Legislature(2015 - 2016)BUTROVICH 205
03/30/2016 03:30 PM Senate RESOURCES
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Confirmation Hearing | |
SB205 | |
Adjourn |
* first hearing in first committee of referral
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*+ | SB 205 | TELECONFERENCED | |
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SB 205-APPROVAL OF SALE OF ROYALTY OIL TO TESORO 4:07:52 PM CHAIR GIESSEL announced consideration of SB 205 [version 29- GS2225\A was before the committee]. 4:08:09 PM JIM SHINE, Special Projects Assistant, Department of Natural Resources (DNR), Anchorage, Alaska, presented SB 205. He said it ratifies a contract for sale of royalty oil from the state to Tesoro. He explained that essentially, the state can elect either royalty in kind (RIK) versus royalty in value (RIV). Taking it in value means the producer produces, transports and markets the oil on the state's behalf. In an RIK situation the state takes possession of the oil and sells it itself. When electing either a best interest finding must be made according to AS 38.05.182 that also says RIK is the default. But that still requires a best interest finding. This process was commenced through a solicitation of interest that went out in January 2015 to all the in-state refineries to gauge market interest in purchasing royalty oil. MR. SHINE said that the state receives all royalties as RIV now. That is kind of an anomaly as the state has historically, back to 1979, sold RIK to in-state producers, starting with Mapco, Williams, Petro Star, Flint Hills, and Tesoro. Today, because the contract with Tesoro terminated on January 31, 2016, the state is taking all of its North Slope royalties in value. He explained that a best interest finding needs to be made that taking RIK is in the state's best interest, and as part of that it is directed per statute to sell it by competitive bid unless there is no adequate competition. The department received responses from BP and ConocoPhillips, which have North Slope topping plants for in-field use. Their response was that they would take volumes, but they weren't interested in processing them in-state. Flint Hills responded that they weren't taking volumes, because they had closed their doors in June 2014. Tesoro and Petro Star both responded with a willingness to purchase RIK barrels. Tesoro agreed to the state's price terms in the solicitation and Petro Star responded that they would like to purchase barrels, but at a different pricing mechanism that was not as advantageous to the state and not in line with the solicitation. At that time the commissioner made a determination that there was not adequate competition based on the pricing responses and proceeded with a non-competitive negotiated contract with Tesoro. 4:11:34 PM MR. SHINE said the decision criteria in AS 38.05.183 direct the commissioner in selling royalty oil to provide the maximum benefit to the citizens of the state. Some of the criteria include the cash value offered (price terms), the effect on the economy, the benefits of refining and providing those products in-state, and eight other criteria listed in AS 38.06.070, which are reviewed by the Royalty Board. He explained that they issued the preliminary best interest finding on February 3, 2016; attached to that as an exhibit was the proposed contract with Tesoro that was out for a 30-day public comment period. During that time they received public comments from Petro Star and its parent corporation, ASRC, and those were addressed in the proposed final contract that is before the legislature today. That contract was submitted to the Royalty Board and it was unanimously approved with a recommendation of ratification by the legislature. 4:12:47 PM The Royalty Oil and Gas Development Advisory Board, known as the Royalty Board, under AS 38.06.070(a), also reviewed the contract under the following decision criteria: -revenue needs of the state -projected local regional needs for the products -desirability of capital investment in local secondary development -social impacts -projected additional costs and responsibilities put on the state -additional criteria include the existence of labor and consumption markets, potential environmental positive and negative impacts, and projected proposed transaction upon commercial enterprises. The Royalty Board after considering the contract in line with these criteria did unanimously approve the contract, he said. 4:13:40 PM MR. SHINE explained that the actual contract before the legislature is a five year contract for sale of 20-25,000 barrels of royalty oil per day. Tesoro takes possession of those at the Valdez Marine Terminal and then barges them over to the Tesoro Nikiski refinery. He discussed the formula used to determine the RIK versus RIV valuation methodology: in the RIV world the producers' netback when they transport from the Valdez Marine Terminal to the West Coast a marine transportation deduction is netted back off of the final (ANS) sales prices. In an RIK situation the state doesn't have that marine transportation because it's not being sent from Valdez down to the West Coast. So, you essentially start with the U.S. West Coast average and then deduct the $1.95 RIK differential, which is meant to represent the value of the price of oil sold in-state. Another provision is if they don't nominate oil for three consecutive months, the contract will terminate. SENATOR WIELECHOWSKI asked him to explain the $1.95 figure. MR. SHINE said basically the Commercial Section of the Division of Oil and GAs uses the $1.95 RIK differential in the last Tesoro contract to reflect the in-state price of a barrel of oil. 4:15:51 PM ALEX NOUVAKHOV, Commercial Manager* Division of Oil and Gas* Department of Natural Resources (DNR)* explained that the pricing formula assumes West Coast price for ANS as a basis and then there are deductions from that to arrive at the price which the state receives. The deductions include things like tariffs for the TAPS and relevant upstream pipelines, quality adjustments based on the quality of the crude, and in cases of RIV pricing a marine transportation cost deduction. In RIK pricing, an RIK differential is used instead of that marine transportation cost deduction. It is a location differential which mimics and reflects the private transactions which occur for ANS within Alaska (without transporting the crude to the U.S. West Coast). MR. SHINE said the equation for RIK was on slide 9 as follows: ANS Spot Price - $1.95 - Tariff Allowance +/- Quality Bank Adjustments - Line Loss 9 •ANS Spot Price = Average U.S. 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). SENATOR WIELECHOWSKI said he was still trying to figure out $1.95 and asked if the $3.70 is the current deduction for shipping from Valdez to the West Coast. Does the $1.95 represent the in-state transportation cost? MR. SHINE responded that the $3.30-$3.70 per barrel is the average of marine transportation deductions right now as reported by Department of Revenue (DOR). It is the cost to ship a barrel of oil from Valdez to the destination (mostly the U.S. West Coast). He didn't know how to further clarify the $1.95 other than it is the deduction to represent the value of the price of a barrel of oil sold within the state in a private transaction. 4:20:38 PM SENATOR WIELECHOWSKI said he still wanted further clarification. He asked, "Because they don't have to ship it down there, why are we allowing a $1.95?" 4:21:06 PM MR. NOUVAKHOV answered that the $1.95 is a location differential that reflects the market dynamics. Even though the crude does not leave the state, transactions between private buyers and sellers still have a location differential that is determined by supply and demand. It is not a transportation deduction of any sort. The best interest finding had a table from the Department of Revenue that showed the location differential between private transactions at various locations within the state. CHAIR GIESSEL asked what page the best interest finding table that he was referring to was on. MR. NOUVAKHOV answered that table 1 on page 11 shows the past location differentials. That table shows historic location differentials between private sales of crude ranged from $1.34- $2.12. 4:24:57 PM SENATOR WIELECHOWSKI asked how much the state loses for every penny of differential. MR. NOUVAKHOV answered that he didn't have that number here, but he could calculate the impacts penny by penny on a barrel and get it to him. SENATOR WIELECHOWSKI asked the rationale behind going from $1.65 to $1.95. "Has the market adjusted that much?" MR. NOUVAKHOV answered the last two contracts they had were with Flint Hills and Tesoro. The Flint Hills contract had $2.15 and Tesoro (which expired in January 2016) had $1.95 for a differential. So, the $1.95 in the current proposal is in line with the past contract with Tesoro and a little better than the contract which was in place with Flint Hills, and it is within the range of location differentials for private contracts in the state. SENATOR STOLTZE remarked that this is a take it or leave it provision and it is not amendable. 4:27:41 PM SENATOR MICCICHE asked if he understood that this $1.95 is an assumption that if BP purchased the same quantity from ExxonMobil that the location differential would be very similar. MR. NOUVAKHOV answered that it is not an assumption. This DOR figure is based on actual contracts which they have access to between private parties, but the information it forecasts for a future year is an assumption. SENATOR MICCICHE said that illustrates his point that Tesoro is not getting a special deal. In fact, in their 2014 contract they had less of a deduction than Flint Hills. He assumed when the Flint Hills contract was written that the current going price for location differential between private parties was somewhere around $2.15. MR. NOUVAKHOV said that was correct; in 2013 it was $2.12. SENATOR COGHILL said it's important to understand how you arrive at this, but it looks like the state was about to switch between RIK and RIV much more rapidly than under this contract. "Is that the reason for this number being so critical at this point?" MR. SHINE responded that the $1.95 is not a transportation deduction. Market factors determine that location differential. The $1.95 is a fixed price over the life of the five-year contract. The delta between the $1.95 location differential and the marine transportation deduction that they would otherwise be incurring in an RIV situation is approximately $1.50-$1.75 per barrel. Over the life of this contract that difference equates to $45-56 million more to the state over RIV. "If we elect RIK we have to at least be equal to or greater than RIV." 4:31:00 PM SENATOR STOLTZE asked him to comment about the supply of asphalt that is such a critical part of Alaska's building industry- which plant can provide it and where they are located. MR. SHINE said he wasn't an expert on asphalt or the construction industry, but representatives from Tesoro could better answer that. SENATOR STOLTZE said he was interested in other suppliers besides Tesoro and in having a more economical distribution. "Was that discussed by the Governor's team, and did that enter into the best findings?" MR. SHINE replied selling royalty oil to in-state refineries - Tesoro, Petro Star, and Flint Hills, - historically provides a certain security of supply as their feed stock for producing those products that are used within the state. 4:32:44 PM CORRI FEIGE, Director, Division of Oil and Gas, Department of Natural Resources (DNR), Anchorage, Alaska, added that asphalt and the sale of asphalt was not necessarily a part of the best interest finding discussion or the negotiation of the RIK contract, because the contract itself deals with the sale of the ANS crude. What the refiner chooses to use that crude for and what derivative products comes off of that is not a function of the best interest finding. Tesoro can speak to the refined products that they put out. It was part of the discussion at one point with Petro Star that they, too, were also looking at developing an asphalt plant. But the division does not have access to that information. SENATOR STOLTZE said a decision like this that affects availability should have more departments involved; maybe the commissioner of DOTPF should have been consulted. It is a gap in the process that can exponentially increase the cost of state projects and locally-funded projects. CHAIR GIESSEL said that the committee has a contract before them versus micromanaging a project. SENATOR MICCICHE said he was interested in RIK contract terms for employment of Alaska residents and no discrimination against Alaska companies and residents. Does Tesoro meet that requirement? 4:36:09 PM MR. SHINE replied that the most recent RIK contracts use pretty standard terms. The "commercially reasonable efforts" means a reasonableness standard of diligence, because requiring the in- state use of products has constitutional issues. A Supreme Court case dealing with limiting the processing of forest products to those used in-state was found unconstitutional based on the Dorman Commerce Clause. As with any contract, they absolutely encourage employment of Alaskans and local hire. Tesoro currently employs 210 local Alaskans bringing $127 million to the economy annually. They meet that mandate and there are no indications that will ever change. SENATOR MICCICHE said that works for him. MR. SHINE said should Tesoro fall below a certain credit rating (BBB-), then they would be required to supply a letter of credit equal to the value of 90 days of oil delivery (slide 8). It protects the state in the event that credit ratings fall below a certain level, which has not been the case over the last two years. 4:38:21 PM SENATOR MICCICHE asked the similarities between this contract and the previous two contracts. MR. SHINE replied that the only major difference really is in the RIK differential. It was $2.15 for Flint Hills in 2014, but the valuation has been identical in the last two years of contracts with Tesoro for purchase of royalty barrels. The other difference would be in volume of barrels that are under contract. The 2014 Flint Hills contract had a nomination window of 18,000-30,000 barrels per day. When they closed their doors in 2014, that contract terminated. SENATOR MICCICHE said that says to him that the department is largely allowed to do their jobs on contractual arrangements, and the Parnell contract is essentially identical to the Walker contract, although there may be tougher questions depending on which administration you support the most. Realistically the contract is independent and very similar to others in nature. MR. SHINE said that was correct. He said slide 10 highlights the point he made earlier that the value this contract brings to the state of an estimated $45-56 million more over the next five years than it would otherwise receive for royalty in value. 4:40:38 PM SENATOR MICCICHE asked if he is saying there is more potential profit for purchasing the state's oil in RIV rather than an RIK sale such as this. MR. SHINE answered the RIV purchaser would be someone on the West Coast, although he didn't follow the question. SENATOR MICCICHE restated if you add $45 million more value to the state in RIK, then one would think this is more profitable to the state and RIV would be more profitable to the other purchasers (because the state would lose $45-56 million). MR. SHINE said that was correct. The delta between the $1.95 location differential and the approximate $3.50 marine transportation deduction in an RIV situation is where the state realizes the most economic benefit in this contract over RIV, and that number equates to $45-$56 million. He said slide 11 talks about additional royalty oil sales. The state will nominate up to 95 percent of its available royalty barrels for sale and is in current negotiations with Petro Star to provide royalty oil to them over the next five years. Those contracts will terminate about the same time as this Tesoro contract. The state has contracts with Tesoro and Petro Star right now and 95 percent of its volumes are nominated. They actually have more additional barrels than was predicted and those will be offered for sale on an equal basis to both contracting parties. 4:42:56 PM MR. SHINE said Petro Star had raised a couple of issues in their public comments to the proposed contract. Those fall into two buckets: the first being the length of the contract with Tesoro. The initial contract was for five years with the option to extend for five years. That would have to be among mutual consent of the parties and it would come back to the legislature for ratification. That provision has since been struck. The contract before them for ratification is a stand-alone, five- year contract. Another concern that was addressed was with respect to a pro- ration preference to Tesoro in exchange for nominating a little less volume, so more could be provided to Petro Star. But after consideration and receiving that comment, the pro-ration preference was also struck. So, it's status quo if the state has its royalty barrels under contract. If there is a field maintenance or a downturn in production and that state doesn't have enough barrels to meet contractual obligations, then all the royalty purchasers are pro-rated proportionate to their share. 4:44:14 PM SENATOR WIELECHOWSKI ^Confirmation Hearingasked him to talk about the other bids they received. MR. SHINE answered that the department sent a solicitation of interest to five refineries within the state - Flint Hills, Petro Star, Tesoro, BP, and ConocoPhillips - and got responses from BP and ConocoPhillips, which have North Slope topping plants for in-field use, indicating willingness to purchase barrels, but they were not planning on refining them within the state. They were going to be added to export shipments. The response from Flint Hills was that they were not interested in purchasing, because they were no longer operating. The response from Petro Star indicated that they were willing to enter into a non-competitive, negotiated process for a pricing mechanism that was not the same as provided in the solicitation of interest, whereas Tesoro responded affirmatively, indicating a willingness to participate in a competitive bid or an informal negotiated process and met the price term solicitation. SENATOR WIELECHOWSKI asked if the bids from BP and ConocoPhillips would have resulted in more profit to the state. MR. SHINE answered that the price is just one of the considerations the commissioner has to review in making a best interest finding. They probably agreed with the price term of $1.95, but they were not going to refine within the state and export it. When all of the criteria in AS 38.05.183 is considered, the state would receive more value in selling its RIK to an in-state refiner that would provide those products to local markets. MR. NOUVAKHOV added their discussions with BP and ConocoPhillips did not go into the pricing as much. They made indications that they would be potentially interested in bidding for the crude, but they wouldn't be able to meet in-state refining conditions. Given the statute which requires the state to make a best interest finding for any export of crude - crude that is in excess to the in-state demand - they couldn't reach that threshold, because indications Petro Star and Tesoro combined came to a different that RIK that was available. So, the state couldn't very well make a best interest finding that it had excess crude to sell for export. SENATOR WIELECHOWSKI asked if they did a financial analysis on providing the oil to BP and ConocoPhillips would the state get a production tax on that and was that added value factored in. MR. NOUVAKHOV answered that this is royalty oil and it would make no difference for production tax to whom they are selling it (Tesoro, petro Star or back to a producer). The fiscal aspects of the sale would not be different. So, in terms of a marginal economic impact there is no difference who the buyer is. CHAIR GIESSEL noted that Tesoro was in the room for questions. 4:49:17 PM SENATOR STOLTZE asked Mr. Shine when he looked at royalty prices if he looked at any issues of motor fuel price collusion and affordability. MR. SHINE replied that is not a criteria that is expressly provided in the statute that the commissioner consider. They look at what refined products will be delivered and used in state, but the actual price of fuel is very far removed from the actual sale of feedstock to the refineries. A number of factors influence the sale of gasoline in the state. The Seattle oil price information service (OPIS) price plus a small percentage differential is typically what sets the market rate for gasoline prices within the state. So, between the state selling RIK to Petro Star or Tesoro and what somebody pays at the pump there are a number of transaction and transportation costs that get added to that, as well as capital costs, employment and overhead. The price of gasoline is not considered in selling the state's RIK. They look to maximize the benefit of the resources to the citizens of the state. MR. SHINE said that asphalt is not an express consideration, but this went out to public comment for 30 days and before the Royalty Board in a very transparent process and they didn't receive any comments suggesting that they consider the asphalt industry in the determination. SENATOR STOLTZE asked if the asphalt production issue was ever brought up other than the comment period. MR. SHINE answered no, to his knowledge, but Director Feige mentioned that the issue has come up in the context of Petro Star maybe making improvements at their refinery to make asphalt more available within the state. 4:51:45 PM SENATOR STOLTZE said that has come up in the process, but not formally in the comment period. MR. SHINE responded yes. CHAIR GIESSEL asked Ms. Feige who took that over producing asphalt when Flint Hills stopped. MS. FEIGE responded that she did not know if it was assumed by another operator, but she thought not. MR. NOUVAKHOV answered that he didn't know that anyone took that over, but they had discussion with Petro Star about future plants. CHAIR GIESSEL invited Tesoro to the table. 4:53:41 PM MATT GILL, Senior Manager, External Affairs, Tesoro Alaska, supported SB 205. He said Tesoro Corporation is currently a Fortune 100 company; it is an independent refiner and marketer of petroleum products. Tesoro's refining operation started in Alaska with purchase of its Kenai Refinery in 1969. The Kenai Refinery has an operational capacity of up to 72,000 barrels per day. It's primarily focused on jet and diesel production followed by gasoline and gasoline blend stocks, heating oil, heavy oils, propane and asphalt. They operate a 68-mile common carrier products pipeline that transports jet fuel, gasoline, diesel fuel to the Port of Anchorage and the Anchorage International Airport. The wholesale delivery of their products occurs through their terminals in Kenai, Anchorage, the Nikiski Dock, and the Port of Anchorage. In addition to being the largest taxpayer in the Kenai Borough, Tesoro provides over 225 in-state, family-wage jobs at the refinery and terminals along with about 30 fulltime contractors that are working in and around the refinery year-round. They are a major supporter of the Cook Inlet Regional Citizens Advisory Council (CIRCAC) as well as the largest member of Cook Inlet Spill Prevention and Response Team (CISPRT). They actively support a wide range of events and programs across the state. In 2015 they gave over $300,000 in grants from the Tesoro Foundation and their intention is to beat that number in 2016. Each year they sponsor all the 5th and 6th grade classes on the Kenai Peninsula to conduct a mission at the Kenai Challenger Learning Center. They are the signature sponsor of the Caring for the Kenai Program as well as the founding sponsor of the Alaska Business Week, a statewide business program that gets put on each summer. MR. GILL said this legislation is the result of over a year of dialogue and productive negotiations between Department of Natural Resources (DNR) and Tesoro Corporation and by all accounts, they are very impressed with the state's ability to understand their issues and with their ability to come to a mutually beneficial agreement that is win/win for the state and Tesoro as well as accommodating to the other in-state refiners. Their estimates indicate that the state will continue to receive a price for its royalty in kind oil that exceeds the price it would receive if it elected to keep its royalty oil in value. The estimated additional revenues is $45-56 million for the span of the contract. For Tesoro, this five-year contract will provide a stable supply of ANS crude while also giving them the volumetric flexibility to help accommodate seasonal fluctuations in demand for their refined products. MR. GILL said the availability, flexibility, and stability that this contract offers has a positive impact on their ability to maintain their ongoing operations at the Kenai Refinery. In order to accommodate the needs of the other in-state refiners, Tesoro and the state modified this contract to reduce the volumes as well as eliminate a pro-ration clause and the five- year extension option. Tesoro believes in Alaska's future and is committed to being an active corporate citizen and looks forward to continuing to provide Alaskans with clean burning fuels and successfully running their refinery for perhaps another 47 years. CHAIR GIESSEL asked who should be asked the asphalt question. MR. GILL answered that would best be directed to Cameron Hunt. 4:58:19 PM CAMERON HUNT, Vice President and Manager, Kenai Refinery, Tesoro Alaska, said that Tesoro has picked up all of the asphalt volume for Southcentral and the Fairbanks area demand with the closing of Flint Hills. This last summer they produced 430,000 barrels and are investing in improvements to their loading rack to speed up asphalt loading at the Nikiski Refinery. Through press releases they have found that Petro Star is also building capacity to supply asphalt from their North Pole refinery. SENATOR MICCICHE asked the percentage of Alaska hire at the Kenai Refinery. MR. HUNT answered that he didn't have a percent for Alaskan hire. They are unable to find in-market for certain specialty educational backgrounds such as chemical engineers. He can say that 100 percent of their refinery employees do live in the state, which the North Slope companies can't necessarily claim. Whenever it's possible to hire locally, they do so especially in their operations workforce, especially mechanics, carpenters, and electricians, and they were even able to hire several Flint Hills employees after it closed and relocate them down to the Kenai. CHAIR GIESSEL opened public testimony, and finding no comments, closed it. SENATOR COSTELLO moved to report SB 205, version 29-GS2225\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 |
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SB 205-Version A.PDF |
SRES 3/30/2016 3:30:00 PM |
SB 205 |
SB 205 Transmittal Letter.pdf |
SRES 3/30/2016 3:30:00 PM |
SB 205 |
SB 205 Fiscal Note.PDF |
SRES 3/30/2016 3:30:00 PM |
SB 205 |
SB2015-Presentation to SRES-DNR-3-30-2016.pdf |
SRES 3/30/2016 3:30:00 PM |
SB2015 |
SB 205 Supporting Document Report to Alaska Legislature.pdf |
SRES 3/30/2016 3:30:00 PM |
SB 205 |
SB 205 Supporting Document Resolutions for Tesoro RIK Contract 2016.pdf |
SRES 3/30/2016 3:30:00 PM |
SB 205 |
SB 205 Supporting Document TesoroRIKContractBIF.pdf |
SRES 3/30/2016 3:30:00 PM |
SB 205 |
AGDC Board Factsheet.pdf |
SRES 3/30/2016 3:30:00 PM |
AGDC Board-Fact Sheet |
AGDC-Resume-Dave Cruz.pdf |
SRES 3/30/2016 3:30:00 PM |
AGDC Board-Dave Cruz |
SB 205-Presentation to SRES-DNR-3-30-2016.pdf |
SRES 3/30/2016 3:30:00 PM |
SB 205 |