Legislature(2017 - 2018)SENATE FINANCE 532
02/06/2017 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB30 | |
| SB39 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 30 | TELECONFERENCED | |
| + | SB 39 | 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."
9:03:38 AM
JIM SHINE, COMMERCIAL MANAGER, DIVISION OF OIL AND GAS,
DEPARTMENT OF NATURAL RESOURCES, discussed the
presentation, "Proposed Sale of the State's Royalty Oil to
Petro Star: Senate Bill 30; Senate Finance Committee" (copy
on file).
Co-Chair MacKinnon stated that Mr. Chapadose was online for
questions.
Mr. Shine looked at 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 pay 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.
The SOA has regularly taken royalties of ANS oil as
RIK (starting in 1979).
The State will receive between $29 to $37 million in
additional revenue over what the state would receive
if the contracted volumes were taken RIV.
Petro Star contract has been through public review and
Royalty Board processes.
Mr. Shine addressed 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 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.
Co-Chair MacKinnon acknowledged Senator Micciche.
9:08:44 AM
Senator Olson looked at slide 2. He queried the period that
the increase of $29 million to $37 million took place. Mr.
Shine replied that it included the current one-year
contract and the four-year contract contained in the
legislation. The one-year contract did not need legislative
approval. The $29 million to $37 million included the one-
year and four-year contracts through calendar year 2021.
Senator Dunleavy stressed that the proceeds were deposited
into the Permanent Fund. Mr. Shine agreed.
Co-Chair MacKinnon noted that 50 percent of revenue was
deposited into the Permanent Fund; 45 percent went to the
general fund; and 5 percent went to the Public School Trust
Fund. Mr. Shine agreed.
Mr. Shine looked at 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; 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 highlighted slide 5, "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 addressed 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;
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.
Senator Dunleavy looked at number 7, and wondered who
oversaw that criteria. Mr. Shine replied that the Division
of Oil and Gas oversaw that criteria, but he did not know
how much consultation was done with other state agencies.
He stated that the report indicated that there would be no
negative environmental impacts. He stated that it was
existing status quo operations for Petro Star.
9:13:46 AM
Mr. Shine discussed slide 7, "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
percent of the total ANS royalty oil if the
nominations from all RIK buyers is greater than
the 95 percent 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 percent
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.
9:19:01 AM
Mr. Shine addressed slide 8, "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 Plattsand 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.
Senator Micciche queried the range of ANS spot prices for
the calculation. Mr. Shine replied that the actual spot
price was not included. He remarked that the local in-state
differential gave the approximate $1.50 per barrel benefit
over RIV. He stated that the starting point was the same
regardless of the price of oil.
Co-Chair MacKinnon wondered if it was fair to consider the
revenue from the one-year contract. Mr. Shine replied that
the one-year contract did not require legislative approval,
so it was not included in the fiscal note. The $29 million
to $37 million did include the benefit that the state would
receive with the four-year contract and one-year contract.
Senator Olson noted the volatility of the oil price market,
and queried the advantage of a four-year contract versus a
year-to-year contract. Mr. Shine replied that the benefit
the state received was that it was not subject to a $3.50
per barrel deduction for marine transportation from the
Valdez Marine Terminal to its west coast destination.
Senator Olson announced that the price did not matter. Mr.
Shine agreed.
Mr. Shine continued to discuss slide 8:
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 percent of the amount resulting
from the formula above, excluding "Line Loss."
Senator Micciche noted that the differential between $29
million and $37 million was the transportation difference
between the take-or-pay quantity and the max-quantity of
the contract. Mr. Shine agreed. He stated that the $29
million would represent the benefit to the state if the
minimum volumes were nominated in each contract month,
versus the $37 million the state would receive if the
maximum volume was nominated each month.
9:24:37 AM
Mr. Shine looked at 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
percent-30 percent will be refined products.
Petro Star refineries' estimated contribution to
the local economy in 2014 was $25mm
Vice-Chair Bishop felt that the four-year contract was a
national security issue. He wanted comments on his concern.
9:25:54 AM
DOUG CHAPADOSE, PRESIDENT AND CEO, PETRO STAR, ANCHORAGE
(via teleconference), stated that Petro Star was the
largest supplier of fuel to the Defense Logistics Agency,
which was the federal agency responsible for supplying
energy in all forms to the Department of Defense (DOD). He
stated that the fuel supplied by Petro Star was essential
to the war-fighting capabilities of the Pacific forces
located in Alaska. He stressed that it was a large factor
in determination to base the F-35 fighters at Eielson Air
Force Base.
Senator von Imhof noted that Golden Valley Electrical
Association felt that the contract would provide a 10
percent or more reduction for the cost of power for
approximately 35,000 Interior Alaska residence, because of
the new fuel blend. Mr. Shine agreed. He acknowledged the
letter of support in the bill packet.
Senator von Imhof queried plans to expand beyond 35,000
customers. Mr. Shine deferred to Mr. Chapadose.
Co-Chair MacKinnon shared that the public testimony portion
of the meeting might address that concern.
Co-Chair MacKinnon stressed it a contract which the state
had made with Petro Star. She noted that the bill mentioned
the Arctic Slope Regional Corporation, and queried the
relationship and its inclusion in the statutory bill. Mr.
Shine replied that Arctic Slope Regional Corporation was
the parent wholly-owned subsidiary was Petro Star Refining.
Mr. Chapadose thanked the efforts in drafting the contract.
He stated that it was a long period to come to a
resolution, and felt that it was a rewarding period. He was
pleased with the contracts.
9:30:33 AM
Senator von Imhof noted that Golden Valley Electrical
Association (GVA) had entered into a contract with Petro
Star to provide NAPTHA fuel costs, which resulted in a 10
percent decrease in costs. She remarked that GVA provided
power to approximately 35,000 Interior Alaska members. She
wondered if there were further plans for Petro Star to
expand their footprint to provide natural gas to more
residents. Mr. Chapadose responded that the 35,000
referenced the number of account holders of Golden Valley
Electrical Association. Those individuals would receive the
benefit of the new contract; therefore, the lower cost fuel
was passed onto the consumers. He could not speak to
expanding the GVA membership.
Senator Micciche wondered why the availability of royalty
oil to the refineries was not only beneficial to the parent
company of the refinery. He queried its importance to the
overall economy in Alaska. Mr. Chapadose replied that Petro
Star operated the only refinery in the interior. The Flint
Hills refinery was currently being demolished. He stressed
that Petro Star was the only source of refined products
within the interior region, including Valdez. The oil from
the Trans-Alaska Pipeline System (TAPS) was the only oil
available to refine. He stressed that the ability to source
crude was critical to the Petro Star operation. He remarked
that acquiring crude from producers was becoming more
difficult, as production had decreased on the North Slope.
He stated that the source of crude from the state was
essential to remain in business.
9:35:09 AM
Co-Chair MacKinnon CLOSED public testimony.
9:35:09 AM
AT EASE
9:36:38 AM
RECONVENED
9:36:40 AM
Vice-Chair Bishop detailed the fiscal note.
9:37:05 AM
AT EASE
9:37:16 AM
RECONVENED
Vice-Chair Bishop readdressed the fiscal note.
SB 30 was HEARD and HELD in committee for further
consideration.
9:38:25 AM
AT EASE
9:40:00 AM
RECONVENED
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 30 PPT to SFIN 02.06.17.pdf |
SFIN 2/6/2017 9:00:00 AM |
SB 30 |
| SB 39 C-PACE Senate Finance 02.06.17.pdf |
SFIN 2/6/2017 9:00:00 AM |
SB 39 |
| SB 39 Sectional for CRA CS.pdf |
SFIN 2/6/2017 9:00:00 AM |
SB 39 |