Legislature(2015 - 2016)HOUSE FINANCE 519
03/31/2016 08:30 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Confirmations: Alaska Mental Health Trust Authority | |
| HB373 | |
| SB124 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | HB 373 | TELECONFERENCED | |
| + | SB 124 | TELECONFERENCED | |
| + | HB 319 | TELECONFERENCED | |
| *+ | HB 250 | TELECONFERENCED | |
| + | HB 249 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 273
"An Act relating to the transfer of the title to a
vehicle, including certain manufactured homes and
trailers, on the death of the owner; and providing for
an effective date."
8:49:50 AM
MARTY RUTHERFORD, ACTING COMMISSIONER, DEPARTMENT OF
NATURAL RESOURCES, indicated she would be providing a brief
overview of the proposed sale of the state's royalty oil to
Tesoro.
Commissioner Rutherford relayed that she would discuss the
process and the criteria for royalty-in-kind (RIK) sales.
She would also discuss the specific contract terms of the
Tesoro RIK contract. She would also be mentioning another
royalty oil contract the state was in the mist of
negotiating.
Commissioner Rutherford began with slide 2: "Royalty In-
Kind versus Royalty In-Value":
The State has a choice to take its royalty in-kind
(RIK) or in-value (RIV)
· When the State takes its royalty as RIV, the
lessees who produce the oil also market the
State's share along with their own production and
pays the State the value of its royalty share.
· When SOA takes its royalty share as RIK, the SOA
assumes ownership of the oil, and the DNR
Commissioner disposes of it through the sale
procedures prescribed by AS 38.05.183.
· Currently, the SOA receives all royalties as RIV;
historically, the SOA has regularly taken
royalties as RIK.
Commissioner Rutherford advanced to slide 3: "Non-
Competitive RIK Sale Process":
· Before taking RIK, the DNR Commissioner must find
it is in the State's best interest.
· DNR must decide whether to sell RIK pursuant to a
competitive auction or a non-competitive,
negotiated sale.
· Solicitation of Interest issued January 2015 to
prospective purchasers to gauge market interest.
· DNR determined that there was not competition
allowing for a competitive sale, and proposes to
enter into the negotiated 5 year contract with
Tesoro.
Commissioner Rutherford continued to slide 4:
"Commissioner's Decision Criteria":
AS 38.05.183(e) states that the commissioner must sell
the State's royalty oil to the buyer who offers
"maximum benefits to the citizens of the state." In
making this determination, the commissioner must
consider:
1. The cash value offered
2. The projected effects of the sale on the economy
of the state
3. The projected benefits of refining or processing
the oil in state
4. The ability of the prospective buyer to provide
refined products for distribution and sale in the
state with price or supply benefits to the
citizens of the state
5. The eight criteria listed in AS 38.06.070(a), as
reviewed by the Royalty Board
Commissioner Rutherford noted that she would be talking
about the eight criteria in greater detail in another
slide.
Commissioner Rutherford turned to slide 5: "Approval
Process for the RIK Sale":
· DNR must make a Best Interest Finding (BIF) in
support of the sale
· Preliminary BIF issued February 2016; final BIF
issued in March 2016.
· DNR presented the sale to the Royalty Board on
March 15, 2016; the Board reviewed the BIF and
the contract, and unanimously voted to recommend
the Legislature approve the sale to Tesoro.
· Prior to finalizing the RIK contract, the
Legislature must pass a bill ratifying the
contract with Tesoro (HB 373; SB 205).
8:54:44 AM
Commissioner Rutherford discussed slide 6: "Royalty Board's
Decision Criteria":
AS 38.06.070(a) states that the Alaska Royalty Oil and
Gas Development Advisory Board must 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;
3. The desirability of localized capital investment,
increased payroll, secondary development and
other possible effects of the sale;
4. The projected social impacts of the transaction;
and
5. The projected additional costs and
responsibilities which could be imposed upon the
state and affected political subdivisions by
development related to the transactions.
Commissioner Rutherford stated that number 3 was not
applicable because the state was selling to an existing
refinery that had been using alternative privately
purchased supplies. She also relayed that number 5 was not
applicable because the state had an established refinery.
Commissioner Rutherford turned to slide 7: "Royalty Board's
Decision Criteria Cont.":
AS 38.06.070(a) states that the Alaska Royalty Oil and
Gas Development Advisory Board must consider:
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 or negative environmental
effects related to the transactions; and
8. The projected effects of the proposed transaction
upon existing private commercial enterprise and
patterns of investment.
Commissioner Rutherford added that the royalty board
reviewed the final best interest finding and the associated
Tesoro contract. They voted unanimously to recommend that
the legislature approve the sale.
Commissioner Rutherford spoke on slide 8: "Tesoro RIK
Contract Terms":
· 5 year contract for 20,000 to 25,000 barrels per
day.
· The RIK sales price uses a netback formula and
provides higher revenue to State compared to RIV.
· If Tesoro nominates zero barrels for 3
consecutive months, the contract terminates.
· Security: Tesoro shall provide a letter of
opinion from a financial analyst or a stand-by
letter of credit equal in value to 90 days of ANS
royalty oil (if rating falls below BBB- and
Baa3).
· In-state processing: Tesoro to use "commercially
reasonable efforts" to manufacture refined
products from the ANS royalty oil.
· Employment of Alaska residents: no discrimination
against AK companies and residents.
Commissioner Rutherford highlighted that Tesoro had over
210 Alaskan employees and employed over 40 Alaskan
contractors. The plant was located in Nikiski and had been
in operation for several decades.
8:58:26 AM
Commissioner Rutherford detailed slide 9: "RIK Contract
Price":
ANS Spot Price - $1.95 - Tariff Allowance +/- Quality
Bank Adjustments - Line Loss
· ANS Spot Price = Average US 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).
Commissioner Rutherford pointed to the price formula listed
at the top of the slide in red. The Revenue In-Kind
contract prices equaled the Arctic North Slope (ANS) spot
price minus $1.95 minus a tariff allowance, adjusted for a
quality bank - either up or down - minus line loss. She
explained that ANS spot price was the destination value of
ANS at the United States West Coast - determined by reports
from the industry trade publications, Reuters and Platts.
The next item deducted was a location differential. She
reported that the amount of $1.95 was used in the
solicitation of interest. She explained that starting with
the ANS spot price the state deducted the marine
transportation costs. When the state received RIV and
looked to the working interest owners the
shippers/producers charged the state between $3.30 and
$3.70 for the cost of the marine transportation from the
Valdez Marine Terminal to the West Coast. The state then
deducted the tariff allowance, a combination of the Trans
Alaska Pipeline tariff and the upstream pipelines.
Following those deductions the state adjusted for a quality
bank, determined by the TAPS quality bank administrator at
the Federal Energy Regulatory Commission (FERC). Finally,
the line loss was deducted, the loss of volume that
occurred between Pump Station 1 and the Valdez Marine
Terminal. The resulting figure equaled the value that the
state of Alaska received. She explained that difference
between RIK versus RIV was about $1.95 versus $3.50 - about
$1.50 in the state's favor. The only distinction between
calculating the RIK versus was RIV had to do with the
amount being deducted.
Commissioner Rutherford highlighted slide 10: "Contract is
in the State's Best Interest":
· DNR estimates the State will receive $45 to $56
million in additional revenue over taking RIV.
· Producers deduct around $3.30 to $3.70 from the
west coast value as a "transportation deduction"
in arriving at the price for RIV.
· The proposed Tesoro contract will deduct only
$1.95 as a "location differential" from the west
coast ANS value.
· The proposed sale provides crude to Tesoro's
refinery at Nikiski with associated economic and
social benefits to Alaska's economy:
· Tesoro employs approximately 210 Alaskans
· Tesoro produces 59,000 bpd refined products at
its Nikiski refinery
· Tesoro refinery's estimated contribution to the
local economy is $127mm
9:02:55 AM
Commissioner Rutherford moved to slide 11: "Additional
Royalty Oil Sales":
•Additional royalty oil volumes are available for the
other in-state refiner, Petro Star; helping maintain a
competitive in-state refining industry.
•DNR is currently negotiating sales with Petro Star of
remaining royalty oil under similar contractual terms.
•The proposed Tesoro contract and forthcoming Petro
Star contract will allow for additional sale oil
nominations to maximize royalty oil sales if the State
has more royalty oil than is currently forecasted.
Commissioner Rutherford added that if the volume fell the
state would be pro-rationing both contracts down together.
She concluded her presentation and made herself available
for questions.
Co-Chair Thompson asked about the quality bank adjustment.
He asked her to elaborate on the subject.
Commissioner Rutherford suggested Mr. Nouvakhov would be a
better person to address Co-Chair Thompson's question.
ALEX NOUVAKHOV, DIVISION OF OIL AND GAS, DEPARTMENT OF
NATURAL RESOURCES, responded that the quality adjustment in
the netback evaluation equation looked at the crude which
was being sold at the entry of the TAPS and compared it to
the comingled stream at the Valdez point. If any residuals
were frozen into the TAPS the payment or penalty would be
borne by Petro Star rather than the sellers. The two
contracts between the State and Tesoro and between the
state and Petro Star would have the same quality
adjustment.
Commissioner Rutherford explained to Mr. Nouvakhov that
because both Petro Star and Tesoro took their oil at the
terminus the question was whether there was any quality
bank adjustment involved in the formula for Tesoro.
9:06:30 AM
Mr. Nouvakhov responded in the affirmative. He explained
that there was because, depending on the nominating field,
the state had an option as to which fields and crudes were
nominated. For example, if the state nominated something
for the crude oil field and then compared that to a
commingled final crude in Valdez there might be a quality
adjustment.
Co-Chair Thompson was still unclear. He thought the quality
bank had to do with the amount of product taken off by
Petro Star in the Fairbanks area. They take out a part of
the product and what was placed back in the line was of a
lesser quality. Therefore, there was a quality bank change
to Petro Star. He furthered that if Tesoro took it out in
the same as it would go to the West Coast and did not put
anything back in the line, he wondered if there would still
be a quality bank adjustment. They did not put back a
lesser quality product into any line.
Mr. Nouvakhov responded that Co-Chair Thompson was correct
that Tesoro did not put any product back into a line. He
detailed that the crude the state sold at the point of
delivery at Pump Station 1 could be of a different quality
than the final commingled ANS crude which Tesoro took at
the Valdez Terminal.
Commissioner Rutherford furthered that the state received
an average of 12.5 percent from certain fields. The state
took delivery of its RIK from Pump Station 1. What was
delivered downstream from that could be of lessor or
greater quality. The quality bank used an adjustment to
calculate either a deduction or an increase to the state's
value to ensure the state would receive the pure molecular
value for the units from which the state received its oil.
Representative Wilson commented that Petro Star would be
effected by the quality bank differently than Tesoro
because of their location. She did not think how they
[Tesoro] were effected had anything to do with their
contracts because a certain portion was not in the
contract. It was dealt with separately because of it being
a federal government related transaction and certain
information was unknown at the time. Commissioner
Rutherford indicated she was correct. She relayed that it
was an effort to ensure that where the state took its
molecules and the composition of the particular molecules
were accommodated so that when they were mixed with
everything going into line the state received the
appropriate value for the molecules.
9:10:03 AM
Representative Wilson thanked Department of Natural
Resources for making it possible for the state to keep its
own oil in the state and using it for the in-state
refinery. She hoped it would result in keeping the refinery
more profitable and steady. She hoped the state had learned
a lesson from what happened at Flint Hills and looked
forward to the arrival of Petro Star.
Representative Gara was fine with the bill. He was glad a
rider was not in the bill like there had been two years
previously. He commented that the more he looked at the
legislation the unhappier he became about what the
legislature did 2 years prior. He explained that
legislation that passed granted up to $10 million per year
of tax credits adding to the royalty renewal contract for
three company owners of refineries. Tesoro had indicated
they did not want them. He did not believe the state was in
the kind of financial condition to continue that kind of
legislating. He opined that in part the budget was very
unfair to many people. He thought it would be unfair not to
give the $10 million to Tesoro if the state was giving it
to others. He would consider offering an amendment on the
House Floor.
Co-Chair Thompson indicated that the discussion would
continue on the house floor.
Representative Guttenberg had assumed that the quality bank
calculation was zero. He realized that there were
adjustments for quality per field. He queried if there was
a daily calculation on flow rate. He wondered if the state
was taking oil from its high volume fields. Commissioner
Rutherford responded that she would ask Mr. Nouvakhov to
speak to his question about flow. She responded that the
State of Alaska received its royalty oil as it was produced
by producers. The state could not over lift or under lift.
When the producers produced from various fields the state
received its royalty percentage from particular leases. If
there was a variation of the royalty rate, it would very
between leases. The state took it as it was produced by the
various working interests by field and by lease.
9:13:54 AM
Vice-Chair Saddler asked about the effects of the price
indices rising substantially. He wondered if the contracts
for the sale to Tesoro had any provisions for an escalated
price. Commissioner Rutherford explained that the place
where the state captured how the price was variable was at
the ANS spot price.
Vice-Chair Saddler asked Commissioner Rutherford to
describe the negotiations that lead to the equalization of
the pro-rata provisions in exchange for changed volume for
Petro Star.
Commissioner Rutherford detailed that when the department
went out for the solicitation of interest the state
received various responses. Two of the five parties that
responded were North Slope Producers who had indicated that
while they might be able to meet a price point of $195 they
were intending to ship out of state for refining. The state
had received a response from Flint Hills indicating they
were closing down and not interested. The state also
received a response from Petro Star that they were
interested but were not willing to hit the price point.
Tesoro expressed their interest and willingness to hit the
price point. The state, then began its negotiations with
Tesoro. As negotiations with Tesoro progressed Petro Star
came back expressing their interest and the desired price
point. The state was well into the negotiating process with
Tesoro. As part of trying to accommodate Petro Star's
desire for volume the state asked Tesoro if it was willing
to give up some of its volume to accommodate Petro Star's
interest. The state believed it was good to have a
competitive environment for refining in Alaska. In exchange
the state had looked at providing Tesoro with a
preferential pro-rationing position. She furthered that as
the negotiations continued a point was reached where all
partners were relatively satisfied. In the end it was
decided that neither party would have a pro-rationing
decision. The state would pro-ration down equally between
any contracts the state had in place.
Co-Chair Thompson asked for further questions.
9:17:22 AM
MATT GILL, EXTERNAL AFFAIRS, SENIOR MANAGER, TESORO, urged
members support for the legislation. He read from a
prepared statement:
Tesoro Corporation is a Fortune 100 company and is an
independent refiner and marketer of petroleum
products. Tesoro's refining operations started Alaska
with the purchase of the Kenai refinery back in 1969.
Our Kenai refinery has the operational capacity to
produce up to 72,000 barrels per day and is primarily
focused on Jet and Diesel production followed by
gasoline and gasoline blendstocks, heating oil and
heavy fuel oils, propane and asphalt. We operate a 68-
mile, common-carrier products pipeline that transports
jet fuel, gasoline and diesel fuel to the Port of
Anchorage and the Anchorage International Airport. The
wholesale delivery of our products occurs through our
terminals in Kenai, Anchorage, our Nikiski dock and
the Port of Anchorage.
In addition to being the largest taxpayer in the Kenai
Peninsula Borough, Tesoro is also able to provide
around 225 family wage jobs at the refinery, along
with about 30 full-time contractors that are working
in and around the refinery year round. We provide
retail fuels at our company-owned Tesoro 2-Go retail
outlets as well as at numerous branded and unbranded
outlets. We employ operators who work at our terminals
in the Port of Anchorage and in Nikiski.
We are a major supporter of the Cook Inlet Regional
Citizens Advisory Council (CIRCAC) and the largest
member of the Cook Inlet Spill Prevention & Response
team (CISPRI).
We actively support a wide range of local events and
programs - from employee fundraising for the United
Way to youth sports programs. Each year we sponsor all
of the 5th and 6th grade classes on the Kenai
Peninsula to conduct a mission at the Kenai Challenger
Learning Center and we are the Signature Sponsor of
"Caring for the Kenai" program.
Tesoro strongly urges you to support House Bill 373,
"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."
This legislation is the result of constructive dialog
and productive negotiations between the Department of
Natural Resources and the Tesoro Corporation. By all
accounts, our company was very impressed with the
State's ability to understand our issues and arrive at
a mutually beneficial agreement that is truly a win-
win for both parties as well as accommodating to the
other refineries in the State.
For the State, the DNR estimates that it will continue
to receive a price for its Royalty-in-Kind oil that
exceeds the price it would have receive if it elected
to keep its Royalty Oil in Value.
For Tesoro, this 5 year contract will provide us with
a stable supply of ANS crude while also giving us the
volumetric flexibility to help accommodate seasonal
fluctuations in demand for refined products. The
availability, flexibility and stability that this
contract offers will have a positive impact on our
ability to maintain our ongoing operations at our
Kenai refinery.
In order to accommodate the needs of the other in-
state refiners, Tesoro and the State modified this
contract to reduce volumes as well as eliminate a
proration clause and a 5 year extension option.
Tesoro believes in Alaska's future and is committed to
being an active corporate citizen. We look forward to
continuing to provide Alaskans with clean burning
fuels to keep your homes warm and your cars, boats and
snow machines traveling across this great state.
I urge you to support House Bill 373.
9:21:20 AM
Representative Pruitt reported regularly getting asked
about pricing. He asked Mr. Gill how Tesoro saw the sales
impacting the consumer. Mr. Gill clarified that
Representative Pruitt was asking about gasoline prices
versus oil prices.
Representative Pruitt responded affirmatively. Mr. Gill
relayed that the approval or denial of the contract before
the committee would have no direct impact on street prices
of gasoline and Tesoro's other oil products. It was
strictly a commercial transaction between Tesoro and the
State of Alaska, equivalent to a commercial seller.
Vice-Chair Saddler queried about any other supply of crude
oil that would replace the state RIK oil. He wondered about
the current source of capacity assuming there would be no
change in the refinery throughput. Mr. Gill reported that
currently Tesoro took every drop of oil produced in Cook
Inlet, the company's base supply. It supplemented the Cook
Inlet oil with ANS crude either through state royalty
contracts or through contracts with other North Slope
producers. On rare occasion the company had to import crude
oil from out of state to fill its' needs. Currently,
Tesoro's royalty oil contract, which expired in January
2016, left the company with a gap until the new contract
was in effect in August 2016. It was his understanding that
the company had to purchase some Russian crude to bring
into the refinery.
9:23:37 AM
Co-Chair Thompson OPENED public testimony.
Co-Chair Thompson CLOSED public testimony.
Co-Chair Thompson asked Vice-Chair Saddler to review the
fiscal note.
Vice-Chair Saddler reviewed one indeterminate fiscal note
from DNR, Division of Oil and Gas, Office of Management and
Budget, component number 439. The fiscal note was dated
March 23, 2016.
Co-Chair Neuman MOVED to report HB 373 out of Committee
with individual recommendations and the accompanying
indeterminate fiscal note. There being NO OBJECTION, it was
so ordered.
HB 373 was REPORTED out of committee with a "do pass"
recommendation and with one previously published
indeterminate fiscal note: FN1 (DNR).
9:25:01 AM
AT EASE
9:29:05 AM
RECONVENED