02/22/2017 01:00 PM House RESOURCES

        SB  30-APPROVAL: ROYALTY OIL SALE TO PETRO STAR                                                                     
                                                                                                                                
1:39:02 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  JOSEPHSON announced  that  the next  order of  business                                                               
would be 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."                                                                                           
                                                                                                                                
1:39:45 PM                                                                                                                    
                                                                                                                                
JIM  SHINE,   Commercial  Manager,  Division  of   Oil  and  Gas,                                                               
Department   of   Natural   Resources,  provided   a   PowerPoint                                                               
presentation entitled, "Proposed Sale  of the State's Royalty Oil                                                               
to Petro  Star:  Senate Bill  30," and informed the  committee SB
  is similar  to last  year's legislation  enabling a  contract                                                               
with Tesoro for  a royalty-in-kind (RIK) sale.   He said royalty-                                                               
in-value  (RIV) occurs  when a  producer  ships, transports,  and                                                               
sells the state's  royalty share, along with its  own, and remits                                                               
the  royalty  value to  the  state;  RIK  occurs when  the  state                                                               
assumes ownership of  its royalty barrels of oil  and disposes of                                                               
them  through  statutory  sales  procedures.   The  bill  is  the                                                               
culmination of a long  process including commercial negotiations,                                                               
a best interest  finding, a public review,  and other procedures.                                                               
Mr.  Shine  said   the  state  has  participated   in  RIK  sales                                                               
procedures  since  1979,  and  directed   attention  to  a  chart                                                               
provided in the committee packet  that illustrated the history of                                                               
RIK sales  [chart not  provided].  The  contract with  Petro Star                                                               
Inc. (Petro Star) in SB 30  will yield the state from $22 million                                                               
to $28 million  more over RIV revenue.  Currently,  the state has                                                               
a one-year  contract with  Petro Star that  would be  followed by                                                               
the  four-year   contract  within   SB  30,   commencing  1/1/18.                                                               
Together,  the  two  contracts  will yield  the  state  from  $29                                                               
million to  $37 million  more over  RIV revenue  [slide 2].   The                                                               
best  interest finding  has determined  SB 30  is in  the state's                                                               
best interest,  and the  Alaska Royalty  Oil and  Gas Development                                                               
Advisory Board,  Department of Natural Resources,  recommends the                                                               
legislature approve the sale by  its Resolution 2016-2, a copy of                                                               
which  was  provided in  the  committee  packet  [slide 3].    In                                                               
addition,  the  commissioner  of  DNR  considered  the  following                                                               
decision criteria [slide 4]:                                                                                                    
                                                                                                                                
   • cash value offered                                                                                                         
 • projected effects of the sale on the economy of the state                                                                    
   • the ability to provide refined products for distribution                                                                   
      and sale within the state                                                                                                 
                                                                                                                                
1:44:04 PM                                                                                                                    
                                                                                                                                
MR. SHINE  restated the approval  process for the RIK  sale began                                                               
with  the  preliminary  best interest  finding  issued  in  2016,                                                               
followed  by  public review,  review  and  recommendation by  the                                                               
royalty advisory  board, the contract, and  SB 30 [slide 5].   He                                                               
provided slide  6 which listed  the statutory criteria  that must                                                               
be considered by the royalty  advisory board.  Mr. Shine provided                                                               
details of the  contract enabled by SB 30 such  as projections of                                                               
royalty  volume  over a  five-year  period  of 50,000  to  55,000                                                               
barrels per  day of  royalty oil  in 2017,  and 36,000  to 50,000                                                               
barrels available from 2018 through  2021.  He recalled last year                                                               
a Tesoro  RIK contract was  approved that is providing  20,000 to                                                               
25,000 barrels  of royalty  oil over a  five-year period  and was                                                               
used as a guide in the state's projections [slide 7].                                                                           
                                                                                                                                
REPRESENTATIVE PARISH questioned whether  the state will have the                                                               
ability  to  pick up  additional  capacity  in  the event  of  an                                                               
increase  in  throughput  [in the  Trans-Alaska  Pipeline  System                                                               
(TAPS)].                                                                                                                        
                                                                                                                                
MR.  SHINE said  the contract  has built-in  quantity flexibility                                                               
that allows  the state  to offer additional  oil on  equal terms.                                                               
He returned  to contract terms  and pointed  out in the  event of                                                               
default  the state  is  exposed  in two  scenarios:   a  complete                                                               
default  -  in which  the  state  does  not receive  payment  for                                                               
barrels produced  and sold,  and a denomination  risk -  in which                                                               
the  buyer  defaults after  a  certain  volume  of oil  has  been                                                               
nominated.  In  order to protect the state against  either of the                                                               
aforementioned  events, the  contract  has  a security  provision                                                               
clause for a $46 million surety  bond.  In addition, the contract                                                               
urges  Petro  Star  to use  commercially  reasonable  efforts  to                                                               
manufacture  refined  products  in  the state  and  employ  local                                                               
residents  [slide  7].   In  regard  to  RIK contract  price,  he                                                               
explained  the contract  begins  with  the monthly/daily  average                                                               
U.S. West Coast price for Alaska  North Slope (ANS) oil.  The RIK                                                               
differential of  $1.95 is a  reduction of the price  to determine                                                               
the value  of an in-state barrel  of oil, thus in  an RIV context                                                               
the state  is subject to  marine transportation costs  of between                                                               
$3.30  and $3.50  per barrel;  however, in  an RIK  contract, the                                                               
state uses a $1.95 RIK  location differential that represents the                                                               
value of  a barrel of  oil sold within  the state.   The location                                                               
differential is determined  by the Department of  Revenue and DNR                                                               
to ensure the oil remains  competitive, and to maximize the value                                                               
of the resource to the state.                                                                                                   
                                                                                                                                
CO-CHAIR JOSEPHSON  asked how the  differential compares  to that                                                               
of last year's royalty oil sale.                                                                                                
                                                                                                                                
MR.  SHINE  said the  differential  is  the  same.   In  2014,  a                                                               
previous  contract with  Flint Hills  carried  a differential  of                                                               
$2.15 per barrel.   He advised the other deductions  are the same                                                               
as found in an RIV formula as follows [slide 8]:                                                                                
                                                                                                                                
   • TAPS tariff allowance and tariffs for oil transported                                                                      
     upstream of Pump Station 1                                                                                                 
   • quality bank adjustments required by regulation by the                                                                     
     Federal Energy Regulatory Commission                                                                                       
   • line loss calculated at an industry standard amount for                                                                    
     metering in and metering out                                                                                               
                                                                                                                                
MR. SHINE summarized as follows [slide 9]:                                                                                      
                                                                                                                                
   • the contract is in the state's best interest                                                                               
   • the contract will yield $29 million to $37 million in                                                                      
      additional revenue over what the state would receive if the                                                               
      volume of royalty oil is taken RIV                                                                                        
   • location differential is a static number and marine                                                                        
      transportation   costs   are   expected   to   exceed   the                                                               
      differential                                                                                                              
   • Petro Star employs 44 Alaskans in refining operations and                                                                  
      others statewide                                                                                                          
                                                                                                                                
MR. SHINE presented slide 10 which  was a short comparison of the                                                               
contract within SB 30 and last year's contract with Tesoro.                                                                     
                                                                                                                                
REPRESENTATIVE BIRCH expressed his support.                                                                                     
                                                                                                                                
REPRESENTATIVE   DRUMMOND   questioned    why   DNR   needs   the                                                               
legislature's permission to sell royalty oil.                                                                                   
                                                                                                                                
MR. SHINE explained for royalty oil  sold in excess of a one-year                                                               
contract,  there is  a statutory  requirement for  DNR to  obtain                                                               
legislative approval.                                                                                                           
                                                                                                                                
1:54:56 PM                                                                                                                    
                                                                                                                                
DOUG CHAPADOS,  President/CEO, Petro Star Inc.,  acknowledged the                                                               
efforts of the commissioners of DNR  to support the contract.  He                                                               
said after long negotiations, the contract is a fair agreement.                                                                 
                                                                                                                                
1:56:06 PM                                                                                                                    
                                                                                                                                
BRYCE  WARD, Mayor,  City of  North Pole,  opined the  ability to                                                               
sell  RIK is  beneficial to  the  state and  Petro Star  provides                                                               
benefits to  the City of  North Pole.   He expressed  his concern                                                               
related to the  differential in the RIK contract  and pointed out                                                               
the product is  state oil provided to state residents  by a state                                                               
producer, but  at a  differential price that  is higher  than the                                                               
spot market price.   He acknowledged the contract  is bringing in                                                               
an additional  $30 million to  the state, however,  he questioned                                                               
whether this  is a benefit for  all residents of the  state since                                                               
Interior residents will  be paying the differential  cost.  Mayor                                                               
Ward  encouraged the  committee  to  look at  the  intent of  the                                                               
differential as  the oil is  not being exported, but  is provided                                                               
solely to state residents.                                                                                                      
                                                                                                                                
1:58:12 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOSEPHSON  opened the hearing for  public testimony, and                                                               
after  ascertaining  no  one wished  to  testify,  closed  public                                                               
testimony.                                                                                                                      
                                                                                                                                
1:59:18 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  TARR  moved to  report  SB  30  out of  committee  with                                                               
individual  recommendations  and  the accompanying  fiscal  note.                                                               
There being  no objection, SB  30 was  reported out of  the House                                                               
Resources Standing Committee.