Legislature(2025 - 2026)BUTROVICH 205
04/23/2025 03:30 PM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| SJR8 | |
| SJR19 | |
| SB176 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SJR 8 | TELECONFERENCED | |
| *+ | SB 176 | TELECONFERENCED | |
| += | SJR 19 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
April 23, 2025
3:45 p.m.
MEMBERS PRESENT
Senator Cathy Giessel, Chair
Senator Bill Wielechowski, Vice Chair
Senator Matt Claman
Senator Forrest Dunbar
Senator Scott Kawasaki
Senator Shelley Hughes
Senator Robert Myers
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
SENATE JOINT RESOLUTION NO. 8
Relating to strengthening international relations with Taiwan.
- MOVED SJR 8 OUT OF COMMITTEE
SENATE JOINT RESOLUTION NO. 19
Urging the United States Congress to honor the terms of the
Mineral Leasing Act and the Alaska Statehood Act and provide the
state with a 90 percent share of all bonuses, royalties, and
rentals received by the federal government from the Arctic
National Wildlife Refuge and the National Petroleum Reserve in
Alaska.
- MOVED CSSJR 19(RES) OUT OF COMMITTEE
SENATE BILL NO. 176
"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."
- HEARD & HELD
PREVIOUS COMMITTEE ACTION
BILL: SJR 8
SHORT TITLE: INTERNATIONAL RELATIONS WITH TAIWAN
SPONSOR(s): SENATOR(s) GRAY-JACKSON
02/14/25 (S) READ THE FIRST TIME - REFERRALS
02/14/25 (S) RES
03/19/25 (S) RES AT 3:30 PM BUTROVICH 205
03/19/25 (S) Heard & Held
03/19/25 (S) MINUTE(RES)
04/23/25 (S) RES AT 3:30 PM BUTROVICH 205
BILL: SJR 19
SHORT TITLE: ANWR & NAT'L PETRO RESERVE: STATE SHARE
SPONSOR(s): SENATOR(s) BJORKMAN
04/10/25 (S) READ THE FIRST TIME - REFERRALS
04/10/25 (S) RES
04/11/25 (S) RES AT 3:30 PM BUTROVICH 205
04/11/25 (S) Heard & Held
04/11/25 (S) MINUTE(RES)
04/14/25 (S) RES AT 3:30 PM BUTROVICH 205
04/14/25 (S) Heard & Held
04/14/25 (S) MINUTE(RES)
04/23/25 (S) RES AT 3:30 PM BUTROVICH 205
BILL: SB 176
SHORT TITLE: APPROVE MARATHON PETRO ROYALTY OIL SALE
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
04/15/25 (S) READ THE FIRST TIME - REFERRALS
04/15/25 (S) RES, FIN
04/23/25 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
SENATOR ELVI GRAY-JACKSON, District G
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Sponsor of SJR 18.
LAURA ACHEE, Staff
Senator Jesse Bjorkman
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented SJR 19 on behalf of the sponsor.
INTIMAYO HARBISON, Staff
Senator Cathy Giessel
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Explained the committee substitute for SJR
19 on behalf of the Senate Resources Committee, Senator Giessel,
Chair.
DEREK NOTTINGHAM, Director
Division of Oil and Gas
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Introduced SB 176 on behalf of the Senate
Rules Standing Committee, by request of the Governor.
RYAN FITZPATRICK, Commercial Manager
Division of Oil and Gas
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Presented SB 176 on behalf of the Senate
Rules Standing Committee, by request of the Governor.
ACTION NARRATIVE
3:45:43 PM
CHAIR GIESSEL called the Senate Resources Standing Committee
meeting to order at 3:45 p.m. Present at the call to order were
Senators Dunbar, Myers, Hughes, Wielechowski, Kawasaki and Chair
Giessel. Senator Claman arrived thereafter.
SJR 8-INTERNATIONAL RELATIONS WITH TAIWAN
3:46:31 PM
CHAIR GIESSEL announced the consideration of SJR 8-INTERNATIONAL
RELATIONS WITH TAIWAN.
3:46:55 PM
SENATOR ELVI GRAY-JACKSON, District G, Alaska State Legislature,
Juneau, Alaska, explained that SJR 8 would reaffirm Alaska's
commitment to strengthening its relationship with Taiwan. It
recognizes the deep economic, cultural, and educational ties
between Alaska and Taiwan and would foster a mutually beneficial
relationship.
3:47:27 PM
CHAIR GIESSEL opened public testimony on SJR 8; finding none,
she closed public testimony.
3:47:49 PM
CHAIR GIESSEL solicited the will of the committee.
3:47:52 PM
SENATOR WIELECHOWSKI moved to report SJR 8, work order 34-
LS0442\A, from committee with individual recommendations and
attached fiscal note(s). He gave authorization for Legislative
Legal Services to make technical and conforming changes.
3:48:03 PM
SENATOR CLAMAN joined the meeting.
3:48:09 PM
CHAIR GIESSEL found no objection and SJR 8 was reported from the
Senate Resources Standing Committee.
SJR 19-ANWR & NAT'L PETRO RESERVE: STATE SHARE
3:48:19 PM
CHAIR GIESSEL announced the consideration of SENATE JOINT
RESOLUTION NO. 19 Urging the United States Congress to honor the
terms of the Mineral Leasing Act and the Alaska Statehood Act
and provide the state with a 90 percent share of all bonuses,
royalties, and rentals received by the federal government from
the Arctic National Wildlife Refuge and the National Petroleum
Reserve in Alaska.
3:48:53 PM
LAURA ACHEE, Staff, Senator Jesse Bjorkman, Alaska State
Legislature, Juneau, Alaska, said SJR 19 urges Congress to
reverse its decision to limit Alaska's share of revenues from
oil and gas resource development in the Alaska National Wildlife
Refuge (ANWR) to 50 percent. She noted that ANWR is federal
land. She said that, at statehood, Alaska was promised a 90
percent share (in both the Alaska Statehood Act and the Mineral
Leasing Act). In addition, SHR 19 includes a request for Alaska
to receive 90 percent of revenues from production in the
National Petroleum Reserve in Alaska (NPRA). The latter was not
included in the Alaska Statehood Act or the Mineral Leasing Act.
She explained that the 50 percent revenue share that Alaska
receives from NPRA production is given to specific regions and
programs. The state takes on the work of supporting production
in NPRA (through permitting, etc.) but there is no return for
the general fund. She shared that, for this reason, the sponsor
of SJR 19 felt it was appropriate to include the NPRA production
request.
3:50:48 PM
CHAIR GIESSEL solicited a motion.
3:50:52 PM
SENATOR WIELECHOWSKI moved to adopt the committee substitute
(CS) for [SJR 19], work order 34-LS0840\H, as the working
document.
3:51:03 PM
CHAIR GIESSEL objected for the purpose of discussion.
3:51:15 PM
INTIMAYO HARBISON, Staff, Senator Cathy Giessel, Alaska State
Legislature, Juneau, Alaska, explained that SJR 19, version H
changes page 1, lines 6-7, removing any reference to the federal
administration. In addition, version H reiterates that the
Alaska State Legislature is grateful for the approval and
development of the Willow Project along with other projects in
the NPRA.
3:51:52 PM
CHAIR GIESSEL removed her objection.
3:51:55 PM
CHAIR GIESSEL found no further objection and CSSJR 19 was
adopted as the working document.
3:51:59 PM
CHAIR GIESSEL [opened public testimony on SJR 19]; finding none,
she closed public testimony.
3:52:21 PM
CHAIR GIESSEL solicited the will of the committee.
3:52:24 PM
SENATOR WIELECHOWSKI moved to report CSSJR 19, work order 34-
LS0840\H, from committee with individual recommendations and
attached fiscal note(s). He gave authorization for Legislative
Legal Services to make technical and conforming changes.
3:52:39 PM
CHAIR GIESSEL found no objection and CSSJR 19(RES) was reported
from the Senate Resources Standing Committee.
SB 176-APPROVE MARATHON PETRO ROYALTY OIL SALE
3:52:55 PM
CHAIR GIESSEL announced the consideration of SB 176-APPROVE
MARATHON PETRO ROYALTY OIL SALE
3:53:24 PM
DEREK NOTTINGHAM, Director, Division of Oil and Gas, Department
of Natural Resources (DNR), Anchorage, Alaska, said that SB 176
would allow the State of Alaska to execute a contract for the
sale of royalty oil to Marathon Petroleum (Marathon). He
explained that the State of Alaska and Marathon are nearing the
end of a 3-year contract for royalty in-kind sales. The current
contract expires at the end of July 2025. The new contract would
be a 3-year primary term with options for 1-year extensions. The
contract would sell 10-15 thousand barrels per day of royalty
in-kind oil to Marathon. He said the State of Alaska has a long-
standing practice of selling its portion of royalty as oil in-
kind, when this maximizes the benefits to Alaskans.
MR. NOTTINGHAM said that the proposed contract facilitates this
by capturing a price premium for royalty in-kind oil that is
sold in-state. He contrasted royalty in-kind (RIK) (sold in-
state) with royalty in-value (RIV) (sold out-of-state). The
contract premium would generate additional revenue of
approximately $4 million to $18 million over the life of the
contract. He stated that royalty oil provides a secure source of
feedstock oil. In this case, the feedstock oil would be for
Marathon's Kenai Refinery, which produces gasoline, jet fuel,
and other products used in Alaska. He stated that the
commissioner of the Department of Natural Resources (DNR) has
completed the determination and best interest finding required
by Alaska Statute. The State Royalty Board have likewise
completed both the required resolution and report to show that
the contract meets all statutory requirements. All of these are
included in the supporting documents for SB 176. He said that
the final step is legislative approval.
3:56:03 PM
At ease.
4:00:26 PM
CHAIR GIESSEL reconvened the meeting.
4:00:36 PM
RYAN FITZPATRICK, Commercial Manager, Division of Oil and Gas,
Department of Natural Resources (DNR), Anchorage, Alaska,
advanced to slide 2. He explained that under the proposed
contract, the State of Alaska would take a portion of North
Slope production and market that oil in-kind to Marathon's
Nikiski Refinery:
[Original punctuation provided.]
What is "Royalty In-Kind"?
Oil and gas leases issued by the State reserve a
"royalty share" to the State a portion of production
that the State receives as owner of the resource. The
State has the option to take its royalty oil and gas
in-value (RIV) or in-kind (RIK).
• RIV: Lessees market the royalty oil or gas
alongside their own production; the State
receives the proceeds from the sale of its
royalty oil, subject to fair market value
• RIK: Lessees provide royalty oil or gas of sales
quality to the State; the State is responsible
for marketing its royalty oil or gas
Department of Natural Resources (DNR) has statutory
processes for receiving royalty:
• Alaska Statute (AS) 38.05.182 requires DNR to
make best interest findings for RIV and RIK
determinations, and requires the commissioner
report annually to the Legislature about these
elections
• AS 38.05.183 guides DNR in the sales of RIK and
requires that contracts meet a number of
statutory criteria and, in certain cases, receive
legislative approval before being entered into
• AS 38.06 establishes the Alaska Royalty Oil and
Gas Development Advisory Board, which reviews
royalty-in-kind actions by DNR.
4:02:15 PM
SENATOR CLAMAN asked what percentage of royalty oil belongs to
the State of Alaska.
4:02:46 PM
MR. FITZPATRICK replied that the exact percentage varies by oil
field. He said that the North Slope leases that are predominant
in terms of production have a 12.5 percent royalty share. Some
leases under production have a 16 and two-thirds percent royalty
share. The exact total percentage of royalty shares varies over
time. He said that the approximate amount of Alaska's royalty
oil is somewhere between 12.5 and 16 and two-thirds percent at
any given time. He noted that the amount is usually closer to
12.5 or 13.5 percent, considering the vintage of the leases and
where the majority of production originates. Currently, the
State of Alaska's royalty production is approximately 50
thousand barrels of oil per day.
4:04:02 PM
SENATOR CLAMAN stated that oil and gas taxes apply to the
percentage of oil that does not belong to the State of Alaska.
Other revenue that comes to the state results from the sale of
the state-owned royalty oil.
4:04:30 PM
MR. FITZPATRICK agreed. He added that the oil and gas fiscal
system includes the royalty percentage (i.e. the percentage the
State of Alaska receives as its share of production), and the
oil and gas production tax is separately levied on the
producer's share of that production. He noted that this tax is
administered by the Alaska Department of Revenue (DOR). In
addition, there is an oil and gas property tax. Most of the
property tax is received by local jurisdictions, although the
State of Alaska receives a portion of that tax.
4:05:07 PM
SENATOR CLAMAN commented on the sale of royalty oil in-kind to
Marathon. He shared his understanding that Marathon would
purchase that oil directly from the state.
4:05:19 PM
MR. FITZPATRICK confirmed this understanding. He explained that
the State of Alaska sells royalty oil in-kind via a forward sale
to Marathon Refining. He reiterated that the State of Alaska
receives the payment from Marathon for royalty oil in-kind
sales.
4:05:43 PM
MR. FITZPATRICK advanced to slide 3 and discussed how royalty is
a core lease term. Slide 3 contains examples of Alaska lease
language and Alaska Oil and Gas Unit Agreement. He noted that
these examples reflect the royalty percentage and added that the
royalty percentage is one of the core lease terms for the State
of Alaska.
4:06:10 PM
MR. FITZPATRICK advanced to slide 4 and discussed sources of
North Slope royalty. Slide 4 contains a map showing North Slope
lease ownership by notification lessee. He explained that this
shows the areas where the State of Alaska is predominantly
taking its oil as royalty in-kind. He noted Cook Inlet
production and explained that the State of Alaska's share of
that oil production is not sufficient to meet the volumes that
Marathon has requested (as part of the contract under
consideration). He explained that the State of Alaska primarily
takes royalty oil in-kind (to satisfy its contracts) from its
leases on the North Slope. The specific unit varies from month
to month.
4:07:06 PM
MR. FITZPATRICK advanced to slide 5, containing a graph of
historical North Slope royalty oil from January 1980-November
2024:
[Original punctuation provided.]
Royalty In-Kind Contract History
• The State has historically selected to receive
royalty oil both in-kind and in-value
• About 97 percent of the State's royalty oil in-
kind selections have been for North Slope oil
• The amount of RIK oil that the State sells varies
and depends many factors:
• Alaska North Slope (ANS) oil production from
state-owned lands
• Royalty rates for State oil and gas leases
• State's selection of the fields from which
to choose RIK oil
• Quantity of crude oil sought by in-state
refineries or other potential buyers
• Competitiveness of ANS royalty oil versus
other sources of crude oil for instate
refineries or other potential buyers
MR. FITZPATRICK said that the State of Alaska has sold a
percentage of its royalty oil as royalty in-kind (RIK) since oil
development began in Prudhoe Bay. He directed attention to the
chart on slide 5 and explained that this shows the total royalty
volume. The green bars reflect the percentage of the total
royalty production that the State of Alaska is selling in-kind.
While it was historically around 97 percent, the amount of
royalty oil sold in-kind has evened out to the 40-50 percent
range. He discussed reasons for the monthly percentage
variations and noted that in-state refinery maintenance periods
can impact the amount of RIK the refineries take for one or two
months. He said that generally, one-third to one-half of the
State of Alaska's royalty oil production is sold in-kind.
4:08:41 PM
MR. FITZPATRICK advanced to slide 6, containing a bar graph
illustrating North Slope royalty in-kind (RIK) to in-state
purchasers since 1979:
[Original punctuation provided.]
Royalty In-Kind Contract History
• Almost all the nearly one billion barrels sold to
date have been sold via non-competitive sales
• Less than 5 percent has been sold via competitive
sales
• The large majority of RIK oil sold to date has
been to in-state entities, with a few historical
cases where RIK oil was sold for export outside
of Alaska
MR. FITZPATRICK directed attention to the two lines toward the
righthand side of the chart, which reflect the State of Alaska's
current RIK contracts. One of these is with Marathon's Nikiski
Refinery (this is the contract that SB 176 would extend). The
other contract is with Petro Star. He briefly discussed Petro
Star's oil refineries. He explained that Petro Star renewed its
contract in 2022; the new contract included a 5-year renewal
term. He noted that Marathon's contract expires in 2025.
4:10:10 PM
SENATOR KAWASAKI asked about non-competitive sales versus
competitive sales. He asked whether many companies request [RIK]
contracts. He asked how a non-competitive contract works. He
wondered if RIK is generally recognized as the best option.
4:10:46 PM
MR. FITZPATRICK replied that before entering into contracts for
RIK sales with Marathon or Petro Star, the State of Alaska goes
through a public solicitation of interest process, which
includes a public notice requesting any expressions of interest
for purchases of the royalty oil. He said that, historically
(for the past decade or more), the only companies to express
concrete interest have been Marathon and Petro Star. He briefly
described unsuccessful discussions with other potentially
interested buyers. He explained that the public solicitation
process helps to determine whether there is a market for
competitive sale. He said that when concrete interest is limited
to the two in-state refiners, there is not sufficient demand to
take the entirety of the State of Alaska's royalty oil. In this
case, the contracts are negotiated.
MR. FITZPATRICK said that the pricing term is addressed in a
future slide. He stated the State of Alaska negotiates contracts
that ensure a premium for the state (i.e. the sale amount is
higher than the amount that would be obtained if the royalty oil
was sold in-value).
4:12:35 PM
MR. FITZPATRICK advanced to slide 7:
[Original punctuation provided.]
Processes and Legislative Approval
RIK contract development and execution involves
several significant steps:
• DNR commissioner follows a statutory process to
negotiate a proposed sale; then DNR publishes a
proposed finding describing the terms and reasons
for the sale
• DNR must brief the Alaska Royalty Oil and Gas
Development Advisory Board (AS 38.06) on the
proposed sale and receive the Board's review and
approval
• After receiving public comment on the proposed
findings, DNR publishes a final best interest
finding
• AS 38.06.055 requires authorization by the
Legislature before a contract can be executed
There are limited exceptions to this process, such
contracts to relieve storage or market conditions with
a duration of one year or less, and contracts for
sales of 400 barrels per day or less. These exceptions
do not apply to the Marathon contract now under
consideration.
MR. FITZPATRICK said that the Alaska Royalty Oil and Gas
Development Advisory Board's report is included in the
supporting documents for SB 176.
4:13:28 PM
MR. FITZPATRICK advanced to slide 8, which contains an excerpt
from a resolution by the Alaska Royalty Oil and Gas Development
Advisory Board (Royalty Board) and an excerpt from a report by
the Royalty Board to the Alaska State Legislature. He noted that
the full version is included in the supporting documents for SB
176:
[Original punctuation provided.]
Royalty Board Review
AS 38.06.050 requires the Alaska Royalty Oil and Gas
Development Advisory Board:
• To provide a written recommendation of the board
on the proposed sale, submitted to the
Legislature at the time a bill approving the
proposed sale is introduced, and
• To provide a report on the criteria used to
evaluate the proposed sale
4:13:49 PM
MR. FITZPATRICK advanced to slide 9. He stated that the Royalty
Board considers each of the following factors when performing
the review and compiling its report to the legislature. He
emphasized the in-depth nature of the review:
[Original punctuation provided.]
Royalty Board Review Criteria
Sec. 38.06.070. Criteria. (a) In the exercise of its
powers under AS 38.06.040(a) and 38.06.050 the board
shall consider
(1) the revenue needs and projected fiscal condition
of the state;
(2) the existence and extent of present and
projected local and regional needs for oil and gas
products and by-products, the effect of state or
federal commodity allocation requirements which
might be applicable to those products and by-
products, and the priorities among competing needs;
(3) the desirability of localized capital
investment, increased payroll, secondary development
and other possible effects of the sale, exchange, or
other disposition of oil and gas or both;
(4) the projected social impacts of the transaction;
(5) the projected additional costs and
responsibilities which could be imposed upon the
state and affected political subdivisions by
development related to the transaction;
(6) the existence of specific local or regional
labor or consumption markets or both which should be
met by the transaction;
(7) the projected positive and negative
environmental effects related to the transaction;
and
(8) the projected effects of the proposed
transaction upon existing private commercial
enterprise and patterns of investments.
(b) When it is economically feasible and in the public
interest, the board may recommend to the commissioner
of natural resources, as a condition of the sale of
oil or gas obtained by the state as royalty, that
(1) the oil or gas be refined or processed in the
state;
(2) the purchaser be a refiner who supplies products
to the Alaska market with price or supply benefits
to state citizens; or
(3) the purchaser construct a processing or refining
facility in the state.
The board shall make a full report to the
legislature on each criterion specified in (a) or
(b) of this section for any disposition of royalty
oil or gas that requires legislative approval. The
board's report shall be submitted for legislative
review at the time a bill for legislative approval
of a proposed disposition of royalty oil or gas is
introduced in the legislature.
4:14:43 PM
SENATOR KAWASAKI wondered about the accuracy of the Royalty
Board's assessment. He asked whether the report findings are
verified at a later date to determine if those findings align
with future data.
4:14:59 PM
MR. FITZPATRICK shared his understanding that the employment
status of jobs supported by Marathon's refining complex is
typically a part of the Royalty Board's review process. The
Department of Natural Resources (DNR) independently verifies
that information as part of the best interest finding. The
employment numbers at the Nikiski Refinery are a part of that
evaluation. He shared his understanding that this same process
applies to the Petro Star refinery. DNR considers employment as
a primary benefit for utilizing in-state refineries. He noted
statutory guidance that the RIK program is also intended to
support the in-state refining sector.
4:16:03 PM
MR. FITZPATRICK advanced to slide 10 and discussed recent
royalty in-kind (RIK) contracts. Slide 10 contains a table
displaying RIK contract information for Tesoro Corporation,
Petro Star Inc., and Marathon Oil Corporation from 2016 through
2025. He noted that the final row on the chart shows the
contract under consideration by SB 176. He pointed out that the
contract under consideration has a 3-year primary term followed
by 7 one-year option terms. He contrasted this with the previous
contract with Marathon, which had a 3-year primary term. He
stated that the one-year option terms were of interest to both
Marathon and DNR. He explained that the option years allow the
contract term to extend up to a total of 10 years. He added
that, in order to extend the contract for one year, both parties
must be happy with the contract's performance upon conclusion of
the 3-year primary term. If either party is unhappy at that
time, both parties have the option of ending the contract. He
said this simplifies the administrative process for both the
State of Alaska and Marathon. In addition, it provides Marathon
with longer term certainty.
4:18:07 PM
SENATOR CLAMAN asked whether each extension would require
legislative approval.
4:18:26 PM
MR. FITZPATRICK replied no. He explained that, because the one-
year option terms are before the legislature for approval (as
part of SB 176), the extensions options could be exercised by
DNR.
4:18:40 PM
SENATOR CLAMAN asked whether the one-year option terms would
allow Marathon and DNR to modify contract terms or whether a
modification of contract terms would require legislative
approval.
4:19:04 PM
MR. FITZPATRICK replied that Alaska Statute requires that any
modification of contract terms be approved by the legislature.
4:19:28 PM
MR. FITZPATRICK returned to slide 10 and stated that the
nomination volume of the contract is 10-15 thousand barrels per
day. This is the same as the current contract.
4:19:49 PM
MR. FITZPATRICK advanced to slide 11:
[Original punctuation provided.]
Competitive vs. Non-Competitive Sales
• AS 38.05.183 requires the sale of royalty oil be
by competitive bid, unless determined that the
best interest of the State does not require it or
no competition exists
• A non-competitive sale requires a written finding
by DNR; for the Marathon contract, a Final Best
Interest Finding was published on April 14, 2025
• How does DNR decide between a competitive and
non-competitive sale?
• DNR publishes a "Solicitation of Interest"
letter with the goal of gauging the interest
of the market
• In this letter, DNR establishes its
preferred method of sale (i.e., competitive
disposition) with non-binding parameters for
such sale
• Interested parties are invited to comment on
their willingness to buy RIK oil and their
preferred terms
• DNR analyzes those responses and makes a
written determination of the method of sale
that is in the best interest of the State
When awarding a royalty sale the commissioner shall
consider:
• The cash value offered;
• The projected effects of the sale, exchange, or
other disposal on the economy of the state;
• The projected benefits of refining or processing
the oil or gas in the state;
• The ability of the prospective buyer to provide
refined products or by-products for distribution
and sale in the state with price or supply
benefits to the citizens of the state; and
• The criteria listed in AS 38.06.070(a)
There have been very limited competitive sales in the
past:
• Competitive sales of RIK oil only occurred in
1981, 1985, and 1986
• Less than 5 percent of RIK oil (46 million
barrels of approximately one billion overall
barrels) sold to date has been via competitive
sales
MR. FITZPATRICK reiterated that the solicitation of interest has
not resulted in concrete sales offers; therefore, DNR continues
to negotiate directly with the in-state refining sector for
direct sales.
4:20:28 PM
MR. FITZPATRICK advanced to slide 12:
[Original punctuation provided.]
RIK's In-State Priority
DNR is statutorily directed to give a priority to in-
state RIK sales
Sec. 38.05.183. Sale of royalty.
d) Oil or gas taken in kind by the state as its
royalty share or gas delivered to the state under AS
43.55.014(b) may not be sold or otherwise disposed of
for export from the state until the commissioner
determines that the oil or gas is surplus to the
present and projected intrastate domestic and
industrial needs
MR. FITZPATRICK said that the Marathon and Petro Star refinery
complexes are the two sources of in-state demand. DNR must
satisfy in-state demand before looking at potential out-of-state
competitive sales. He reiterated that out-of-state sales have
not materialized in recent years.
4:21:33 PM
MR. FITZPATRICK advanced to slide 13, which contains a scatter
graph displaying the premium of RIK price over RIV price for
Alaska North Slope (ANS) royalty oil from January 2008 through
November 2024:
[Original punctuation provided.]
The Historic Premium of RIK Sales
• 11 Alaska Administrative Code 03.026(b) states
that the RIK price should be at least equal to
the RIV price
• From 2008 - 2023 the average RIK price was
$1.25/bbl higher than that RIV price
• The State sold over 173 million barrels of
royalty oil during this period
• RIK sales proceeds were $12.99 billion
• The State made over $188 million in revenue
compared to taking the royalty barrels in-value
MR. FITZPATRICK directed attention to the graph and noted that
any dot appearing above the zero-dollar line reflects a month in
which the RIK sales obtained a premium over equivalent RIV
barrels. He pointed out that the State of Alaska obtained a
premium most months during the time displayed. He noted some
months (e.g. in 2020) when the State of Alaska did not obtain
the premium; he explained that this is most often due to changes
in the oil market. RIK sales provide for a premium in addition
to the RIV barrels, resulting in additional revenue for the
state. He noted that this additional revenue also flows into the
Alaska Permanent Fund.
4:23:20 PM
MR. FITZPATRICK advanced to slide 14, containing a flow chart
illustrating the RIK process. He briefly explained the process,
highlighting RIK contract negotiations. He noted that, once the
solicitation of interest is complete, the contracts receive a
best interest finding. DNR then opens the best interest finding
for public comment. He noted that DNR did not receive public
comment on the best interest finding for the contract under
consideration. Once the public comment period has concluded, DNR
publishes a final best interest finding. DNR presents its
findings to the Royalty Review Board. Following this, the
Royalty Review Board provides a report. Once these steps are
completed, DNR presents the contract to the legislature for
approval. If the legislature grants approval, DNR can execute
the contact. He pointed out that, if the legislature approves
the proposed contract, DNR can begin selling the barrels of oil
to Marathon when the current contract expires in July 2025.
4:24:50 PM
MR. FITZPATRICK advanced to slide 15, containing a table of
recent RIK contract key terms. He directed attention to the
final row and said that this includes the RIK differential. He
stated that this is part of the key pricing term for how DNR
prices oil for sales contracts. He briefly described the
process, which begins with a west coast price index. He noted
that these data are used by the State of Alaska as well as in
private contracts for sales of Alaska North Slope (ANS) crude
oil throughout the commercial environment. He explained the
process used to generate an in-state sales price. When oil is
sold on the west coast, the price includes a marine
transportation component (i.e. the cost for transporting the oil
from the Valdez terminal to the west coast market). In-state
sales have a differential that approximates the marine
transportation cost to create an artificial price for the sale
of oil in Alaska. This is a small deduction from the value of a
barrel of oil on the west coast. He noted that the RIK
differential does not always equal the marine transportation
cost, which tends to be slightly larger. He said that this is
part of the premium that comes from selling the oil in-state.
4:27:02 PM
MR. FITZPATRICK directed attention to the previous contracts
shown on the table and said that DNR previously negotiated the
RIK differential on a fixed-value basis. The proposed contract
does not include a fixed RIK differential. He explained that DOR
publishes a volume-weighted average of statewide location
differentials for in-state sales. The proposed contract refers
to the DOR price - using the market index price for the location
differential. $0.24 is subtracted from that price. This reduces
the deduction amount, thereby earning an additional premium for
the State of Alaska. He said that moving to the DOR index price
creates price advantage certainty (relative to the market
location differential). In addition, this allows the pricing
terms to adjust to the market if the contract is extended. He
said that discussions of this market index pricing mechanism led
to discussions about extending the contract term.
4:29:49 PM
SENATOR WIELECHOWSKI asked if DNR sought legal advice to
determine whether the contract term changes comply with the
Constitution of the State of Alaska. In particular, he wondered
whether the changes conflict with the restriction against
binding future legislatures.
4:30:09 PM
MR. FITZPATRICK replied that he is unsure whether DNR consulted
with the Department of Law (DOL) regarding that issue. He noted
that DOL was extensively involved in developing the contract
under consideration. He commented that the legislature has
considered multiple RIK contracts. He added that Alaska Statute
allows DNR to set contract terms for RIK sales of greater than
one-year duration. He said that for short-term contracts, DNR
has a more limited authority. He stated that the contract terms
are contractual obligations, rather than enactments of the
legislature. He reiterated that he is unsure whether DNR
received guidance from Department of Law on this issue; however,
he surmised that, because this is a commercial contract, the
statutory provision related to binding future legislatures would
not apply.
4:31:23 PM
MR. FITZPATRICK advanced to slide 16 and discussed why RIK is
preferable to royalty in-value (RIV). Slide 16 contains two flow
charts to illustrate the route for RIK versus RIV sales. He
noted the premium for RIK sales. He briefly described the
process for determining RIK versus RIV sales, noting the
difference between the RIK differential (for RIK sales) and the
marine transportation cost (for RIV sales). He said that
additional transportation costs include tariffs regulated by
Regulatory Commission of Alaska (RCA). He briefly discussed the
tariffs. He noted that the published tariff schedules are
subject to specific rate regulation. Depending on the tariff
schedule, this may be the same for both in-state and out-of-
state sales. He pointed out that the actual value received by
the state (in the example provided on slide 16) reflects a
higher value for RIK oil (in-state sales) versus RIV oil (out-
of-state sales).
4:33:08 PM
MR. FITZPATRICK advanced to slide 17:
[Original punctuation provided.]
RIK Pricing formula
ANS West Coast price
• Monthly average of ANC USWC daily reported prices
for Platts and Reuters
Minus (-)
RIK differential (DOR location differential minus
$0.24)
• Publicly available number published by DOR
• Average location differential from arm's length
transactions within the state
Minus (-)
Tariff allowance
• Actual TAPS and other pipeline tariffs from point
of sale
Plus or Minus (+/-)
Quality bank adjustment
• Reflects the value of the field specific oil
stream in TAPS
Minus (-)
Line loss
• Small variance in the metered volumes at Pump
Station 1 and the Valdez Terminal
Equals (=)
Royalty In-Kind price
Pipeline tariffs and quality bank adjustments are
public and regulated by the Federal Energy Regulatory
Commission
DOR: Department of Revenue
USWC: U.S. West Coast
TAPS: Trans-Alaska Pipeline System
MR. FITZPATRICK briefly explained that the actual transportation
costs in the tariff are a part of the regulated tariff structure
that both the Federal Energy Regulatory Commission (FERC) and
RCA oversee. Quality bank adjustment is another tariff
component. This is an adjustment for the different qualities of
crude oil coming into a regulated pipeline. He briefly explained
this. He said that this method adjusts for different values of
crude oil components, as the end result (what flows from the
pipeline) is a blended crude oil. With respect to line loss, he
emphasized that this is not line loss due to pipeline leaks;
rather, it is related to the blending of multiple crude oils
with different chemical compositions. He noted that any pipeline
spills are reported to DNR and the Department of Environmental
Conservation (DEC).
4:35:17 PM
SENATOR CLAMAN shared his understanding that line loss in this
case means that the percentage of the different oils entering
the pipeline may have changed slightly by the time that oil
reaches the end of the pipeline.
4:35:39 PM
MR. FITZPATRICK replied that this interpretation is more closely
aligned with the quality bank, although these two concepts are
similar. He clarified that the line loss has to do with the
various characteristics of the different crude streams that are
being combined. He stated that line loss refers to the actual
physical shrinkage of the barrels of oil that are going into the
pipeline together. He explained that two barrels may go into the
pipeline and 1.9998 barrels may come from the end of the
pipeline. He reiterated that this is due to the chemical
characteristics of the oil. He shared an anecdote to further
illustrate this concept.
4:36:37 PM
MR. FITZPATRICK advanced to slide 18, containing a line graph
depicting the marine deduction and RIK differential:
[Original punctuation provided.]
Contract Terms for Marathon Using DOR Location
Differential
Proposed RIK differential = DOR Location Differential
minus 24 cents/bbl
• Difference between marine deduction and RIK
differential largely drives RIK premium over RIV
• New methodology allows for dynamic RIK
differential deduction over contract term
• DNR estimates $1.08/bbl RIK premium
• This would result in approximately $4.9 million
incremental revenue per year of the contract over
RIV if Marathon purchases an average of 12.5
thousand barrels of oil per day (mbopd)
MR. FITZPATRICK said that slide 18 reflects a history of several
different price components. He directed attention to the graph,
which compares the volume weighted average marine deduction, the
volume weighted average RIK differential (this negotiated fixed
price is what DNR has historically received for its RIK
differential), and the DOR location differential minus 24 cents
(this is the differential proposed by the new contract). He
noted that this price changes more than the negotiated fixed
price (which is an average of multiple fixed prices). He said
that DNR generally expects the location differential to perform
better for the state (compared to the fixed RIK differential).
More importantly, the pricing term would be robust over time;
this would avoid market risk over the term of the contract. He
emphasized the importance of risk management alongside any
additional premium the State of Alaska would receive.
4:38:26 PM
SENATOR MYERS pointed out that in-state oil sales do incur some
marine transportation costs. He asked how those costs are
factored into the contract.
4:38:42 PM
MR. FITZPATRICK replied that when the State of Alaska sells RIK
barrels, it does not undertake physical transportation or
holding of that oil. He explained that the State of Alaska sells
the oil at the point of production (i.e. at the unit boundary).
The cost of transportation is a deduction that the State of
Alaska sees against the value of its oil. He explained that
Marathon must pay for the transportation of the oil from the
North Slope to Valdez. Marathon also incurs any tariff costs. He
opined that it makes sense for Marathon to undertake that
responsibility, as the company has other contracts for
purchasing oil on the North Slope and has the infrastructure in
place to move oil to the refinery. He briefly discussed why
Marathon may at times purchase additional (out-of-state) oil for
its Nikiski Refinery. He reiterated that Marathon incurs the
cost of transportation.
4:40:06 PM
MR. FITZPATRICK advanced to slide 19:
[Original punctuation provided.]
Maximum Benefit to Alaskans
As required by AS 38.05.183(e), the Marathon RIK
contract maximizes the benefits to the State:
• The sale results in royalty premiums to the State
compared to the average RIV values
• Incremental increase in State revenue by $4
to $6 million per year
• In-state refining supports Alaskan jobs
• Marathon provides 220 full-time positions at
its Nikiski refinery, over 60 contracted
positions and 40 positions at Anchorage and
North Pole terminals
• Producing refined products in Alaska reduces the
costs to Alaskans
• Fuel security is economic security
• Marathon's Kenai refinery produces 55,000
barrels of refined product per day
• 30 percent is jet fuel supplied to Ted
Stevens Anchorage International Airport
nearly half the airport's demand
• 27 percent is gasoline, which is
consumed in state
• 43 percent is a combination of liquid
petroleum gas, fuel oil, asphalt and
other products
MR. FITZPATRICK said that the annual value of the contract is
hundreds of millions of dollars; however, the notable premium
increase is related to the amount received for RIK versus RIV.
The initial 3-year contract term would be $12 million to $18
million in additional value to the State of Alaska. He stated
that DNR considers both the additional revenue - from the
economic impact and fuel security - to be a significant benefit
to the State of Alaska.
4:42:15 PM
SENATOR KAWASAKI noted the lack of competition for in-state oil
refiners. He posed a hypothetical scenario in which a refinery
wanted to sell gas at a discounted price - or in such a way that
would benefit Alaskans but would not necessarily be of financial
benefit to the State of Alaska. He asked about the potential for
RIK sales in that scenario.
4:43:11 PM
MR. FITZPATRICK replied that Alaska Statute directs DNR to
attempt to receive a premium versus sales of RIV oil; therefore,
DNR would not be able to sell oil for in-state purposes (i.e.
RIK) at a discount. He noted that statutory changes are the
purview of the legislature.
4:43:56 PM
SENATOR MYERS asked how oil producers factor into the process of
determining whether the State of Alaska will take its royalty
oil in-kind or in-value.
4:44:15 PM
MR. FITZPATRICK replied that oil and gas contracts have a built-
in nomination period. He explained that DNR must inform
producers that the State of Alaska plans to take the royalty oil
in-kind. This advance notice gives producers the opportunity to
adjust their sales contracts as needed. He indicated that DNR
considers producers' preference for in-kind versus in-value oil
nominations when possible. He stated that DNR attempts to work
with purchasers when considering nominations from certain oil
fields and briefly discussed this process.
4:45:53 PM
SENATOR WIELECHOWSKI directed attention to SB 176, Section 1,
line 9, which states that the legislature approves and ratifies
the agreement for the sale of royalty oil between the State of
Alaska and Marathon. He noted that the committee does not have
copies of the signed agreement; however, the draft agreement is
available on DNR's website. He asked if that draft agreement is
the one the legislature is ratifying.
4:46:24 PM
MR. FITZPATRICK replied yes. He explained that DNR does not
execute that agreement until the legislature gives authorization
to do so. The agreement that is a part of DNR's best interest
finding is before the legislature. He added that any amendments
must also come before the legislature.
4:46:51 PM
SENATOR WIELECHOWSKI directed attention to section 6.1 of the
agreement, which is related to credit ratings. He asked for
information on Marathon's current credit rating.
4:47:23 PM
MR. FITZPATRICK replied that he does not recall Marathon's
current credit rating. He explained that the references to
credit rating in the agreements reflect the contract security
that DNR negotiates as part of RIK sales. He briefly discussed
payment terms, the financial assurance that the State of Alaska
receives from purchasers, and how these relate to the
purchaser's credit rating. He said that DNR typically requires
some form of financial assurance that is sufficient to cover a
minimum of one month of payment cycles.
4:48:59 PM
SENATOR WIELECHOWSKI directed attention to section 21.1 of the
agreement, which relates to assignments and other transfers, and
asked whether Marathon could sell its assets to any buyer. He
indicated concern that those assets could be sold to adversarial
countries. He asked for further clarification of whether the
State of Alaska would remain obligated to sell the oil to the
new buyer.
4:49:48 PM
MR. FITZPATRICK replied that the contract allows for the
assignment of the contract to a new purchaser of the Marathon
refinery; however, he pointed out that international purchases
are reviewed at both the state and federal levels.
4:50:25 PM
SENATOR WIELECHOWSKI noted concerns previously raised by the
committee related to adversarial countries and asked whether it
would be appropriate to add a provision to the contract to limit
potential sales. He shared his understanding that, as currently
written, the contract would allow for sales to adversarial
countries.
4:50:58 PM
MR. FITZPATRICK answered that this could be explored in future
contracts. He reiterated that this contract has already been
through the notice and comment period as well as royalty review,
and would therefore need to be renegotiated in order to add that
provision. He reiterated that both the state and federal
governments review any sale of energy assets to foreign buyers -
particularly if the buyer is from a potentially adversarial
jurisdiction.
4:52:22 PM
SENATOR HUGHES questioned whether the federal government has
jurisdiction to stop negotiations between private companies and
foreign countries. She shared her understanding that the federal
government could review these transactions but would not be able
to stop them.
4:52:54 PM
SENATOR KAWASAKI asked whether this contract was negotiated
before or after the merger between ConocoPhillips and Marathon
Oil.
4:53:16 PM
MR. FITZPATRICK explained that Marathon Oil previously split
into two companies: Marathon Oil Corporation, which focused on
exploration and production activities (this company later merged
with ConocoPhillips) and Marathon Petroleum, which is focused on
refining activities. He clarified that the company operating the
Nikiski Refinery is Marathon Petroleum.
4:54:18 PM
SENATOR CLAMAN asked for confirmation of his understanding that,
at this time, the legislature can either approve or disapprove
the contract; any changes to the contract must be renegotiated.
4:54:47 PM
MR. FITZPATRICK confirmed this understanding. He explained that
modifying the terms of the contract would mean returning to the
public negotiations process, beginning with the best interest
finding and ending with the Royalty Board review.
4:55:28 PM
CHAIR GIESSEL held SB 176 in committee.
4:55:55 PM
There being no further business to come before the committee,
Chair Giessel adjourned the Senate Resources Standing Committee
meeting at 4:55 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 176 DNR Sectional Analysis.pdf |
SRES 4/23/2025 3:30:00 PM |
SB 176 |
| SB 176 Transmittal Letter.pdf |
SRES 4/23/2025 3:30:00 PM |
SB 176 |
| SB 176 Fiscal Note DNR.pdf |
SRES 4/23/2025 3:30:00 PM |
SB 176 |
| SB 176 Alaska Royalty Board Legislative Report_Marathon 2025.pdf |
SRES 4/23/2025 3:30:00 PM |
SB 176 |
| SB 176 DNR Briefing Paper 4-15-25 final.pdf |
SRES 4/23/2025 3:30:00 PM |
SB 176 |
| SB 176 DNR Final Best Int Finding Marathon RIK 4-14-25.pdf |
SRES 4/23/2025 3:30:00 PM |
SB 176 |
| SJR 19 v.H.pdf |
SRES 4/23/2025 3:30:00 PM |
SJR 19 |
| SB 176 Letter of Support.pdf |
SRES 4/23/2025 3:30:00 PM |
SB 176 |
| SB 176 DNR Presentation SRES 4-23-2025.pdf |
SRES 4/23/2025 3:30:00 PM |
SB 176 |