Legislature(2025 - 2026)ADAMS 519
05/01/2025 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB57 | |
| HB27 | |
| HB194 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 57 | TELECONFERENCED | |
| += | HB 27 | TELECONFERENCED | |
| + | HB 194 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 194
"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."
2:53:44 PM
JOHN CROWTHER, DEPUTY COMMISSIONER, DEPARTMENT OF NATURAL
RESOURCES, explained that the bill sought legislative
approval for a "royalty in kind" contract, which was how
the state disposed its share of royalty oil. It was a
longstanding process and resulted in a small premium to the
state versus the average value of royalty, supported the
state's refineries, and ensured fuel security. He asked for
the committee's support for the bill.
RYAN FITZPATRICK, COMMERCIAL MANAGER, DIVISION OF OIL AND
GAS, DEPARTMENT OF NATURAL RESOURCES, provided a PowerPoint
presentation titled "House Bill 194: Approve Marathon Petro
Royalty Oil Sale," dated May 1, 2025 (copy on file). He
began on slide 2 titled "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
Mr. Fitzpatrick expounded that the state's royalty share
ranged from 12.5 percent to approximately 16.7 percent. The
state's share was free of production costs but paid
transportation costs. The state had the option to take the
royalty in two ways as described on the slide.
Mr. Fitzpatrick moved to slide 3 titled "Royalty A Core
Lease Term." That depicted a snapshot of royalty provisions
and the agreement. He turned to slide 4 titled "Sources of
North Slope Royalty," which showed an overview map of the
North Slope. The shaded units were state oil and gas units
where the state received its share of production in
royalty-in-kind, which were almost exclusively derived from
North Slope leases.
2:58:30 PM
Mr. Fitzpatrick turned to slide 5 titled "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 North Slope oil
The amount of RIK oil that the State sells
varies and depends on 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 explained that that the state had taken
royalty in-kind since 1980. The slide portrayed a chart
containing its historical contract history of in-kind
(green) versus in-value royalties (black). He pointed out
that the amount of in-kind royalty varied considerably over
the years. He reported that historically the barrels were
completely marketed, often out-of-state. Recent statutes
required the department to support in-state refining
creating a preference for in-state refineries or other in-
state purchasers before it could be marketed out-of-state.
He elaborated that part of DNR's process was to release a
public notice on potential royalty sales to gauge market
demand. Over the last decade, there were no firm out-of-
state contracts for the purchase of royalty oil and over
the last two decades the royalty oil was exclusively sold
to in-state refiners.
3:00:34 PM
Mr. Fitzpatrick continued to discuss slide 6 titled
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 indicated that the slide also depicted the
history of the different royalty in-kind contracts. He
noted the several long-term contracts existed for many
years. He pointed to the recent Petro Star and
Tesoro/Marathon contracts.
He briefly discussed slide 7 titled "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) (Royalty Board)
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 emphasized that before the contract was
submitted to the legislature for approval, the proposed
contract went through an extensive public process. He
reported that DNR did not receive any public comment on
this contract.
Representative Hannan cited the last sentence on the slide
regarding the exceptions not applying to the current
Marathon contract and asked for clarity. Mr. Fitzpatrick
responded that the public process was for sales contracts
such as the Marathon sale currently before the committee.
He furthered that the department had separate statutory
authority in certain contracts and was not required to be
submitted to the legislature. The contracts went through
public comment and published a best interest finding and
were usually for the short-term of one year or less and for
contracts considered di minimus, subject to a limited
number of barrels or mcf (one thousand cubic feet) of gas
per day.
3:04:50 PM
Mr. Fitzpatrick examined slide 8 titled "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.
Mr. Fitzpatrick indicated that the slide also depicted
portions of the board's resolution and report to the
legislature.
He turned to slide 9 titled "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.
3:06:21 PM
Mr. Fitzpatrick reported that DNR worked extensively with
the royalty board regarding the Marathon contract and
passed a resolution in support of the contract. He
discussed slide 10 titled "Recent RIK Contracts:" The chart
portrayed several of the more recent contracts. The
proposed Marathon contract showed a royalty volume range
(nomination range) from 10,000 to 15,000 barrels per day,
which could vary between the range. He disclosed that
Marathon only negotiated a three-year contract in its prior
contract. Currently, Marathon started with a primary term
of 3 years with an option of 7 years of annual extensions.
The options were exercised one year at a time. Either party
maintained the option to terminate the contract in three
years or at the end of each subsequent year. In addition,
if both parties were satisfied, they had the option to
continue the contract.
Representative Hannan asked about the mutual consent
contract extension. She asked who was responsible for
agreeing to the extension concerning the state's interest.
Mr. Fitzpatrick answered that the decision on renewals was
undertaken by the department. Functionally, the decision
was made by the commissioner, but the decisions were run
through the Division of Oil and Gas and managed by the
Commercial Section. Representative Hannan asked if the
annual extension required a specific time period. She
thought a one year extension seemed short. She wondered
whether the state could initiate the request to extend. Mr.
Fitzpatrick answered that there was a notice period prior
to the end of each subsequent one year term and the
agreement had to be made prior to the end of each term. He
furthered that the requirement lasted 30 or 60 days and the
decision had to be made before the contract lapsed. The
department had a certain window when the producers had to
be notified that the state was electing royalty in-kind and
the stated needed certainty that the contract would be
renewed prior to the nomination window, therefore the
actual time-period to renew or lapse was several months
before the end of the other time periods.
3:11:37 PM
Representative Galvin deduced that the chart showed all of
the contracts that had been approved since 2016. Mr.
Fitzpatrick replied affirmatively. Representative Galvin
thought that the current Marathon contract was a standout
due to the seven year optional potential. She wondered if
there was any inherent reason for it to be designed so
differently than other past contracts. Mr. Fitzpatrick
answered that the chart depicted "adjustments to the
contracts" versus brand new contracts. The extensions were
a method to extend the contract on a basis both parties
understood. He characterized it as a modification versus a
wholesale change in terms. In addition, longer-term
contracts were a positive thing for the state and important
part of energy security.
3:13:51 PM
Representative Galvin believed that it appeared positive
that the producers were looking to have a longer term
commitment. She thought it locked in the number of barrels.
She asked if there was any reason for the state to hesitate
to lock in for a longer period of time. Mr. Crowther
responded that the pricing term had also been adjusted
slightly to lock in the premium but also float year to year
with an adjustment rather than being fixed for the entire
term of the contract. He indicated that prior contracts had
a fixed model. The more flexible the contract with a
guaranteed premium and option to extend worked in the
state's favor. Representative Galvin deemed that it could
be very helpful for the company to have a fixed price
because it would know what its profits looked like in the
future. She wanted to determine whether the state had done
its best to capture the most revenue possible. Mr. Crowther
answered that the contract did not expose the state to
underpricing due to the contract's price terms associated
with an index that changes with the market.
3:16:26 PM
Representative Galvin inquired whether the legislature had
ever rejected a royalty in-kind contract and if so, why.
Mr. Crowther replied in the negative. He believed that it
was in part, due to the robust public process.
Mr. Fitzpatrick turned to slide 11 titled "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 communicated that when DNR only dealt with
a single purchaser it was viewed as potentially problematic
from a competitive standpoint. The bidder lacked a
competitive environment and lacked the incentive to bid
over the minimum of the bid. The state would then engage in
non-competitive sales and enter into direct negotiations
with the producer to increase the premium the state
received.
3:18:51 PM
Mr. Fitzpatrick addressed slide 12 titled "Royalty-in-Kind
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 reiterated that no out of state interest
had resulted in an in-kind purchase in many years.
3:19:28 PM
Mr. Fitzpatrick moved to slide 13 titled "The Historical
Premium for 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 cited the slide's graph that depicted the
premium of RIK price over RIV price for ANS royalty oil
from January 2008 through November 2024. He pointed out
that the zero dollar mark demarked the break even between
the RIK and RIV sales. He indicated in almost every month
the state managed to secure a premium for in-kind sales of
over $1 to $3 relative to RIV sales excluding a few periods
of market instability. The in-kind sales garnered
additional revenue for the state.
Mr. Fitzpatrick turned to slide 14 titled RIK Process
Overview." He briefly reported that the slide contained a
flow chart of the Royalty In-Kind process, which he already
discussed in detail.
3:21:39 PM
Mr. Fitzpatrick advanced to slide 15 titled "Recent RIK
Contract Key Terms:
Netback Pricing
DNR sells its royalty oil at the field or "wellhead"
and bases the price on market sales price indices with
various costs backed out. Thus, the price of royalty
oil is calculated by "netting back" the price of ANS
oil from the U.S. West Coast to the field.
RIK price =
ANS price at the U.S. West Coast
- RIK Differential
- Pipeline transportation cost
+/- Quality bank adjustment
- Line loss
Mr. Fitzpatrick explained that the chart was similar to
slide 10 with the same contracts exemplified and related to
Representative Galvin's questions regarding price terms and
the potential for longer term contracts. He pointed to the
far right hand column titled "RIK Differential." He
explained that it showed the pricing term for the
contracts. The RIK differential along with another
"location differential contract" was an equivalent of the
marine transportation costs when comparing the United
States (US) west coast price using the market price indices
for the sales and backed the price into the state of
Alaska. The negotiated price did not have to match Alaska's
actual marine cost and was less than the total marine cost.
He revealed that there was a built in premium for sales
that occurred in the state relative to West Coast sales.
The chart portrayed the previous RIK differential was
negotiated on a fixed dollar basis and was locked in at the
prices shown on the chart. He noted that the price was a
subtraction from what the state received from a barrel of
oil. However, in the current year, instead of fixing a
price, the department used DOR's location differential
based on surveys of all of the oil sales contracts executed
in the state over 12 months. The updates were published
each year that contained the location differential for the
Alaska market. The state used the location differential for
its reference value and negotiated a discount off the
location differential to establish a premium, which was
$0.24 in the current year. It reduced the deduction against
the state's value of oil in addition to the in-state
premium. He expounded that because the state used a market
value reference that was updated on an annual basis based
on the market survey, it provided DNR the confidence to
offer a potential longer term contract. He believed that it
reduced the potential to diminish or eliminate the
additional profit, and the model locked in the premium over
the life of the contract.
3:26:26 PM
Mr. Fitzpatrick addressed slide 16 titled "Why RIK?" He
explained that the graphics showed the value chain for a
barrel of oil in ANS in-value royalty and ANS in-kind
royalty. He pointed out that both started at $80/bbl and
detailed that the marine transportation allowance for in-
value oil was $3.50 while the RIK differential was
$2.25/bbl. There was a deduction on both of $6.00 for other
transportation costs and adjustments. The resulting price
per barrel for RIK oil was $71.75/bbl. and the RIV price
was $70.50/bbl. He noted that the prices were hypothetical.
3:27:27 PM
Mr. Fitzpatrick moved to slide 17 titled "RIK Pricing
Formula The chart contained a formula representation of
the RIK pricing calculation resulting in the Royalty In-
Kind price explained in prior slides. He recounted that the
department used the Reuters and Platts pricing agencies to
determine the market indices for the west coast price. He
noted that the tariff allowance was the actual
transportation cost that also had two other components
associated with it. The first was the Quality Bank
adjustment that reflected the value of the field specific
oil stream in Trans-Alaska Pipeline System (TAPS). The
other was the Line Loss, which was the small variance in
the metered volumes at Pump Station 1 and the Valdez
Terminal. It was a small diminishment of a barrel when two
crude streams were combined with different chemical
conditions.
3:28:25 PM
Mr. Fitzpatrick highlighted slide 18 titled "Contract Terms
For Marathon Using the 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 elucidated that the graph depicted the
marine deduction and the RIK differential from 2007 to
2024. The information conveyed how the new pricing term
would have performed relative to the fixed price
differentials. He pointed out that the two tracked
relatively closely with slight differences depending on the
year. The purpose of moving to the market index pricing
formula was not attempting to gain an additional premium,
which was built into its current contracts. The main reason
for the new mechanism was to reduce uncertainty over the
term of the contract and to lock in the premium. He
characterized it as a risk mitigation measure.
3:30:24 PM
Mr. Fitzpatrick moved to slide 19 titled "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
Co-Chair Foster asked for a review of the fiscal note.
3:32:02 PM
Mr. Fitzpatrick reported that the published Department of
Natural Resources zero fiscal note (FN1(DNR) had no cost
for the department. The revenue was indeterminate for three
years due to the variability in the amount up to 15,000
bbl. per day. However, the department did estimate between
$4,000,000 and $6,000,000 in additional revenue.
3:32:51 PM
Co-Chair Foster OPENED public testimony.
CASEY SULLIVAN, GOVERNMENT AND PUBLIC AFFAIRS MANAGER,
MARATHON PETROLEUM, ANCHORAGE (via teleconference),
supported the bill. He believed that the contract provided
stability, availably, and flexibility for the Kenai
refinery. He shared that the Kenai facility had been one of
the longest operating refineries in the state, opening in
1969. The plant was capable of producing up to 69,000
barrels per day and was focused on value added products
like propane, diesel, and asphalt. They distributed
products statewide and employed many Alaskans. He relayed
that Marathon was committed to reliably producing quality
fuels in Alaska for the long-term. He concluded that the
contract would provide a positive shared value for all
Alaskans and asked for members' support of HB 194.
Co-Chair Foster thanked Mr. Sullivan.
Co-Chair Foster CLOSED public testimony.
3:35:46 PM
Co-Chair Foster noted the bill did not seem controversial.
He wondered if there was an interest in moving the bill.
Representative Galvin MOVED to REPORT HB 194 out of
committee with individual recommendations and the
accompanying fiscal note.
There being NO OBJECTION, it was so ordered.
HB 194 was REPORTED out of committee with eight "do pass"
recommendations and with one previously published
indeterminate fiscal note: FN1 (DNR).
3:37:36 PM
Co-Chair Foster reviewed the schedule for the following
day.