Legislature(2021 - 2022)ADAMS 519
04/14/2022 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB239 || SB240 | |
| HB265 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 265 | TELECONFERENCED | |
| + | HB 409 | TELECONFERENCED | |
| + | HB 410 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | SB 239 | TELECONFERENCED | |
| + | SB 240 | TELECONFERENCED | |
SENATE BILL NO. 239
"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."
SENATE BILL NO. 240
"An Act approving and ratifying the sale of royalty
oil by the State of Alaska to Marathon Petroleum
Supply and Trading Company LLC; and providing for an
effective date."
1:33:57 PM
JHONNY MEZA, COMMERCIAL ANALYST, DIVISION OF OIL AND GAS,
DEPARTMENT OF NATURAL RESOURCES, introduced the PowerPoint
presentation: "The Process for the Sale of ANS Royalty Oil
In-Kind and the Proposed Contracts with Marathon and Petro
Star SB 239 AND SB 240." He indicated the beginning of
the presentation would be provided by Mr. John Crowther.
1:34:50 PM
JOHN CROWTHER, DEPUTY COMMISSIONER, DEPARTMENT OF NATURAL
RESOURCES (via teleconference), emphasized that the royalty
oil in-kind sales had been an important element in the
state's use and development of natural resources. It had
also been an important part in supporting the in-state
refining capacity, which benefited consumers through fuel,
supply, and security, and also benefited the broader
economy. It had also provided additional value over and
above the general royalty and value sales. He began with
slide 2 of the presentation which stated that it was
critical that the proposed contracts be executed by April
22, 2022. The slide showed a summary of the steps needed in
order to effectuate the contract and an explanation of why
the Department of Natural Resources (DNR) and the
administration was seeking an expedited review.
1:36:24 PM
Mr. Meza turned to slide 4 of the presentation and shared
that he would be reviewing some of the contract terms for
the companies Marathon and Petro Star. The slide showed a
table reflecting the recent history of the royalty oil in-
kind contracts. He explained that the state had received
royalty oil from the North Slope both in-kind and in-value.
When selling royalty oil in-value, the state received a
share of the proceeds from the producers according to its
royalty rate in the oil and gas contracts. When the state
elected to receive its royalty oil in-kind, the majority of
the oil produced would come from in-state refineries. The
state had a history of entering into royalty in-kind
contracts from the beginning of production of oil in the
North Slope.
Mr. Meza explained that the contracts with Marathon and
Petro Star were highlighted on the slide. The fourth column
on the slide showed the way in which the department and the
buyers agreed to value the royalty oil, specifically
following the netback methodology. He explained that DNR
sold its royalty oil at the field; therefore, the price of
royalty oil was calculated by "netting back" the price of
Alaska North Slope (ANS) oil at the U.S. West Coast to the
field. The netback methodology was essentially the same
process as in-value pricing, with the exception of royalty
in-kind differential. This was a negotiated term between
the department and the in-state refineries. The last column
showed the values of the negotiated terms and the royalty
in-kind differential throughout the history of the
contracts.
Representative Johnson asked if it was better for the state
to receive oil in-kind or in-value.
Mr. Meza replied that when the state entered into a royalty
in-kind contract, regulations required the price be at
least as high as the in-value price. From 2008 to 2021, the
department obtained an average premium of $0.93 per barrel
in addition to a royalty in-value oil.
Representative Johnson asked whether the difference between
royalty in-kind and royalty in-value related to the chain
of events that happened throughout the selling process.
Mr. Meza responded that there was a process for selecting
royalty in-kind and that generating a premium over royalty
in-value was one of the requirements.
Representative Wool asked whether royalty in-kind was
another deduction in the price that would be offered to the
state. He understood it to represent the normal price of
oil plus another deduction.
Mr. Meza responded that Representative Wool was correct.
The royalty in-kind was another deduction in the price, but
even so, a premium was still generated over royalty in-
value.
1:41:41 PM
Mr. Meza moved to slide 5 and explained that the slide was
a visual representation of the differences between the
determination of the price of royalty in-value oil and the
price of royalty in-kind oil. The processes were similar in
that the netback methodology was applied to both. He
indicated that when the state elected to receive royalty
ANS oil in-value, producers typically sold that oil outside
of Alaska. When the state elected to receive royalty ANS
oil in-kind, it typically sold the oil inside of Alaska.
There were some deductions related to the transportation of
royalty in-value oil, such as the marine transportation
costs. The royalty in-kind oil did not have transportation
cost deductions; therefore, the royalty in-kind
differential was employed. The department used the
deductions and the royalty in-kind differential to
determine the oil premium.
Mr. Meza continued to slide 6 which showed some historical
information related to the previous graph on slide 5. The
graph on slide 6 showed the historical value of the royalty
in-kind differential and the marine transportation costs.
He explained that the blue line showed the weighted average
marine transportation allowance, the green line showed DNR
location differential, and the grey line showed the
weighted average royalty in-kind differential. He
elaborated that the difference between the blue and grey
lines was the source of the premium that the department
obtained by entering into royalty in-kind contracts.
Another consideration was that the department provided
supplies to the refineries, but it was not the only
supplier. It was important to consider whether the royalty
oil was competitive as compared to other suppliers.
1:45:04 PM
Representative Edgmon asked Mr. Meza to address the revenue
difference for the state.
Mr. Meza jumped to slide 9 which showed how much the state
had been able to generate in terms of additional revenues.
The current Marathon contracts estimated between $3 million
and $4 million in revenue, and the Petro Star contracts
estimated between $17 million and $19 million in revenue.
The revenue estimates were in excess of what would have
been received had the state elected to receive 100 percent
of the royalty oil in-value.
Representative Edgmon suggested that there was a reason for
the public process. He was a strong supporter of the
legislation.
1:46:49 PM
Co-Chair Merrick asked Mr. Meza to review the fiscal note
for SB 239 with a control code EPVzv.
Mr. Meza explained the fiscal note from DNR aimed to
decompose the values he had just given for the Marathon and
Petro Star contracts. He relayed that 74.5 percent of the
revenues for each fiscal year would be allocated to the
general fund, 24 percent would be allocated to the
Permanent Fund, and 0.5 percent to the school fund.
Co-Chair Merrick noted that there was a typo in the fiscal
note that would be corrected before it moved from
committee. She asked Mr. Meza to address the fiscal note
for SB 240 with control code gjwMS from DNR.
Mr. Meza explained that the process was the same as the
previous fiscal note. The main differences were the revenue
estimates and the proposed amount of royalty oil dedicated
to Marathon.
1:48:34 PM
Representative Carpenter noticed a discrepancy on the back
page of the fiscal note.
1:48:50 PM
AT EASE
1:55:46 PM
RECONVENED
Representative Wool asked about for more information on the
difference between the grey line and the green line in the
prior graphic on slide 6.
Mr. Meza explained that he was comparing the blue line on
the top with the grey line on the bottom. This was the
important comparison because regulation dictated that the
royalty in-kind price had to be at least equal to the
royalty in-value price. The royalty in-value price was
represented by the blue line.
Representative Wool had a question regarding slide 5. He
asked how the oil was transported.
Mr. Meza relayed that DNR was not in charge of the
transportation of oil. The state transferred the royalty
title at the field. The purpose of including the deduction
in the graph on slide 5 was because the price of ANS oil
began at the West Coast of the United States and the
royalty oil was sold at the field.
1:58:16 PM
Representative Wool understood that the oil went through
the pipeline, then into a terminal, then into a boat. He
did not think the oil went directly to Marathon or Petro
Star and wondered where their oil came from.
Mr. Meza responded that Representative Wool was correct. He
furthered that Petro Star obtained royalty oil and other
types of oil from other producers. Marathon obtained
royalty oil from Valdez and it was barged to Nikiski.
Representative Wool thought it made sense that Marathon
picked the oil up from Valdez and it was then sold at the
field.
Representative Josephson understood that Marathon was
located in Nikiski and asked where Petro Star was located.
Mr. Meza responded that Petro Star had a refinery in North
Pole and another in Valdez.
Co-Chair Merrick asked Mr. Meza to review Fiscal Note 1 by
DNR for SB 239.
Mr. Meza explained the fiscal note with the control code
ezbNE. He indicated that the note showed that the
allocation to the general fund and other funds were done
uniformly. He reminded members that 74.5 percent would be
allocated to the general fund, 24 percent to the Permanent
Fund, and 0.5 percent to the school fund.
Representative Carpenter requested a brief "At ease."
2:00:41 PM
AT EASE
2:01:59 PM
RECONVENED
Representative Carpenter asked about the oil flowing
through the pipeline on slide 5. He wondered if there was
an impact on the property taxation on the oil when it had a
royalty in-kind status. He wondered if there was any
difference in taxation.
Mr. Meza thought there was no difference.
2:02:53 PM
Co-Chair Merrick OPENED public testimony for SB 239 and
SB 240.
DOUG CHAPADOS, ASRC, PETRO STAR, ANCHORAGE (via
teleconference), spoke in favor of SB 239. He relayed that
Petro Star was the state's only Alaskan-owned refinery. In
addition to operating a variety of field terminals located
around the state, Petro Star also operated two of the
state's three commercial refineries. Both refineries drew
crude oil from the pipeline. He thought that the
legislation was essential to Petro Star's continued
operations. Petro Star's oil was used for things like jet
fuel, heating oil, and diesel fuel. The royalty in-kind
contract would maximize the revenues generated from
Alaska's royalties from oil. It would also help maintain
the refining industry in the state.
Representative LeBon thanked the testifier for calling in.
He appreciated the information about Petro Star's important
role in the state.
2:06:01 PM
Representative Edgmon asked for more information on the
Alaskan hire percentages in his district.
Mr. Chapados indicated that all but two of Petro Star's 275
employees were Alaska residents.
2:06:48 PM
CASEY SULLIVAN, MARATHON PETROLEUM, ANCHORAGE (via
teleconference), thanked the committee for hearing the
bill. He shared support for SB 240. The flexibility and
stability of the contract would help Marathon optimize the
ongoing operations of the Kenai refinery. The Kenai
refinery was one of Alaska's longest in-state manufacturers
of fuel and had been operating since 1969. The refinery
could produce up to 68,000 barrels per day. He noted that
much of the oil produced at the refinery was used in
Alaska, and all of the company's employees were Alaskans.
The company was seen as an economic engine for communities,
and it offered careers, not just jobs. He added that while
much of the contract was a renewal, it was result of
dialogue and negotiations between Marathon and the Division
of Oil and Gas. In conclusion, Marathon was committed to
safely and reliably creating quality fuels for Alaskans. He
encouraged support for SB 240.
2:10:32 PM
Co-Chair Merrick CLOSED public testimony for SB 239 and
SB 240.
Co-Chair Merrick noted that SB 239 and SB 240 were
companion bills to HB 409 and HB 410.
Representative Wool returned to slide 9 which gave
information on the additional revenue to the state. He
applauded DNR and the administration for looking into all
revenue streams, no matter how small.
2:11:57 PM
Co-Chair Foster MOVED to report SB 239 out of committee
with individual recommendations and the accompanying fiscal
note.
There being NO OBJECTION, it was so ordered.
SB 239 was REPORTED out of committee with nine "do pass"
recommendations and with one new fiscal impact note by the
Department of Natural Resources.
2:12:24 PM
Co-Chair Foster MOVED to report SB 240 out of committee
with individual recommendations and the accompanying fiscal
note.
There being NO OBJECTION, it was so ordered.
SB 240 was REPORTED out of committee with nine "do pass"
recommendations and with one new fiscal impact note by the
Department of Natural Resources.
2:12:40 PM
AT EASE
2:13:58 PM
RECONVENED
Co-Chair Merrick indicated that the committee would stand
at-ease to the call of the chair.
2:14:05 PM
AT EASE
[RECESSED TO A CALL OF THE CHAIR.]
4:12:42 PM
RECONVENED
Co-Chair Merrick indicated the committee had heard the HB
265 previously on March 29, 2022. There were three proposed
amendments.