Legislature(2017 - 2018)BUTROVICH 205
01/30/2017 03:30 PM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| SB30 | |
| Oil Production Forecast Methodology Overview | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| *+ | SB 30 | TELECONFERENCED | |
SB 30-APPROVAL: ROYALTY OIL SALE TO PETRO STAR
3:31:13 PM
CHAIR GIESSEL announced SB 30 to be up for consideration. She
said this bill cannot be amended since it is ratifying a
contract for royalty oil between the Alaska Department of
Natural Resources (DNR) and Petro Star. Last year this body
considered and ratified the contract between the Alaska
Department of Natural Resources and Tesoro. She explained that
Alaska's Constitution mandates developing the resources for the
maximum benefit of the people of Alaska and when the state takes
its royalty oil in kind (RIK) it needs to prove that it is
getting more money than it otherwise would taking royalty in the
traditional means of in value (RIV).
JIM SHINE, Commercial Manager, Division of Oil and Gas,
Department of Natural Resources (DNR), Alaska Department of
Natural Resources (DNR), said he would first provide a brief
overview on the contract ratification process and then review
the contract.
ED KING, Special Assistant to the Commissioner, Alaska
Department of Natural Resources (DNR), introduced himself.
MR. SHINE noted that DNR Deputy Commissioner Mark Wiggin was
available on line as well as other members of the Commercial
Team who were involved in the negotiation with Petro Star.
He explained that when the state takes royalty it has a choice
to receive it in kind (RIK) - physical possession - or in value
(RIV). When it elects to receive its royalty in value, the
producers ship, co-mingle, and sell the state's royalty share
with theirs and remits the state's value to it by way of a
check. When the state elects to receive RIK, the state assumes
ownership over the actual oil and the DNR Commissioner disposes
of it through sale procedures described in statute. The state
has regularly sold RIK to in-state refiners dating back to 1979
with Mapco/Williams.
The contract that is before them in SB 30 for ratification has
gone through a thorough public review; the preliminary best
interest finding (BIF) was out for a 30-day public comment and
no comments were received. A revised BIF was presented to the
Royalty Oil and Gas Development Advisory Board (Royalty Board)
in August and it considered the contract, the presentation, and
the BIF and recommended unanimously that the legislature approve
it.
3:35:01 PM
MR. SHINE clarified that there are two contracts, and the one
that is currently in place is a one-year contract commencing on
January 2017 for the sale of royalty oil to Petro Star, which
does not require legislative approval. Following the termination
of that contract starting in January 2018, the four-year
contract in SB 30 would commence. The state will receive a
combined benefit from the two contracts of $29 - $37 million
more than if it had received the same barrels over those five
years in value.
SENATOR COGHILL joined the committee.
CHAIR GIESSEL asked who is on the Royalty Board.
MR. SHINE replied that the Royalty Board consists of eight
members: three commissioners from the Department of Natural
Resources (DNR) who is a non-voting member, the Department of
Revenue (DOR), and the Department of Commerce, Community and
Economic Development (DCCED), as well as five public members:
Bruce Anders (Chair), Dana Pruhs, Kathryn Dodge, Lawrence
Gaffaney, and Steve Selvaggio.
SENATOR WIELECHOWSKI asked if the lower tariffs are factored
into the $29 - 37 million in savings from the increased
production in the pipeline that would result in more revenue to
the state.
MR. SHINE replied the $27 - $37 million figure is spelled out in
the BIF. The real benefit is the difference between the marine
transportation deduction, which is present in the RIV net back
formula versus RIK net back, which is an in-state location
differential, which he would describe later.
SENATOR WIELECHOWSKI asked again if that savings figure takes
into account the lower tariff that would result in slightly
higher taxes to the state.
3:38:12 PM
MR. SHINE answered that both RIK and RIV formulas have a tariff
reduction as part of the net back formula. If the royalty
volumes are coming from Prudhoe Bay, the tariff is from Pump
Station 1 to the Valdez Marine Terminal. Tariffs from any fields
upstream of Prudhoe Bay would include transportation to that
point.
3:38:32 PM
However, before taking RIK the commissioner must find it is in
the state's best interest. The state can dispose of its RIK
through a competitive bid process or a non-competitive,
negotiated sale process. The DNR issued a solicitation of
interest in January 2015 to five refineries - Petro Star,
Tesoro, Flint Hills, BP, and ConocoPhillips - within the state
to determine market interest in purchasing the state's royalty
barrels. The two responses it received were from Tesoro and
Petro Star, and last year the Tesoro negotiated sale contract
was ratified. This year the Petro Star negotiated sale contract
is before them.
Based on the responses, it was determined that there was not
enough competition for a competitive sale, Mr. Shine said, and
while Tesoro agreed immediately to the price terms in the
solicitation, Petro Star was seeking a different pricing
mechanism that is not as advantageous to the state. At that
point the DNR commissioner determined that a competitive bid
sale was not in the state's interest and entered into separate
negotiated sales.
The first contract in effect right now is less than one year in
length to relieve market conditions and allow Petro Star to
secure its feed stock for refineries in Valdez and North Pole in
the near term while also negotiating a long term contract to
provide a secure source of supply for the refineries over the
next four years.
He explained the reason for having both contracts terminate near
the same time in 2021 is because at that point the department
will have a better sense of what royalty volumes are available.
Historically, the state has been able to enter into 10-year RIK
sale contracts, but with declining throughput and uncertainty of
what volumes would be available, it's been determined that five
year contracts are more accurate at this point.
3:41:26 PM
MR. SHINE said 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," and 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.
3:42:08 PM
For approval of an RIK sale the DNR must make a Best Interest
Finding (BIF) in support of the sale. In this case, the
preliminary BIF was issued in July 2016 and the final was issued
in September 2016. DNR presented the proposed sale to the
Royalty Board on August 31, 2016, and it unanimously voted in
Resolution 2016-2 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).
3:42:58 PM
The Royalty Board's decision criteria was listed on slide 6.
Slide 7 had the actual contract terms:
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
MR. SHINE explained that the range is a minimum nomination per
day and the high number would be the maximum. The numbers
decline over the next five years, whereas the Tesoro contract
last year had a static number of 20,000-25,000 barrels per day.
The Petro Star contract is meant to give them as much royalty
volume as the state can project to not exceed in the next four
years. Typically they don't nominate more than 95 percent of
expected royalty volumes and so the Tesoro contract combined
with the Petro Star contract is about 95 percent of expected
royalty volumes under contract to local refiners within the
state.
The net back formula provides a higher revenue to the state over
RIV that uses a marine transportation deduction, which is
basically the price to ship a barrel of oil from Valdez to its
destination on the West Coast. The in-state location
differential is a deduction in the net back formula meant to
represent the cost of a barrel of oil within the state.
3:45:26 PM
MR. SHINE explained that the flexibility of quantity provides
for a three-month consecutive turnaround clause in which either
refinery may nominate below its minimum range for planned
service interruptions for factory upgrades, de-bottlenecking,
and efficiencies, which is customary in the refining and the
upstream oil and gas industry. The reason the state doesn't want
to keep 5 percent of expected royalty oil is to keep markers on
what the marine transportation deductions are and what the net
back formulas look like to ensure the department is meeting its
statutory mandate to meet or exceed royalty in value when the it
elects to sell the state's royalty in kind. If more royalty is
available than projected, additional volumes will be offered to
both Petro Star and Tesoro on equal terms consistent with the
pricing mechanisms in each contract.
He said that Petro Star has filed a $46 million surety bond with
the state as provided in the one-year contract in the event an
in-state refiner or royalty purchaser defaults (or denominates)
on its obligations to pay the state for royalty already
delivered. Both contracts encourage commercially reasonable
efforts to manufacture refined products within the state and
promote local hire of Alaska residents and contractors. All
communications with Petro Star have indicated that they have no
intent to do anything but refine the products within the state
for local use as jet fuel, home heating fuel, and ultra-low
sulphur diesel, to name a few.
3:48:31 PM
MR. SHINE said the RIK net back formula is: ANS Spot Price -
$1.95 -Tariff Allowance +/-Quality Bank Adjustments -Line Loss.
He explained that the ANS spot price is a monthly average of the
daily average of the two reporting agencies, Platts and Reuters.
The in-state location differential is deducted from that $1.95
as well as the TAPS and upstream tariffs to Pump Station 1. Then
there are Quality Bank adjustments and a small percentage of
line loss. Line loss is a .09 percent, industry-standard
deduction from net back formulas that is meant to represent
small differences in measurement between meters upstream and
downstream as well as any loss in product due to evaporation,
friction, ice build-up, or paraffin as is the case in the
TransAlaska Pipeline System (TAPS).
3:50:00 PM
SENATOR WIELECHOWSKI said if you take 20,000 barrels out of TAPS
he understands that the tariff will go up slightly for everyone
else who put oil in the pipeline. Then that in turn is able to
be deducted from the production taxes that are paid to the State
of Alaska, which ultimately causes a small loss for the state.
He asked if that is factored into this.
3:50:44 PM
ED KING, Special Assistant, Alaska Department of Natural
Resources (DNR) answered that the oil that is being delivered to
Tesoro is presumed to have already been produced and shipped
through TAPS through the Petro Star refinery, so it would
already be calculated into the tariff calculation. If the state
weren't selling oil to Tesoro the assumption is that they would
be purchasing the same volumes of oil from someone else and it
wouldn't have any net effect.
SENATOR WIELECHOWSKI said that didn't answer his question, but
they could discuss it afterwards.
SENATOR COGHILL asked who puts the calculation together and what
value that adjustment means at the end of the line.
MR. SHINE answered that the Quality Bank administrator makes
those determinations, which is meant to measure the difference
in value of the oil streams into the co-mingle point and the
stream of oil coming out in Valdez. So, adjustments are made to
those entities who are contributing a lower quality of oil that
result in a benefit to the upstream producer who has a higher
quality product. Those adjustments can be made as far back as
eight years in this contract when the Quality Bank administrator
or FERC makes a determination.
SENATOR COGHILL said that is interesting, because this contract
has a huge variable.
MR. SHINE said that is the reason for the eight-year tail in the
contract. Even though it is a five-year contract having that
tail move out eight years provides the state with a little bit
more certainty that if adjustments were made that they would
benefit the state, too.
MR. KING noted that the Quality Bank adjustment is also in
existence if they were to take RIV as well as RIK. So this
contract has no actual effect on the value in that regard.
3:53:36 PM
MR. SHINE continued that the contract will yield $29 - $37
million in additional revenue to the state over what it would
have received taking the same barrels in value. The real benefit
between RIV and RIK is really realized in the in-state location
differential and the RIK net back formula as opposed to the
marine transportation deduction, which is present in the RIV net
back formula. The marine transportation deduction for FY17 is
somewhere in the $3.30-$3.40/barrel range and is expected to
move up by about 10 cents per year until 2021 when it will be
about $3.70/barrel. The static $1.95 RIK differential in the
current contract as well as the Tesoro contract is where the
state is getting the most benefit from the sale of royalty over
RIV.
The value realized by the different contracts is:
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
3:55:04 PM
He explained that some of the criteria that the commissioner and
the Royalty Board consider are the impacts to local economies
and local hire; and Petro Star provides benefits to the state in
terms of employment, its in-state refining capabilities, as well
as providing ultra-low sulphur diesel, jet fuel, and asphalt to
local economies. He presented a comparison of the volumes of the
two contracts on slide 10 and said he was available to answer
questions.
CHAIR GIESSEL asked if he had any objections to this contract.
MR. SHINE answered no and no public comments were received; no
adverse comments were presented at the Royalty Board.
3:56:09 PM
DOUG CHAPADOS, President & CEO, Petro Star, Inc., Anchorage,
Alaska, thanked the DNR Division of Oil and Gas for their
efforts and past and present commissioners for the work they had
done in getting this contract in place. These are critically
important contracts for their company, because without oil they
are out of business. With the decline of TAPS throughput they
have found it more and more difficult to source crude oil from
producers on the North Slope. Being a consistent source of crude
in the future, the state has brought Petro Star back and they
look forward to refining this oil and making products for Alaska
consumers.
SENATOR COGHILL commented that the investment Petro Star had
made was immediately beneficial to the North Pole area and he is
very grateful.
3:57:59 PM
SENATOR MEYER asked if it matters to him or the refinery if the
oil is heavy or light, or what the gravity or sulphur rate is.
MR. CHAPADOS said they like to see higher quality crude oil and
Petro Star refineries are designed to process a barrel of crude
in a very simple way. They like to see lots of middle distillate
materials in the crude: kerosene, jet fuel, and diesel fuels.
That allows them to retain more from each barrel they process.
Typically they retain 25-30 percent of each barrel that they
process and the balance is returned back to the pipeline. That
is where this Quality Bank liability is generated, because the
oil they return is considered to be of lower quality than the
balance of the oil that is being shipped through TAPS. Crude
from the Alpine Field is an example of a lighter crude oil that
has a high concentration of jet fuel range material in it.
SENATOR MEYER asked if he gets to choose which oil he gets.
MR. CHAPADOS answered he wished he could, but they are subject
to whatever is being shipped through TAPS, which is a co-mingled
stream from all the fields. Over time the quality of the oil
increases and decreases; it's at a good point now between those
that are coming on line and those that are declining.
4:00:20 PM
SENATOR MEYER said he had heard that pipeline oil is becoming
heavier, so it is encouraging to hear that CD-5 and the Willow
discovery have high gravity rates.
MR. CHAPADOS responded that he believes that the new fields are
of reasonably good quality.
4:01:13 PM
MR. CHAPADOS said Senator Wielechowski questioned whether or not
the sale of this royalty oil to Petro Star would increase the
tariff rates for the remaining barrels that are being shipped
through TAPS, and the very quick and simple answer is no. He
explained that prior to the state royalty oil contracts, Petro
Star was buying oil from another North Slope producer. Those
barrels were being shipped through TAPS just as these barrels
will be. So, at the end of the day, it's really a zero net gain
in terms of how many barrels are being shipped through TAPS and
where it's being shipped to.
4:02:20 PM
CHAIR GIESSEL opened public testimony, and finding none, closed
it.
SENATOR COGHILL moved to report SB 30, labeled 30-GS1873\A, from
committee with individual recommendations and attached fiscal
note(s). There were no objections and it was so ordered.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 30 Transmittal Letter.pdf |
SRES 1/30/2017 3:30:00 PM |
SB 30 |
| SB 30 Request for Hearing.pdf |
SRES 1/30/2017 3:30:00 PM |
SB 30 |
| SB0030A.pdf |
SRES 1/30/2017 3:30:00 PM |
SB 30 |
| SB 30 Fiscal Note-1-2-012017-DNR-Y.pdf |
SRES 1/30/2017 3:30:00 PM |
SB 30 |
| SB 30 Royalty Board Resolution.PDF |
SRES 1/30/2017 3:30:00 PM |
SB 30 |
| SB 30 Report from Royalty Board.pdf |
SRES 1/30/2017 3:30:00 PM |
SB 30 |
| SB 30 PPT to SRES 01.30.17.pdf |
SRES 1/30/2017 3:30:00 PM |
SB 30 |
| SB 30 Contract.pdf |
SRES 1/30/2017 3:30:00 PM |
SB 30 |
| SB 30 Best Interest Finding.pdf |
SRES 1/30/2017 3:30:00 PM |
SB 30 |
| SB 30- Support-Petro Star-1-30-17.pdf |
SRES 1/30/2017 3:30:00 PM |
SB 30 |
| DNR Production Forecast SRES-1-30-17.pdf |
SRES 1/30/2017 3:30:00 PM |
Oil Production Forecast |
| DOR Production Forecast SRES-1-30-17.pdf |
SRES 1/30/2017 3:30:00 PM |
Oil Production Forecast |
| SB 30 Support-GVEA-1-30-17.pdf |
SRES 1/30/2017 3:30:00 PM |
SB 30 |