Legislature(2017 - 2018)HOUSE FINANCE 519
03/13/2017 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB30 | |
| HB90 HOUSE BILL NO. 90 | |
| HB6 | |
| HB31 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 31 | TELECONFERENCED | |
| + | HB 90 | TELECONFERENCED | |
| + | SB 30 | TELECONFERENCED | |
| + | HB 6 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE BILL NO. 30
"An Act approving and ratifying the sale of royalty
oil by the State of Alaska to Petro Star Inc.; and
providing for an effective date."
1:51:09 PM
JIM SHINE, COMMERCIAL MANAGER, DIVISION OF OIL AND GAS,
DEPARTMENT OF NATURAL RESOURCES, provided a PowerPoint
presentation titled "Proposed Sale of the State's Royalty
Oil to Petro Star: Senate Bill 30" dated March 13, 2017
(copy on file). He relayed that the proposed sale was the
result of a lengthy commercial negotiation and public
review process. He began on 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).
lessees who produce the oil also market the
State's share along with their own production and
pay the State the value of its royalty share.
SOA assumes ownership of the oil, and the DNR
Commissioner disposes of it through the sale
procedures prescribed by AS 38.05.183.
oil as RIK (starting in 1979).
million in additional revenue over what the state
would receive if the contracted volumes were
taken RIV.
review and Royalty Board processes.
Mr. Shine related that the state was currently selling oil
to Petro Star under a one-year contract, which had not
required legislative approval. Contracts over one year
required legislative ratification.
Mr. Shine addressed slide 3 titled "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 proposed to enter into two
negotiated contracts with Petro Star.
The first contract, in effect for the period January -
December 2017, did not need legislative approval under
AS 38.06.055(a) and (b)(1), received recommendation of
the Royalty Board and was entered into in August 2016.
The second contract, effective for the period January
2018 -December 2021, received the recommendation of
the Royalty Board, but requires Legislative approval.
Mr. Shine detailed that the Department of Natural Resources
(DNR) sent the solicitation of interest to five instate
refineries: Petro Star, Tesoro, Flint Hills, BP, and
ConocoPhillips. The state choose to enter into negotiated
sales with Tesoro and Petro Star. In 2016, the legislature
ratified a 5-year contract with Tesoro under HB 373
Approval of Sale of Royalty Oil to Tesoro [Chapter 3 SLA
16/ - 04/21/2016]. The department prepared a best interest
finding and determined that the 4-year Petro Star contract
was in the state's best interest. In addition, DNR issued a
30-day public comment review where no public comments had
been received. Subsequently, DNR presented the contract to
the Alaska Oil and Gas Royalty Development Advisory Board
(Royalty Board) on August 31, 2016, which unanimously
approved the contract and recommended it for legislative
approval. He noted that the "Report to the Alaska
Legislature" (copy on file) and the Approval Resolution
[Resolution 2016-2 (copy on file)] were included in the
committee member's packets.
1:55:38 PM
Co-Chair Foster noted Representative Wilson had joined the
meeting.
Vice-Chair Gara relayed that he had never had a problem
with the oil royalty contracts. He spoke to RIK versus RIV
and noted that the state stood to gain more taking RIK. He
asked whether the RIK "net positive" accounted for the
amount of oil used to pay the pipeline tariff. Mr. Shine
answered that Petro Star had already received its "feed
stock" from other producers. The state was maximizing the
value of it royalty by selling the oil to Petro Star. He
elaborated that Petro Star refined roughly 25 to 30 percent
of each barrel of oil and returned the remaining percentage
of the barrel back into Trans-Alaska Pipeline System (TAPS)
in the comingled stream. He noted that the same volume of
oil would be shipped upstream and downstream from the
refinery.
Representative Guttenberg referenced the Quality Bank
allowance calculation and a related court case. He asked
what the state would lose in the Quality Bank allowances
versus if there was no sale. He thought that the Quality
Bank cost the state and buyer money. He asked whether there
was a calculation for the expense. Mr. Shine deemed that
the case Representative Guttenberg referred to concerned
the valuation of the residual portion of a barrel of oil
and was a Quality Bank administrative mandated federal
program. The value was determined by a Quality Bank
administrator contracted through the TAPS owners. He
delineated that the Quality Bank payment was a deduction on
the netback formula, determined by the Quality Bank
administrator. He noted the formula was the same if the
state chose RIV. Representative Guttenberg relayed that the
court determined that the state had no standing in the
Quality Bank allowance situation. He was under the
impression the state lost money because "the calculation
was higher than it should be." He asked if the state looked
at the Quality Bank costs and how it impacted the sale of
oil. Mr. Shine replied in the affirmative. He reiterated
that the number was the same whether the state took its
royalty in-value or in-kind. He explained that the Quality
Bank was an economic leveling mechanism that ensured
upstream producers were in the same economic position at
the Valdez main terminal based on the value of oil they
contributed into the comingled stream. He agreed that
larger Quality Bank payments may impact the bank's
deduction that was part of the state's netback formula. He
surmised that the real value to the state taking RIK was
not being subject to a marine transportation deduction.
Representative Guttenberg requested a letter explaining how
the in-kind and in-value worked out to be the same number.
Mr. Shine agreed to follow up.
2:01:34 PM
Representative Grenn referenced point number 4 on slide 4
and read:
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…
Representative Grenn asked whether there was a breakdown of
what Petro Star would do with its refined products. Mr.
Shine answered that the items were covered in the best
interest finding included in the member's packets ["Final
Best Interest Finding and Determination for the Sale of
Alaska North Slope Royalty Oil to Petro Star Inc." Division
of Oil and Gas, Alaska Department of Natural Resources,
September 15, 2016 (copy on file)].
Co-Chair Seaton spoke to refineries tax credits that were
not "transparent." He asked if the department was opposed
to the suggestion of adding transparency language regarding
the credits to the bill. Mr. Shine did not believe the
department would have a problem with increasing
transparency.
Representative Wilson asked whether the bill was the
appropriate vehicle to discuss the refinery tax credits.
Mr. Shine replied that the contract was not subject to
amendment. He believed that DNR preferred the legislature
address the issue in standalone legislation.
Mr. Shine moved to slide 4 titled "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; and
5. The eight criteria listed in AS 38.06.070(a), as
reviewed by the Royalty Board.
In considering these criteria, the commissioner will
state which criteria apply to the proposed disposition
and discuss the weight given to the applicable
criteria in determining the maximum benefits to the
state.
Mr. Shine noted that Petro Star had two refineries: North
Slope and Valdez. The refined products provided jet fuel,
home heating, and ultralow sulfur diesel fuel for Alaskan's
use.
Mr. Shine advanced to slide 5 titled "Approval Process for
the RIK sale":
DNR must make a Best Interest Finding (BIF) in support
of the sale.
Preliminary BIF issued July 2016.
Final BIF issued in September 2016.
DNR presented the proposed sale to the Royalty
Board on August 31, 2016.
The Board reviewed the Preliminary BIF and the
proposed contracts, and unanimously voted to
recommend the Legislature approve the sale of ANS
royalty oil to Petro Star.
The Board issued a Report to the Alaska
Legislature and Resolution 2016-2 stating that
the proposed disposition of ANS royalty oil to
Petro Star meets the requirements of AS
38.06.070.
Prior to finalizing the RIK contract, the
Legislature must pass a bill ratifying the
contract with Petro Star (HB 70; SB 30).
Mr. Shine turned to slide 6 titled "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;
5. The projected additional costs and
responsibilities which could be imposed upon the
state and affected political subdivisions by
development related to the transactions;
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
patters of investment.
Mr. Shine notified the committee that the Royalty Board
addressed the criteria in its report.
2:05:48 PM
Mr. Shine addressed slide 7 titled "Petro Star RIK Contract
Terms":
Quantity
1-year contract: from 18,800 bpd to 23,500 bpd for
Jan. 2017 -Dec. 2017
4-year contract: from 16,400 bpd to 20,500 bpd for
Jan. 2018 -Dec. 2018
from 13,200 bpd to 16,500 bpd for Jan. 2019 -Dec.
2019
from 10,800 bpd to 13,500 bpd for Jan. 2020 -Dec.
2020
from 8,400 bpd to 10,500 bpd for Jan. 2021 -Dec.
2021
Price: the contracts use a netback formula and
provides higher revenue to State compared to RIV.
Quantity flexibility
Petro Star may nominate zero barrels up to 3
consecutive months if "turnaround clause" is used,
otherwise the contract terminates.
The State can cap its delivery amounts to 95% of the
total ANS royalty oil if the nominations from all RIK
buyers is greater than the 95% threshold.
Provided that the supply of ANS royalty oil exceeds
demand from both RIK buyers, the State can sell
Additional Sale Oil as long as the total deliveries
are not greater than the 95% threshold.
Security
Petro Star's guarantor (ASRC) shall provide a letter
of opinion from a financial analyst or a stand-by
letter of credit or surety bond equal in value to 50
days of delivery.
If guarantor's credit rating falls below investment
grade level, then guarantor shall provide a stand-by
letter of credit or surety bond described previously.
In-state processing: Petro Star to use "commercially
reasonable efforts" to manufacture refined products
in-state from the ANS royalty oil.
Employment of Alaska residents: no discrimination
against AK companies and residents.
Mr. Shine reported that the decline in the nomination
values was reflective of the state's anticipated royalty
barrels. The numbers were based on 2015 Fall Production
Forecast using only currently producing assets. He
indicated that the state expected to receive 50 thousand to
55 thousand barrels of oil per day in 2017 and from 2018
through 2021 the state anticipated receiving 36 thousand to
50 thousand barrels of oil per day. The Tesoro contract (HB
373 from the previous year) was based on 20 thousand to 25
thousand barrels per day during the same time period. The
total accounted for approximately 95 percent of the state's
royalty oil in the next five years.
Representative Thompson referenced slide 7 and interpreted
that the state could sell an increased amount of royalty
oil up to the 95 percent threshold if supply was greater
due to increased production. He asked whether the statement
was correct. He noted that current oil production was over
550,000 barrels per day but the fall forecast predicted
under 500,000/bbl. Mr. Shine replied in the affirmative. He
pointed to the third bullet point on slide 7 under
"Quantity Flexibility" and reported that if more royalty
oil was available during the contract period the state
could provide the excess barrels based on the contracts. He
restated that the contract was based on 2015 currently
producing assets.
2:09:08 PM
Mr. Shine spoke to the security provisions. He reported
that the state negotiated a surety bond with the Arctic
Slope Regional Corporation; Petro Stars parent company, for
$46 million that would ensure the state was reimbursed at
the same level in case of default. He elaborated that there
were two default risks: - if barrels were delivered and the
company was unable to meet its obligation or a denomination
risk. He explained that the state employed a nomination
process to receive its royalty oil. One hundred days prior
to the delivery of royalty oil, the state received the
nomination volumes information from Petro Star. The state
then had 10 days to notify upstream producers how many
barrels it was taking in-kind. The purpose of the security
provision and the bond was to ensure the state was "kept
whole" if either default occurred. He indicated that Petro
Star employed over 300 Alaskans.
Mr. Shine offered that the following slide contained the
netback formula for the contract. He discussed slide 8
titled "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
This is a deduction used to calculate the price
of ANS oil sold in Alaska.
The deduction is applied to the price of ANS oil
at its most common destination market (the U.S.
West Coast).
It resembles the deduction used in sales of ANS
oil in Alaska between North Slope producers and
between North Slope producers and in-state
refineries.
In contrast, for the ANS royalty oil that is sold
outside of Alaska and that is taken in-value,
producers use a deduction that approximates the
marine transportation cost.
Since deduction that represents the marine
transportation cost is generally higher than the
value of the RIK differential, the State has the
potential to obtain a higher price for its ANS
royalty oil by taking it in-kind and selling it
in Alaska.
Tariff Allowance = Tariffs for TAPS and pipelines
upstream of Pump Station 1 (PS-1).
Quality Bank Adjustments = adjustments reported
by TAPS Quality Bank Administrator.
Line Loss = loss or mismeasurement of volume
between PS-1 and the Valdez Marine Terminal
(VMT). It is calculated as 0.09% of the amount
resulting from the formula above, excluding "Line
Loss."
Mr. Shine summarized that the main difference between the
RIK and the RIV netback formula was the difference in the
marine transportation deduction versus the RIK
differential. He delineated that the RIK differential was
$1.95 /bbl. in both contracts and the marine transportation
deduction was expected between $3.30/bbl. and $3.70bbl. The
RIK differential represented the value of oil sold within
the state. He referenced the $29 million to $37 million
over 5 years increase in excess of a RIV contract was the
delta between no marine transportation deduction and an RIK
differential at approximately $1.50bbl.
2:13:09 PM
Representative Guttenberg asked who performed the marine
transportation calculation. Mr. Shine replied that the
calculation on fields that were covered under RSAs
(Reimbursable Service Agreements) was an average subtracted
from the netback formula for the RIV.
Mr. Shine instructed that the line loss was an industry
standard deduction in netback formulas for pipeline
transportation that accounted for the difference in flow
meters. He moved to slide 9:
CONTRACT IS IN THE STATE'S BEST INTEREST
The State will receive between $29 to $37 million in
additional revenue over what the state would receive
if the volume of ANS royalty oil the contracts is
taken in-value. 1-year contract (Jan. -Dec. 2017):
from $7.6 to $9.5 million 4-year contract (Jan. 2018 -
Dec. 2021): from $22.3 to $27.9 million
On average, producers selling ANS royalty oil outside
Alaska for the 5-year period of the proposed RIK
contracts with Petro Star are expected to deduct from
$3.37 to $3.70 per barrel as a "marine transportation
cost" in arriving at the price for RIV. This is the
deduction used to adjust the price of ANS oil from the
U.S. West Coast to Alaska.
The proposed contracts with Petro Star will
deduct only $1.95 as a "location differential"
from the west coast ANS value.
The proposed sale provides crude to Petro Star's
refineries at North Pole and Valdez with the
associated economic and social benefits to
Alaska's economy: Petro Star employs
approximately 44 people in its refining
operations.
Maximum throughput capacity North Pole refinery:
22,000 barrels per day (bpd). Valdez refinery:
60,000 bpd.
Of the throughput amounts, approximately 25%-30%
will be refined products.
Petro Star refineries' estimated contribution to
the local economy in 2014 was $25mm
Mr. Shine commented that the total of the two current
contracts and another previously approved Tesoro contract
brought the state $75 million to $95 million more over the
next five years than available under RIV contracts.
2:15:40 PM
Mr. Shine addressed slide 10 titled "Comparison of RIK
Contracts." The slide contained charts summarizing the
breakdown in the difference between the volumes in the
Tesoro and Petro Star contracts. He mentioned that there
was a positive fiscal note accompanying the bill reflecting
the value of the four-year contract taken in RIK versus
RIV.
Representative Guttenberg spoke to the tariff allowance on
slide 10. He read the following from a box titled "Tariff
Allowance":
…If royalty comes from fields upstream of PS No 1,
then RIK contracts consider tariffs filed with FERD
for shipment of royalty oil upstream of PS No 1.
Representative Guttenberg asked where the tariffs were
filed and who set the rates. He asked whether the state was
paying twice for shipments and if the upstream costs were
regulated. Mr. Shine responded that if the state nominated
royalty barrels from Prudhoe Bay the netback formula was
only subject to a TAPS deduction, which represented the
transportation costs from Prudhoe Bay to Valdez. However,
if the state was nominating royalty barrels from other
locations like Pt. Thompson, additional tariff adjustments
were made for moving the oil from the point of production
to the comingled stream at Pump Station number 1. He was
not certain whether the costs were regulated. He would
follow up.
2:18:25 PM
Representative Guttenberg was concerned that in the past
some of the tariff allowances on TAPS were disputed
because, in his view, owners were overcharging themselves
and lowering the costs at the wellhead and getting a better
deal from themselves for shipping costs. He wondered what
happened upstream with TAPS owners and independent
producers and asked for a follow up. Mr. Shine agreed to
follow up.
Co-Chair Seaton asked whether there was any interaction
with the gross value reduction (GVR) for new oil or the 10
percent GVR for those with royalty shares above 12.25
percent. Mr. Shine answered in the negative.
Representative Wilson thanked the department for
negotiating the deal, which she believed was long overdue.
She asked about the difference between the Tesoro contract
and the Petro Star contract in how much more the state
received. Mr. Shine replied that the prior Tesoro contract
was $56 million more over 5 years and in the two current
contracts between $29 million to $37 million more or the
difference between the minimum nomination volumes versus
the high-end volumes. Representative Wilson spoke to the
best interest of the state. She asked if the department
believed the contract was in the state's best interest. Mr.
Shine replied in the affirmative.
Representative Grenn asked for clarification of the fiscal
note (FN 2 (DNR). He noted that according to the analysis
on page two the proposed contract is expected to generate
between $22 million and $27 million in revenues. He asked
about the difference.
2:21:22 PM
Mr. Shine responded that SB 30 was based on a four-year
contract. He cited sub-bullets on slide 9 that reported the
range for a four year contract similar to the fiscal note
at $22.3 million to $27.9 million the minimum versus the
maximum nomination range.
DOUG CHAPADOS, CHIEF EXECUTIVE OFFICER AND PRESIDENT, PETRO
STAR, thanked DNR for its work on the contract and felt
that the contract was equitable.
Representative Thompson asked whether Mr. Chapados was in
favor of the contract. Mr. Chapados replied in the
affirmative. He added that crude oil for his refineries was
essential to remain in business and stated that it was
becoming harder to source with the decline in throughput.
The royalty oil served as the basis of his supply.
Co-Chair Seaton agreed the contract was in the state's best
interest. He asked if the company had any opposition to
transparency regarding refinery credits. Mr. Chapados
answered that Petro Star was happy to provide a level of
transparency, but he believed it was more appropriate to
have the issue attached to a tax bill. Co-Chair Seaton
replied that he was not planning to add any language to the
current bill.
2:25:09 PM
Representative Wilson thanked Mr. Chapados for taking up
the "gap" that had been left in Fairbanks by Flint Hills.
Mr. Chapados answered that Petro Star was happy to still be
in business and was happy to fill the gap left by the
closure of Flint Hills. The company utilized the refinery
credits that enabled Petro Star to fill the void. He
reported that the company invested in an asphalt project
and produced a low-cost fuel for use by Golden Valley
Electric Association due to the credits.
Representative Thompson stated that the company was
currently holding about $15 million in tax credits. He
asked if the company had been paid anything. Mr. Chapados
replied that Petro Star submitted $5 million in tax credits
generated in 2015 and would apply for $10 million in tax
credits generated in 2016.
2:27:17 PM
Co-Chair Foster OPENED and CLOSED public testimony. He
relayed that the bill would be heard on Friday.
SB 30 was HEARD and HELD in committee for further
consideration.