECHOWSKI asked about the level of independence the
AGDC has.
3:55:06 PM
MR. CRUZ replied that all the board members and the executive
team take this corporation very seriously. They have a
responsibility to do what is best for Alaska as well as this
legislature and the administration. "We are not a rubber stamp
board, at all."
SENATOR WIELECHOWSKI asked what their budget is for FY17.
MR. CRUZ answered that he would have to look at the numbers
again, but "I need you guys to make certain that we have this
thing funded."
SENATOR WIELECHOWSKI asked what the impacts would if it is not
fully funded.
MR. CRUZ said AGDC won't be able to complete its mission if that
happens. They have a fiduciary responsibility to spend this
money wisely, be accountable for it, and give results for it.
They understand Alaska's financial condition and they have pared
down. This is a world class project and they cannot pull back on
it.
3:57:21 PM
SENATOR WIELECHOWSKI asked with the downturn in the price of
oil, if our partners are concerned about spending money on this
project. Should they wait until oil prices rise again or would
that set the project back further?
3:57:40 PM
SENATOR MICCICHE joined the committee.
MR. CRUZ said if oil was $100/barrel, every economist would be
worried about the bottom, which hopefully was seen at $26 this
year. To him, now is not the time to cut back on this project,
because a lot of planning is still in place. One of the
milestones AGDC has achieved is having the Corps of Engineers
404 permit this year for a right-of-way from Prudhoe Bay to
Point MacKenzie, and that's usually one of the things that slows
a project down. AGDC has the ability to hand those permits - for
a price - to AKLNG that can facilitate a project. This was able
to happen because the funding continued. If this project is
slowed down and oil goes to $65 in two years and it starts back
up, the window of having first gas in 2022 or 2025 will be
missed.
MR. CRUZ said:
I firmly believe that we need to keep working
diligently on this project and keep it funded. We will
do our level best to be accountable for this money and
we are accurate on our budgets and continue to be able
to answer these tough questions. But unless you are
ready to go the world will pass you by....
SENATOR WIELECHOWSKI said some legislators have expressed
concern about what they perceive as being a lack of transparency
within AGDC. Is that fair?
MR. CRUZ answered it maybe appears that way, but some personnel
issues require executive sessions. No action is taken in
executive session. The board is very open and very cognizant
about what reasons exist for using executive session.
4:01:01 PM
SENATOR WIELECHOWSKI asked if he is familiar at all with the
Alaska Gasline Port Authority (AGPA).
MR. CRUZ answered no.
SENATOR WIELECHOWSKI said there has been some concern that
Governor Walker was putting the "AGPA gang" back together and
asked if he was concerned that someone is pushing an agenda that
may not be in the best interests of the AGDC or the state.
MR. CRUZ answered that at no time has anyone pushed going back
to AGPA. If this project stalls, deadlines will be missed.
SENATOR WIELECHOWSKI asked if he had any thoughts on whether
there should or shouldn't be confidentiality agreements within
AGDC.
MR. CRUZ said he has them all and added that AGDC is a quasi-
public private corporation and certain things - commercial or
proprietary - will need to be held confidential.
SENATOR WIELECHOWSKI asked if it was appropriate to hire Rigdon
Boykin and pay him that salary for his expertise.
MR. CRUZ answered that he met with Mr. Boykin many times and he
was doing his best to get the AKLNG project to move forward. The
agreements that were needed amongst the partners were stalled
and that is where his efforts were focused. In the end if a
project comes together, he contributed. Only the future can
tell.
4:04:49 PM
CHAIR GIESSEL asked for clarity if AGDC is a subdivision of the
executive branch or an independent entity.
MR. CRUZ answered that he believes they are 100 percent an
independent entity.
CHAIR GIESSEL opened public testimony.
SENATOR MICCICHE said he has a lot of faith in Mr. Cruz and is
excited that is he willing to be reappointed.
4:06:16 PM
CHAIR GIESSEL found no further comments and closed public
testimony. She stated that in accordance with AS 39.05.080 the
Resources Committee reviewed the following and recommends the
appointment be forwarded to a joint session for consideration:
Alaska Gasline Corporation Board of Directors, Dave Cruz,
Palmer, appointed 9/13/2013, reappointed 9/14/15. Term expires
9/13/2020. This does not reflect an intent by any of the members
to vote for or against the confirmation of the individual during
further sessions.
4:06:59 PM
At ease
SB 205-APPROVAL OF SALE OF ROYALTY OIL TO TESORO
4:07:52 PM
CHAIR GIESSEL announced consideration of SB 205 [version 29-
GS2225\A was before the committee].
4:08:09 PM
JIM SHINE, Special Projects Assistant, Department of Natural
Resources (DNR), Anchorage, Alaska, presented SB 205. He said it
ratifies a contract for sale of royalty oil from the state to
Tesoro. He explained that essentially, the state can elect
either royalty in kind (RIK) versus royalty in value (RIV).
Taking it in value means the producer produces, transports and
markets the oil on the state's behalf. In an RIK situation the
state takes possession of the oil and sells it itself.
When electing either a best interest finding must be made
according to AS 38.05.182 that also says RIK is the default. But
that still requires a best interest finding. This process was
commenced through a solicitation of interest that went out in
January 2015 to all the in-state refineries to gauge market
interest in purchasing royalty oil.
MR. SHINE said that the state receives all royalties as RIV now.
That is kind of an anomaly as the state has historically, back
to 1979, sold RIK to in-state producers, starting with Mapco,
Williams, Petro Star, Flint Hills, and Tesoro. Today, because
the contract with Tesoro terminated on January 31, 2016, the
state is taking all of its North Slope royalties in value.
He explained that a best interest finding needs to be made that
taking RIK is in the state's best interest, and as part of that
it is directed per statute to sell it by competitive bid unless
there is no adequate competition. The department received
responses from BP and ConocoPhillips, which have North Slope
topping plants for in-field use. Their response was that they
would take volumes, but they weren't interested in processing
them in-state. Flint Hills responded that they weren't taking
volumes, because they had closed their doors in June 2014.
Tesoro and Petro Star both responded with a willingness to
purchase RIK barrels. Tesoro agreed to the state's price terms
in the solicitation and Petro Star responded that they would
like to purchase barrels, but at a different pricing mechanism
that was not as advantageous to the state and not in line with
the solicitation.
At that time the commissioner made a determination that there
was not adequate competition based on the pricing responses and
proceeded with a non-competitive negotiated contract with
Tesoro.
4:11:34 PM
MR. SHINE said the decision criteria in AS 38.05.183 direct the
commissioner in selling royalty oil to provide the maximum
benefit to the citizens of the state. Some of the criteria
include the cash value offered (price terms), the effect on the
economy, the benefits of refining and providing those products
in-state, and eight other criteria listed in AS 38.06.070, which
are reviewed by the Royalty Board.
He explained that they issued the preliminary best interest
finding on February 3, 2016; attached to that as an exhibit was
the proposed contract with Tesoro that was out for a 30-day
public comment period. During that time they received public
comments from Petro Star and its parent corporation, ASRC, and
those were addressed in the proposed final contract that is
before the legislature today. That contract was submitted to the
Royalty Board and it was unanimously approved with a
recommendation of ratification by the legislature.
4:12:47 PM
The Royalty Oil and Gas Development Advisory Board, known as the
Royalty Board, under AS 38.06.070(a), also reviewed the contract
under the following decision criteria:
-revenue needs of the state
-projected local regional needs for the products
-desirability of capital investment in local secondary
development
-social impacts
-projected additional costs and responsibilities put on the
state
-additional criteria include the existence of labor and
consumption markets, potential environmental positive and
negative impacts, and projected proposed transaction upon
commercial enterprises.
The Royalty Board after considering the contract in line with
these criteria did unanimously approve the contract, he said.
4:13:40 PM
MR. SHINE explained that the actual contract before the
legislature is a five year contract for sale of 20-25,000
barrels of royalty oil per day. Tesoro takes possession of those
at the Valdez Marine Terminal and then barges them over to the
Tesoro Nikiski refinery.
He discussed the formula used to determine the RIK versus RIV
valuation methodology: in the RIV world the producers' netback
when they transport from the Valdez Marine Terminal to the West
Coast a marine transportation deduction is netted back off of
the final (ANS) sales prices. In an RIK situation the state
doesn't have that marine transportation because it's not being
sent from Valdez down to the West Coast. So, you essentially
start with the U.S. West Coast average and then deduct the $1.95
RIK differential, which is meant to represent the value of the
price of oil sold in-state.
Another provision is if they don't nominate oil for three
consecutive months, the contract will terminate.
SENATOR WIELECHOWSKI asked him to explain the $1.95 figure.
MR. SHINE said basically the Commercial Section of the Division
of Oil and GAs uses the $1.95 RIK differential in the last
Tesoro contract to reflect the in-state price of a barrel of
oil.
4:15:51 PM
ALEX NOUVAKHOV, Commercial Manager* Division of Oil and Gas*
Department of Natural Resources (DNR)* explained that the
pricing formula assumes West Coast price for ANS as a basis and
then there are deductions from that to arrive at the price which
the state receives. The deductions include things like tariffs
for the TAPS and relevant upstream pipelines, quality
adjustments based on the quality of the crude, and in cases of
RIV pricing a marine transportation cost deduction.
In RIK pricing, an RIK differential is used instead of that
marine transportation cost deduction. It is a location
differential which mimics and reflects the private transactions
which occur for ANS within Alaska (without transporting the
crude to the U.S. West Coast).
MR. SHINE said the equation for RIK was on slide 9 as follows:
ANS Spot Price - $1.95 - Tariff Allowance +/- Quality
Bank Adjustments - Line Loss 9
•ANS Spot Price = Average U.S. West Coast Price for
Alaska North Slope oil (reported by industry trade
publications Platts and Reuters)
•$1.95 RIK Differential
•Destination value minus marine costs so RIK > RIV.
•Tariff Allowance = TAPS and Pipelines upstream of PS-
1.
•Quality Bank Adjustments = as reported by TAPS
Quality Bank Administrator.
•Line Loss (loss of volume between PS1 and the VMT).
SENATOR WIELECHOWSKI said he was still trying to figure out
$1.95 and asked if the $3.70 is the current deduction for
shipping from Valdez to the West Coast. Does the $1.95 represent
the in-state transportation cost?
MR. SHINE responded that the $3.30-$3.70 per barrel is the
average of marine transportation deductions right now as
reported by Department of Revenue (DOR). It is the cost to ship
a barrel of oil from Valdez to the destination (mostly the U.S.
West Coast). He didn't know how to further clarify the $1.95
other than it is the deduction to represent the value of the
price of a barrel of oil sold within the state in a private
transaction.
4:20:38 PM
SENATOR WIELECHOWSKI said he still wanted further clarification.
He asked, "Because they don't have to ship it down there, why
are we allowing a $1.95?"
4:21:06 PM
MR. NOUVAKHOV answered that the $1.95 is a location differential
that reflects the market dynamics. Even though the crude does
not leave the state, transactions between private buyers and
sellers still have a location differential that is determined by
supply and demand. It is not a transportation deduction of any
sort. The best interest finding had a table from the Department
of Revenue that showed the location differential between private
transactions at various locations within the state.
CHAIR GIESSEL asked what page the best interest finding table
that he was referring to was on.
MR. NOUVAKHOV answered that table 1 on page 11 shows the past
location differentials. That table shows historic location
differentials between private sales of crude ranged from $1.34-
$2.12.
4:24:57 PM
SENATOR WIELECHOWSKI asked how much the state loses for every
penny of differential.
MR. NOUVAKHOV answered that he didn't have that number here, but
he could calculate the impacts penny by penny on a barrel and
get it to him.
SENATOR WIELECHOWSKI asked the rationale behind going from $1.65
to $1.95. "Has the market adjusted that much?"
MR. NOUVAKHOV answered the last two contracts they had were with
Flint Hills and Tesoro. The Flint Hills contract had $2.15 and
Tesoro (which expired in January 2016) had $1.95 for a
differential. So, the $1.95 in the current proposal is in line
with the past contract with Tesoro and a little better than the
contract which was in place with Flint Hills, and it is within
the range of location differentials for private contracts in the
state.
SENATOR STOLTZE remarked that this is a take it or leave it
provision and it is not amendable.
4:27:41 PM
SENATOR MICCICHE asked if he understood that this $1.95 is an
assumption that if BP purchased the same quantity from
ExxonMobil that the location differential would be very similar.
MR. NOUVAKHOV answered that it is not an assumption. This DOR
figure is based on actual contracts which they have access to
between private parties, but the information it forecasts for a
future year is an assumption.
SENATOR MICCICHE said that illustrates his point that Tesoro is
not getting a special deal. In fact, in their 2014 contract they
had less of a deduction than Flint Hills. He assumed when the
Flint Hills contract was written that the current going price
for location differential between private parties was somewhere
around $2.15.
MR. NOUVAKHOV said that was correct; in 2013 it was $2.12.
SENATOR COGHILL said it's important to understand how you arrive
at this, but it looks like the state was about to switch between
RIK and RIV much more rapidly than under this contract. "Is that
the reason for this number being so critical at this point?"
MR. SHINE responded that the $1.95 is not a transportation
deduction. Market factors determine that location differential.
The $1.95 is a fixed price over the life of the five-year
contract. The delta between the $1.95 location differential and
the marine transportation deduction that they would otherwise be
incurring in an RIV situation is approximately $1.50-$1.75 per
barrel. Over the life of this contract that difference equates
to $45-56 million more to the state over RIV. "If we elect RIK
we have to at least be equal to or greater than RIV."
4:31:00 PM
SENATOR STOLTZE asked him to comment about the supply of asphalt
that is such a critical part of Alaska's building industry-
which plant can provide it and where they are located.
MR. SHINE said he wasn't an expert on asphalt or the
construction industry, but representatives from Tesoro could
better answer that.
SENATOR STOLTZE said he was interested in other suppliers
besides Tesoro and in having a more economical distribution.
"Was that discussed by the Governor's team, and did that enter
into the best findings?"
MR. SHINE replied selling royalty oil to in-state refineries -
Tesoro, Petro Star, and Flint Hills, - historically provides a
certain security of supply as their feed stock for producing
those products that are used within the state.
4:32:44 PM
CORRI FEIGE, Director, Division of Oil and Gas, Department of
Natural Resources (DNR), Anchorage, Alaska, added that asphalt
and the sale of asphalt was not necessarily a part of the best
interest finding discussion or the negotiation of the RIK
contract, because the contract itself deals with the sale of the
ANS crude. What the refiner chooses to use that crude for and
what derivative products comes off of that is not a function of
the best interest finding. Tesoro can speak to the refined
products that they put out. It was part of the discussion at one
point with Petro Star that they, too, were also looking at
developing an asphalt plant. But the division does not have
access to that information.
SENATOR STOLTZE said a decision like this that affects
availability should have more departments involved; maybe the
commissioner of DOTPF should have been consulted. It is a gap in
the process that can exponentially increase the cost of state
projects and locally-funded projects.
CHAIR GIESSEL said that the committee has a contract before them
versus micromanaging a project.
SENATOR MICCICHE said he was interested in RIK contract terms
for employment of Alaska residents and no discrimination against
Alaska companies and residents. Does Tesoro meet that
requirement?
4:36:09 PM
MR. SHINE replied that the most recent RIK contracts use pretty
standard terms. The "commercially reasonable efforts" means a
reasonableness standard of diligence, because requiring the in-
state use of products has constitutional issues. A Supreme Court
case dealing with limiting the processing of forest products to
those used in-state was found unconstitutional based on the
Dorman Commerce Clause. As with any contract, they absolutely
encourage employment of Alaskans and local hire. Tesoro
currently employs 210 local Alaskans bringing $127 million to
the economy annually. They meet that mandate and there are no
indications that will ever change.
SENATOR MICCICHE said that works for him.
MR. SHINE said should Tesoro fall below a certain credit rating
(BBB-), then they would be required to supply a letter of credit
equal to the value of 90 days of oil delivery (slide 8). It
protects the state in the event that credit ratings fall below a
certain level, which has not been the case over the last two
years.
4:38:21 PM
SENATOR MICCICHE asked the similarities between this contract
and the previous two contracts.
MR. SHINE replied that the only major difference really is in
the RIK differential. It was $2.15 for Flint Hills in 2014, but
the valuation has been identical in the last two years of
contracts with Tesoro for purchase of royalty barrels. The other
difference would be in volume of barrels that are under
contract. The 2014 Flint Hills contract had a nomination window
of 18,000-30,000 barrels per day. When they closed their doors
in 2014, that contract terminated.
SENATOR MICCICHE said that says to him that the department is
largely allowed to do their jobs on contractual arrangements,
and the Parnell contract is essentially identical to the Walker
contract, although there may be tougher questions depending on
which administration you support the most. Realistically the
contract is independent and very similar to others in nature.
MR. SHINE said that was correct. He said slide 10 highlights the
point he made earlier that the value this contract brings to the
state of an estimated $45-56 million more over the next five
years than it would otherwise receive for royalty in value.
4:40:38 PM
SENATOR MICCICHE asked if he is saying there is more potential
profit for purchasing the state's oil in RIV rather than an RIK
sale such as this.
MR. SHINE answered the RIV purchaser would be someone on the
West Coast, although he didn't follow the question.
SENATOR MICCICHE restated if you add $45 million more value to
the state in RIK, then one would think this is more profitable
to the state and RIV would be more profitable to the other
purchasers (because the state would lose $45-56 million).
MR. SHINE said that was correct. The delta between the $1.95
location differential and the approximate $3.50 marine
transportation deduction in an RIV situation is where the state
realizes the most economic benefit in this contract over RIV,
and that number equates to $45-$56 million.
He said slide 11 talks about additional royalty oil sales. The
state will nominate up to 95 percent of its available royalty
barrels for sale and is in current negotiations with Petro Star
to provide royalty oil to them over the next five years. Those
contracts will terminate about the same time as this Tesoro
contract. The state has contracts with Tesoro and Petro Star
right now and 95 percent of its volumes are nominated. They
actually have more additional barrels than was predicted and
those will be offered for sale on an equal basis to both
contracting parties.
4:42:56 PM
MR. SHINE said Petro Star had raised a couple of issues in their
public comments to the proposed contract. Those fall into two
buckets: the first being the length of the contract with Tesoro.
The initial contract was for five years with the option to
extend for five years. That would have to be among mutual
consent of the parties and it would come back to the legislature
for ratification. That provision has since been struck. The
contract before them for ratification is a stand-alone, five-
year contract.
Another concern that was addressed was with respect to a pro-
ration preference to Tesoro in exchange for nominating a little
less volume, so more could be provided to Petro Star. But after
consideration and receiving that comment, the pro-ration
preference was also struck. So, it's status quo if the state has
its royalty barrels under contract. If there is a field
maintenance or a downturn in production and that state doesn't
have enough barrels to meet contractual obligations, then all
the royalty purchasers are pro-rated proportionate to their
share.
4:44:14 PM
SENATOR WIELECHOWSKI ^Confirmation Hearingasked him to talk
about the other bids they received.
MR. SHINE answered that the department sent a solicitation of
interest to five refineries within the state - Flint Hills,
Petro Star, Tesoro, BP, and ConocoPhillips - and got responses
from BP and ConocoPhillips, which have North Slope topping
plants for in-field use, indicating willingness to purchase
barrels, but they were not planning on refining them within the
state. They were going to be added to export shipments. The
response from Flint Hills was that they were not interested in
purchasing, because they were no longer operating. The response
from Petro Star indicated that they were willing to enter into a
non-competitive, negotiated process for a pricing mechanism that
was not the same as provided in the solicitation of interest,
whereas Tesoro responded affirmatively, indicating a willingness
to participate in a competitive bid or an informal negotiated
process and met the price term solicitation.
SENATOR WIELECHOWSKI asked if the bids from BP and
ConocoPhillips would have resulted in more profit to the state.
MR. SHINE answered that the price is just one of the
considerations the commissioner has to review in making a best
interest finding. They probably agreed with the price term of
$1.95, but they were not going to refine within the state and
export it. When all of the criteria in AS 38.05.183 is
considered, the state would receive more value in selling its
RIK to an in-state refiner that would provide those products to
local markets.
MR. NOUVAKHOV added their discussions with BP and ConocoPhillips
did not go into the pricing as much. They made indications that
they would be potentially interested in bidding for the crude,
but they wouldn't be able to meet in-state refining conditions.
Given the statute which requires the state to make a best
interest finding for any export of crude - crude that is in
excess to the in-state demand - they couldn't reach that
threshold, because indications Petro Star and Tesoro combined
came to a different that RIK that was available. So, the state
couldn't very well make a best interest finding that it had
excess crude to sell for export.
SENATOR WIELECHOWSKI asked if they did a financial analysis on
providing the oil to BP and ConocoPhillips would the state get a
production tax on that and was that added value factored in.
MR. NOUVAKHOV answered that this is royalty oil and it would
make no difference for production tax to whom they are selling
it (Tesoro, petro Star or back to a producer). The fiscal
aspects of the sale would not be different. So, in terms of a
marginal economic impact there is no difference who the buyer
is.
CHAIR GIESSEL noted that Tesoro was in the room for questions.
4:49:17 PM
SENATOR STOLTZE asked Mr. Shine when he looked at royalty prices
if he looked at any issues of motor fuel price collusion and
affordability.
MR. SHINE replied that is not a criteria that is expressly
provided in the statute that the commissioner consider. They
look at what refined products will be delivered and used in
state, but the actual price of fuel is very far removed from the
actual sale of feedstock to the refineries.
A number of factors influence the sale of gasoline in the state.
The Seattle oil price information service (OPIS) price plus a
small percentage differential is typically what sets the market
rate for gasoline prices within the state. So, between the state
selling RIK to Petro Star or Tesoro and what somebody pays at
the pump there are a number of transaction and transportation
costs that get added to that, as well as capital costs,
employment and overhead. The price of gasoline is not considered
in selling the state's RIK. They look to maximize the benefit of
the resources to the citizens of the state.
MR. SHINE said that asphalt is not an express consideration, but
this went out to public comment for 30 days and before the
Royalty Board in a very transparent process and they didn't
receive any comments suggesting that they consider the asphalt
industry in the determination.
SENATOR STOLTZE asked if the asphalt production issue was ever
brought up other than the comment period.
MR. SHINE answered no, to his knowledge, but Director Feige
mentioned that the issue has come up in the context of Petro
Star maybe making improvements at their refinery to make asphalt
more available within the state.
4:51:45 PM
SENATOR STOLTZE said that has come up in the process, but not
formally in the comment period.
MR. SHINE responded yes.
CHAIR GIESSEL asked Ms. Feige who took that over producing
asphalt when Flint Hills stopped.
MS. FEIGE responded that she did not know if it was assumed by
another operator, but she thought not.
MR. NOUVAKHOV answered that he didn't know that anyone took that
over, but they had discussion with Petro Star about future
plants.
CHAIR GIESSEL invited Tesoro to the table.
4:53:41 PM
MATT GILL, Senior Manager, External Affairs, Tesoro Alaska,
supported SB 205. He said Tesoro Corporation is currently a
Fortune 100 company; it is an independent refiner and marketer
of petroleum products. Tesoro's refining operation started in
Alaska with purchase of its Kenai Refinery in 1969. The Kenai
Refinery has an operational capacity of up to 72,000 barrels per
day. It's primarily focused on jet and diesel production
followed by gasoline and gasoline blend stocks, heating oil,
heavy oils, propane and asphalt. They operate a 68-mile common
carrier products pipeline that transports jet fuel, gasoline,
diesel fuel to the Port of Anchorage and the Anchorage
International Airport. The wholesale delivery of their products
occurs through their terminals in Kenai, Anchorage, the Nikiski
Dock, and the Port of Anchorage.
In addition to being the largest taxpayer in the Kenai Borough,
Tesoro provides over 225 in-state, family-wage jobs at the
refinery and terminals along with about 30 fulltime contractors
that are working in and around the refinery year-round. They are
a major supporter of the Cook Inlet Regional Citizens Advisory
Council (CIRCAC) as well as the largest member of Cook Inlet
Spill Prevention and Response Team (CISPRT).
They actively support a wide range of events and programs across
the state. In 2015 they gave over $300,000 in grants from the
Tesoro Foundation and their intention is to beat that number in
2016. Each year they sponsor all the 5th and 6th grade classes
on the Kenai Peninsula to conduct a mission at the Kenai
Challenger Learning Center. They are the signature sponsor of
the Caring for the Kenai Program as well as the founding sponsor
of the Alaska Business Week, a statewide business program that
gets put on each summer.
MR. GILL said this legislation is the result of over a year of
dialogue and productive negotiations between Department of
Natural Resources (DNR) and Tesoro Corporation and by all
accounts, they are very impressed with the state's ability to
understand their issues and with their ability to come to a
mutually beneficial agreement that is win/win for the state and
Tesoro as well as accommodating to the other in-state refiners.
Their estimates indicate that the state will continue to receive
a price for its royalty in kind oil that exceeds the price it
would receive if it elected to keep its royalty oil in value.
The estimated additional revenues is $45-56 million for the span
of the contract. For Tesoro, this five-year contract will
provide a stable supply of ANS crude while also giving them the
volumetric flexibility to help accommodate seasonal fluctuations
in demand for their refined products.
MR. GILL said the availability, flexibility, and stability that
this contract offers has a positive impact on their ability to
maintain their ongoing operations at the Kenai Refinery. In
order to accommodate the needs of the other in-state refiners,
Tesoro and the state modified this contract to reduce the
volumes as well as eliminate a pro-ration clause and the five-
year extension option. Tesoro believes in Alaska's future and is
committed to being an active corporate citizen and looks forward
to continuing to provide Alaskans with clean burning fuels and
successfully running their refinery for perhaps another 47
years.
CHAIR GIESSEL asked who should be asked the asphalt question.
MR. GILL answered that would best be directed to Cameron Hunt.
4:58:19 PM
CAMERON HUNT, Vice President and Manager, Kenai Refinery, Tesoro
Alaska, said that Tesoro has picked up all of the asphalt volume
for Southcentral and the Fairbanks area demand with the closing
of Flint Hills. This last summer they produced 430,000 barrels
and are investing in improvements to their loading rack to speed
up asphalt loading at the Nikiski Refinery. Through press
releases they have found that Petro Star is also building
capacity to supply asphalt from their North Pole refinery.
SENATOR MICCICHE asked the percentage of Alaska hire at the
Kenai Refinery.
MR. HUNT answered that he didn't have a percent for Alaskan
hire. They are unable to find in-market for certain specialty
educational backgrounds such as chemical engineers. He can say
that 100 percent of their refinery employees do live in the
state, which the North Slope companies can't necessarily claim.
Whenever it's possible to hire locally, they do so especially in
their operations workforce, especially mechanics, carpenters,
and electricians, and they were even able to hire several Flint
Hills employees after it closed and relocate them down to the
Kenai.
CHAIR GIESSEL opened public testimony, and finding no comments,
closed it.
SENATOR COSTELLO moved to report SB 205, version 29-GS2225\A,
from committee with individual recommendations and attached
fiscal note(s). There were no objections and it was so ordered.
5:02:21 PM
Finding no further business to come before the committee, Chair
Giessel adjourned the Senate Resources Committee meeting at 5:02
p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 205-Version A.PDF |
SRES 3/30/2016 3:30:00 PM |
SB 205 |
| SB 205 Transmittal Letter.pdf |
SRES 3/30/2016 3:30:00 PM |
SB 205 |
| SB 205 Fiscal Note.PDF |
SRES 3/30/2016 3:30:00 PM |
SB 205 |
| SB2015-Presentation to SRES-DNR-3-30-2016.pdf |
SRES 3/30/2016 3:30:00 PM |
SB2015 |
| SB 205 Supporting Document Report to Alaska Legislature.pdf |
SRES 3/30/2016 3:30:00 PM |
SB 205 |
| SB 205 Supporting Document Resolutions for Tesoro RIK Contract 2016.pdf |
SRES 3/30/2016 3:30:00 PM |
SB 205 |
| SB 205 Supporting Document TesoroRIKContractBIF.pdf |
SRES 3/30/2016 3:30:00 PM |
SB 205 |
| AGDC Board Factsheet.pdf |
SRES 3/30/2016 3:30:00 PM |
AGDC Board-Fact Sheet |
| AGDC-Resume-Dave Cruz.pdf |
SRES 3/30/2016 3:30:00 PM |
AGDC Board-Dave Cruz |
| SB 205-Presentation to SRES-DNR-3-30-2016.pdf |
SRES 3/30/2016 3:30:00 PM |
SB 205 |