Legislature(2015 - 2016)SENATE FINANCE 532
04/08/2016 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB205 || HB373 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 114 | TELECONFERENCED | |
| += | SB 128 | TELECONFERENCED | |
| += | SB 205 | TELECONFERENCED | |
| + | HB 373 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
April 8, 2016
9:06 a.m.
9:06:33 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:06 a.m.
MEMBERS PRESENT
Senator Anna MacKinnon, Co-Chair
Senator Pete Kelly, Co-Chair
Senator Peter Micciche, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
MEMBERS ABSENT
Senator Donny Olson
ALSO PRESENT
Jim Shine, Special Project Assistant, Office of the
Commissioner, Department of Natural Resources; Matt Gill,
External Affairs Senior Manager, Tesoro Alaska.
SUMMARY
SB 205 APPROVAL OF SALE OF ROYALTY OIL TO TESORO
SB 205 was HEARD and HELD in committee for
further consideration.
HB 373 APPROVAL OF SALE OF ROYALTY OIL TO TESORO
HB 373 was HEARD and HELD in committee for
further consideration.
SENATE BILL NO. 205
"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."
HOUSE BILL NO. 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."
Co-Chair MacKinnon discussed housekeeping.
9:07:01 AM
JIM SHINE, SPECIAL PROJECT ASSISTANT, OFFICE OF THE
COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES, discussed
SB 205, and HB 373, which were identical bills that would
ratify the contract that had been negotiated between the
department and Tesoro for the sale of royalty oil.
9:08:07 AM
Mr. Shine discussed the presentation, "Proposed Sale of the
State's Royalty Oil to Tesoro: SB 205/HB 373." (copy on
file). He showed 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.
Mr. Shine noted that come of the contract negotiations
dated back to 1979.
9:09:13 AM
Mr. Shine displayed 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.
Mr. Shine elaborated that British Petroleum and
ConocoPhillips had topping plants on the North Slope for
infield use, letters had also been sent to Flint Hills,
Tesoro, and Petro Star. Response had been weak, which led
to the determination to enter the contract with Tesoro.
9:10:46 AM
Mr. Shine discussed 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
9:11:14 AM
Mr. Shine spoke to Slide 5, "Approval Process for the RIK
Sale":
· DNR must make a Best Interest Finding (BIF) in
support of the sale
o 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).
9:12:22 AM
Mr. Shine showed 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.
9:13:08 AM
Mr. Shine discussed 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
patters of investment.
Mr. Shine stated that after consideration of the criteria a
report had been prepared that discussed the criteria and
recommended approval, as well as a resolution that
recommended the ratification of the contract (copy on
file).
9:13:38 AM
Mr. Shine turned to 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.
9:14:35 AM
Senator Dunleavy understood that if the contract were
terminated the state would revert back to RIV.
Mr. Shine answered in the affirmative.
9:14:59 AM
Mr. Shine continued discussing Slide 8:
· 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.
9:16:02 AM
Mr. Shine discussed 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).
9:16:57 AM
Mr. Shine spoke to 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:
o Tesoro employs approximately 210 Alaskans
o Tesoro produces 59,000 bpd refined products
at its Nikiski refinery
o Tesoro refinery's estimated contribution to
the local economy is $127mm
9:19:12 AM
Mr. Shine displayed 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.
Mr. Shine confirmed that the provision had been added after
the public comment period; the issues that had been raised
were the length of the contract and the pro-rationed
preference that had been provided to Tesoro through
commercial negotiations. He said that the pro-rationed
preference meant that if the state had a number of royalty
purchasers, and less volumes available than the contractual
obligation called for, companied would be prorated down
according to their percentage of royalty purchase. He
stated that in 2015, during the course of the negotiations,
Petro Star had approached the department and had indicated
a willingness to purchase on established price terms; in an
effort to make more volumes available for Petro Star to
purchase, Tesoro reduced their maximum volumes from 30,000
to 25,000/ barrels per day. He furthered that in exchange,
the state had provided a pro-ration preference, which would
have allowed them to be the last purchaser of royalties to
be prorated in the event that the sale occurred. He said
that after internal discussions the provision had been
struck from the contract, leaving the status quo to remain.
9:21:40 AM
Co-Chair MacKinnon asked whether a Petro Star contract
would necessitate a separate piece of legislation.
Mr. Shine answered in the affirmative. He explained that
there were two separate contracts under discussion with
Petro Star that would give the company 5 years of royalty
purchases: a 1-year contract that would commence in middle
to late August of 2016, and a 4-year contract that would
commence after the 1-year terminated. Both the Petro Star
and the Tesoro contracts would terminate in 2021.
9:22:38 AM
Senator Bishop asked about the $45 million to $55 million
increase over the life of the project under the 5 year
contract. He understood that the number was the
differential on the marine shipping between the RIK and the
RIV.
Mr. Shine stated that was correct.
9:23:12 AM
Senator Dunleavy asked how extreme price differentials
would impact the agreement.
Mr. Shine stated that the price differentials would bring
more money to the state because the barrels would be valued
higher, but the actual methodology would not change. He
said that if the value of oil went up to $100/bbl., the
deductions would be taken from that value.
9:24:07 AM
Senator Dunleavy asked whether changes in the per barrel
valuation adjustments could make the RIK equal to RIV at
the same prices.
Mr. Shine was not aware of all the ramifications of the
price changes, but detailed that the current contract had
been negotiated to give the department the confidence that
the contract would bring more for RIK than would have been
received in RIV.
9:25:20 AM
Senator Hoffman asked whether the state knew the intended
market that Tesoro had for the product under the contract.
Mr. Shine noted that Tesoro produced a significant amount
of jet fuel, which was shipped via a common carrier
pipeline to the Anchorage Airport; additionally, diesel and
gasoline were sold to in-state markets.
9:25:56 AM
Senator Bishop commented that the five-year contract was
the result of the amount of production on the North Slope.
Mr. Shine stated that the state had been selling royalty
oil for several years. He added that; historically, the
state had enjoyed the ability to have longer term contracts
because there had been more throughput in taps and more
volumes available for sale. He said that when the 2013
contract was negotiated with Flint Hills, there had been
some concern with having a long-term contract based on set-
volumes and the state's inability to predict the future. He
said that the production forecast and declines that the
contract was based on was only for current production and
did not incorporate projects that had yet to come online.
9:27:45 AM
Vice-Chair Micciche asked if the committee had a chance to
review the document, "Final Best Interest Finding and
Determination for the Sale of Alaska North Slope Royalty
Oil to Tesoro Refining & Marketing Company, LLC, Division
of Oil and Gas Alaska Department of Natural Resources March
17, 2016" (copy on file). He thought that it would be very
difficult for RIV to bring more value to the state than
RIK. He referred to the chart on Page 11 of the document,
which showed the marine transportation costs, which he
believed were unlikely to dramatically shift downward. He
read the statement at the top of Page 5:
…..the State sold approximately 95.14 million barrels
of royalty oil in-kind under three different
contracts: the Flint Hills Resources RIK contract from
April 2004 to March 2014 (FHR 2004); the Flint Hills
Resources RIK contract from April 2014 to May 2014
(FHR 2014); and the current Tesoro RIK contract from
February 2014 to January 2016 (Tesoro 2014). The sale
of those 95.14 million barrels in-kind generated about
$106.11 million of additional revenue to the State,
which would not have been realized had this volume of
royalty oil been taken in value.
Mr. Shine concurred. He noted that Page 11 reflected that
marine transportation costs would increase over the next 5
years.
9:29:10 AM
Co-Chair MacKinnon asked how many barrels of royalty oil
were available.
Mr. Shine thought the state had 52 to 55 thousand barrels
per day, but considering the production decline, he thought
that it could be as low as 36 to 38 thousand barrels per
day by 2021.
Co-Chair MacKinnon asked whether there was a formula used
by the state to determine using the RIK versus the RIV.
Mr. Shine explained that when the state used RIK, it did
not nominate more than 95 percent of the available volume.
He said that by maintaining and selling some of the oil in-
value, market indicators could help determined actual costs
and inure that RIK prices met, or exceeded, RIK in future
negotiations.
9:30:57 AM
Vice-Chair Micciche referred to the table on page 3 of the
best interest finding document. He believed that the state
was losing value by not increasing the amount of RIK oil.
He wondered whether there was any way to increase the
proportion of RIK volumes.
Mr. Shine reiterated that the state was currently
negotiating contracts with Petro Star, which when used in
combination with the Tesoro contract, would be
approximately 95 percent of the available royalty volumes.
He added that in an effort to increase and maximize the
value of royalty oil for the state, the department would be
nominating and selling up to 95 percent of the available
volumes, over the next 5 years.
9:32:22 AM
Co-Chair MacKinnon OPENED public testimony for SB 205 and
HB 373.
9:33:15 AM
MATT GILL, EXTERNAL AFFAIRS SENIOR MANAGER, TESORO ALASKA,
urged the committee to support the legislation. He offered
a background of the Tesoro Corporation. He shared that the
company's refinery in Kenai had the operational capacity of
up to 72,000 barrels per day of primarily jet and diesel
production followed by gasoline and gasoline bland stocks,
heating oil and heavy fuel oils, and propane and asphalt.
He shared that the corporation operated a 68 mile, common
carrier products pipeline, which transported jet fuel,
gasoline, and diesel fuel to the Port of Anchorage and the
Anchorage International Airport. He stated that the
wholesale delivery of products occurred through terminals
in Kenai, Anchorage, Nikiski, and the Port of Anchorage. He
relayed that in addition to being the largest tax payer in
the Kenai Peninsula Borough, the corporation provided 225,
family wage, in-state jobs at the refinery and terminals.
He added that there were 30, full-time contractors working
in and around the refinery year-round. He expounded on the
many positive ways that the corporation impacted the state
socially and economically. He relayed that the legislation
was the product of over a year of dialogue and productive
negotiations between the Department of Natural Resources
(DNR) and Tesoro. He expressed appreciation with the
state's ability to understand the corporation's issues and
arrive at a mutually beneficial agreement that was a "win -
win" for both parties. He added that DNR estimated that the
state would continue to receive a price for its RIK oil
that exceeded the price for RIV. He related that the
estimated additional value to the state was between $45 and
$56 million for the span of the contract. The five year
contract would provide Tesoro with a stable supply of ANS
crude, which giving the volumetric flexibility to help
accommodate seasonal fluctuations in demand for refined
products. He furthered that the availability, flexibility,
and stability offered by the contract would have a positive
impact on Tesoro's ability to maintain ongoing operations
at the Nikiski refinery. He stated that in order to
accommodate the needs of other in-state refiners, the
contract had been modified to reduce the volumes, and
eliminate a pro-ration clause and a 5 year extension
period. He offered that Tesoro believed in the future of
Alaska and was committed to being an active corporate
citizen.
9:37:20 AM
Senator Hoffman referred to his previous question regarding
Tesoro markets in the state.
Mr. Gill detailed that the refined jet fuel went primarily
to the Anchorage International Airport, gasoline went into
the Interior markets; Tesoro products generally fed
Anchorage, up to Fairbanks, and along the highway system.
He said that the communities in Southeast and Western
Alaska were serviced by other imports from other companies.
9:38:14 AM
Co-Chair MacKinnon CLOSED public testimony.
9:38:46 AM
AT EASE
9:39:32 AM
RECONVENED
Co-Chair MacKinnon discussed the fiscal note. She
referenced the second page of the note:
There will be an indeterminate increase in revenues;
the increase is indeterminate due to the uncertainty
in predicting the price of ANS crude.
Co-Chair MacKinnon wondered which forecast had been used
when determining the potential economic benefit to the
state.
Mr. Shine explained that the $45 to $56 million had been
meant to represent the difference between the RIV marine
transportation of $3.50 per barrel, and the $1.95 location
differential in an RIK contract, over the life of the
contract on 20 to 25 thousand barrels per day of oil. He
said that the numbers reflected the volumes being sold,
with the approximate $1.50 delta between RIK and RIV,
exclusive of the price of ANS.
9:42:00 AM
Vice-Chair Micciche wondered whether the fiscal note could
reflect a more defensible and conservative number.
Mr. Shine stated that the amount on the fiscal note had
been determined by DNR.
9:42:33 AM
Co-Chair MacKinnon commented that the committee was working
to pass only the barest of fiscal notes out of committee.
She thought that the indeterminate note did not reflect the
positive position that the state would be in with the
approval of the contract.
Mr. Shine added that there would be no negative fiscal
impact, and the indeterminate note was not an effort to
reflect any increases in cost to the department. He
stressed that if the committee wanted a positive fiscal
note he was eager to have the conversation.
9:43:58 AM
Vice-Chair Micciche reiterated that the numbers could be
conservatively estimated. He thought that indeterminate was
less accurate that just using the lowest estimates.
Co-Chair MacKinnon said that the committee would work with
Legislative Finance Division to determine historical
reflections of the numbers, and whether something positive
could be put forward.
9:44:53 AM
AT EASE
9:45:13 AM
RECONVENED
SB 205 was HEARD and HELD in committee for further
consideration.
SB 373 was HEARD and HELD in committee for further
consideration.
Co-Chair MacKinnon discussed housekeeping.
ADJOURNMENT
9:46:07 AM
The meeting was adjourned at 9:46 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 205 040716 DNR PPT SB 205 - S Finance.pdf |
SFIN 4/8/2016 9:00:00 AM |
SB 205 |
| SB 205 Supporting Document Resolutions for Tesoro RIK Contract 2016.pdf |
SFIN 4/8/2016 9:00:00 AM |
SB 205 |
| SB 205 Supporting Document Report to Alaska Legislature.pdf |
SFIN 4/8/2016 9:00:00 AM |
SB 205 |
| SB 205 Supporting Document TesoroRIKContractBIF.pdf |
SFIN 4/8/2016 9:00:00 AM |
SB 205 |
| SB 205 Transmittal Letter.pdf |
SFIN 4/8/2016 9:00:00 AM |
SB 205 |
| HB 373 Supporting Document Report to Alaska Legislature.pdf |
SFIN 4/8/2016 9:00:00 AM |
HB 373 |
| HB 373 Supporting Document Resolutions for Tesoro RIK Contract 2016.pdf |
SFIN 4/8/2016 9:00:00 AM |
HB 373 |
| HB 373 Supporting Document TesoroRIKContractBIF.pdf |
SFIN 4/8/2016 9:00:00 AM |
HB 373 |
| HB 373 Transmittal Letter.pdf |
SFIN 4/8/2016 9:00:00 AM |
HB 373 |