Legislature(2021 - 2022)SENATE FINANCE 532
04/05/2022 01:00 PM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB239 || SB240 | |
| Public Testimony: Sb 239 | |
| SB240 | |
| Public Testimony: Sb 240 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 239 | TELECONFERENCED | |
| + | SB 240 | TELECONFERENCED | |
| + | 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."
1:02:31 PM
Co-Chair Bishop relayed that it was the first hearing for
SB 239 and SB 240. The committee would hear a bill
introduction and a presentation.
1:03:47 PM
JHONNY MEZA, COMMERCIAL ANALYST, DIVISION OF OIL AND GAS,
DEPARTMENT OF NATURAL RESOURCES, explained that the
department had prepared a presentation summarizing the
royalty in-kind contracts for the sale of royalty oil from
the North Slope to in-state refineries Marathon and Petro
Star. He noted that there had been close to an 8-month
period that the department had carefully followed the
language of the regulations and statutes governing the sale
of royalty oil from the North Slope. Following the
regulatory and statutory requirements, the department
maintained the process open to the public, and also allowed
for public comment through publication of a preliminary
best-interest finding.
Mr. Meza discussed the presentation "The Process for the
Sale of ANS Royalty Oil In-Kind and the Proposed
Contractors with Marathon and Petro Star - SB 239 and SB
240," (copy on file).
Mr. Meza showed slide 2, "CONTRACT TERMS FOR MARATHON and
PETRO STAR.
1:05:03 PM
Mr. Meza turned to slide 3, "CONTRACT TERMS FOR MARATHON
AND PETRO STARb- OVERVIEW OF RECENT AND PROPOSED RIK
CONTRACT TERMS," which showed a table listing the two
currently proposed contracts at the bottom: Marathon for
2022 and Petro Star for 2022, and also the most recent
contracts the state had entered since 2016. The second
column showed duration of the contracts, with the most
recent being for three and five years. He explained that
the duration of the contracts was important because
statutory language determined that for every long-term
contract that the Department of Natural Resources (DNR)
entered for the sale of royalty oil, it must look for the
approval of the legislature before the commissioner can
execute the contracts. He noted that there was an exception
if the contracts lasted one year and were entered for the
purpose of relieving storage or market conditions, which is
what DNR did for the one-year contracts seen on the table.
Senator Wielechowski thought it looked as though the Tesoro
royalty in-kind (RIK) contract expired the previous July
and wondered where Tesoro was getting its oil currently.
Mr. Meza stated that the best interest findings published
by DNR detailed how much oil the Kenai refinery obtained
from the North Slope and Cook Inlet combined, which he
thought was about 80 percent. He thought the remaining 20
percent of the oil was obtained from foreign sources and
the Lower 48.
Senator Wielechowski asked if there was a reason Tesoro did
not use 100 percent of its oil from Alaska. He asked if Mr.
Meza knew the source of the foreign oil.
Mr. Meza detailed that the department, when offering its
royalty oil, published a solicitation of interest in order
to gauge the refineries demand for royalty oil. He noted
that Alaskas oil was subject to competitive forces, and
the refineries compared prices from different sources
including foreign sources of crude. He thought the refinery
sporadically obtained the foreign sources of crude rather
than on a long-term basis. He did not know the specific
regions from which the foreign oil was obtained.
Co-Chair Bishop understood that the state did not know the
source of the foreign oil and whether it was from offshore
from the United States or other countries.
Mr. Meza relayed that the department had not asked for the
information.
Senator Wielechowski asked if any of the oil was from
Russia.
Mr. Meza did not know.
Co-Chair Bishop stated that the committee would find out.
1:08:33 PM
Mr. Meza continued to discuss slide 3. He pointed out that
the third column showed royalty barrels that were for sale
throughout the contracts, and observed that some of the
older contracts had sold about 20,000 to 25,000 barrels per
day, which had been declining and may be a reflection on
the particular demand for royalty oil. The currently
proposed contracts were for the sale 10,000 to 15,000
barrels per day for Marathon; and for Petro Star 12,500
barrels per day for the first three years, and between
10,000 and 12,500 barrels per day for the remaining three
years.
Mr. Meza continued to address slide 3. He directed
attention to the column that showed the way that DNR and
the royalty oil buyers had agreed in determining the value
of royalty oil in kind at the field. He continued that DNR
sold the royalty oil at the field and explained that the
valuation process needed to be done in a more transparent
way. He discussed deductions and adjustments and mentioned
the RIK differential. He described a net back methodology
and noted that the price of oil was determined on the U.S.
West Coast, and it was how both parties had agreed to
arrive at the value of the oil. He noted that the final
column gave information on the RIK differential. He noted
that the contracts for 2016 were at $1.95/bbl, which had
increased to $2.23/bbl for Marathon and $2.25 for Petro
Star.
Mr. Meza spoke to slide 4, "CONTRACT TERMS FOR MARATHON AND
PETRO STAR - RIK DIFFERENTIAL IS THE SOURCE OF THE PREMIUM
OF RIK OVER RIV," which showed two flow charts providing a
graphical comparison of how the value of royalty oil was
determined, whether the state chose to value the oil in-
value or when it selected the oil to be in-kind. He
highlighted that the left side of the slide showed royalty
in-value. He noted that most of the Alaska North Slope
(ANS) oil was sold on the U.S. West Coast. He discussed the
state taking a share of the proceeds from lessees, after
assessing the oil at the field and deduction of
transportation casts and adjustments for differing quality.
He made note of the numbers presented as an illustrative
example.
Mr. Meza continued to address slide 4 and the graphic on
the right which showed how the state priced royalty oil in-
kind. There was a similar net-back methodology, but the oil
was no longer physically transported to the U.S. West
Coast. In substitution for the marine transportation
allowance, DNR used the RIK differential. The example
showed all elements were at the same value save for the RIK
differential. He made note of the numbers presented in the
example.
1:13:46 PM
Senator Wielechowski considered slide 3 and thought the
total the state was putting out for RIK was between 20,000
to 30,000 barrels per day. He was curious about the total
amount of barrels available.
Mr. Meza relayed that the total royalty that DNR expected
to obtain from ANS production was a range between 40,000
barrels per day and 70,000 barrels per day. He reminded
that the number was dependent upon the production forecast
and different royalty rates in the leases.
Senator Wielechowski asked if there was a public bidding
process for RIK oil.
Mr. Meza explained that DNR published a solicitation of
interest, and mentioned that the statutory language stated
that the default for the RIK oil sales should be on a
competitive basis. He detailed that in the solicitation of
interest the department invited responses by market
participants in royalty oil. In the current iteration there
were only two interested responses.
Senator Wielechowski asked if Marathon and Petro Star were
the only two companies that had requested a bid, and if the
amount of oil requested was listed on the slide.
Mr. Meza relayed that the initial requirements had varied
slightly. Through the negotiation process, DNR was able to
obtain higher volume of sales of royalty oil for one of the
buyers.
1:16:09 PM
Senator Wielechowski thought the state had anywhere from
20,000 to 40,000 additional barrels that would be sold down
the pipeline.
Mr. Meza agreed, unless the state submitted a solicitation
of interest for a second time.
Senator Wielechowski assumed that the amounts shown would
be maximum amount of oil that would be needed by Marathon
and Petro Star.
Mr. Meza stated that the amounts were the maximum that the
companies would need from the state.
Senator Wielechowski asked if Tesoro was getting a better
deal from producers directly to replace the oil it got from
the state.
Mr. Meza explained that the Kenai refinery was operated by
Marathron, which obtained 80 percent of its crude oil needs
from a combination of ANS producers and Cook Inlet
producers, private producers, including the royalty oil
from the state.
Co-Chair Bishop thought that the committee could inquire
directly to Marathon through invited testimony.
Mr. Meza addressed slide 5, "CONTRACT TERMS FOR MARATHON
AND PETRO STAR - RIK DIFFERENTIAL IS THE SOURCE OF THE
PREMIUM OF RIK OVER RIV":
• There is a consistent difference between the marine
transportation allowance and the negotiated values
of the RIK differential.
• Why, for the proposed RIK contracts, is the RIK
differential higher?
o When the in-state refineries buy ANS oil from
North Slope producers, they use a similar
netback methodology for arriving at the price
of ANS oil at the field.
o In doing so, they use a "location
differential."
o DOR publishes the weighted average of these
location differentials for all contracts for
the sale of ANS oil within Alaska.
o From the perspective of the RIK buyer, the
royalty oil in-kind needs to be as competitive
as other sources of crude oil from the North
Slope.
Mr. Meza explained that the graph on slide 5, entitled
Marine transportation, RIK differential, and location
differential, provided historical information on the
comparison highlighted on previous slides. The distance
between between the marine transportation cost (blue line)
and the RIK differential (grey line) represented the
premium that DNR obtained by selling its royalty oil in-
kind versus receiving it in-value. He explained that the
dotted line on the graph represented what the Department of
Revenue published every year, known as the weighted average
differential, which signified a deduction that third
parties used when selling ANS oil within the state. At that
point in the sale, the oil was not used outside Alaska and
transportation deductions were not taken. He noted that the
purpose of showing the dotted line in the graph was to have
an indication of where the market for ANS oil sales within
the state was going. He pointed out the upward trend.
Co-Chair Bishop summarized that Mr. Meza had communicated
that regarding the weighted average on the DOR location
differential, because of the increased production the state
had more RIK oil to offer on the market.
Mr. Meza agreed.
1:20:10 PM
Senator Wielechowski asked if it would lower the tariff for
everyone if there was more oil in the pipeline, which would
bring the state more tax revenue. He was curious if the
matter had been considered.
Mr. Meza answered "yes." He affirmed that the relationship
that Senator Wielechowski highlighted was correct. He
affirmed that the more through-put the state had in the
Trans-Alaska Pipeline System (TAPS), the per-barrel
transportation costs would be lower and the proceeds from
the sale of royal oil in-kind would be greater. He noted
that DNR focused on total proceeds as well as incremental
revenue.
Co-Chair Stedman thought the topic came up every several
years. He asked Mr. Meza to highlight the difference
between the current proposal for RIK oil currently as
compared to previous versions. He wondered if there was
anything the legislature should be paying special attention
to.
Mr. Meza went back to slide 3 and noted that one purpose of
the table was to compare the current terms of the proposed
contracts with the contracts seen in the past. One main
difference that could be seen was the value of the RIK
differential, which had increased from $1.95 to $2.23 and
$2.25, which signified a further reduction in the value of
royalty oil by approximately $.30. The slide that followed
showed evidence of why DNR believed that increasing the
deduction still corresponded to what the market was
assessing, but also allowed DNR to obtain incremental
revenue versus the other option of royalty-in-value. He
noted that future slides would continue showing current
contracts compared to previous contracts.
1:23:05 PM
Mr. Meza addressed slide 6, "CONTRACT TERMS FOR MARATHON
AND PETRO STAR - FLEXIBILITY FOR BUYER AND SELLER," which
showed a table showing a comparison of contract terms. He
noted that throughout the contracts beginning in 2016, the
RIK buyer (the refinery in Alaska) obtained significant
flexibility that perhaps they might not be able to obtain
through other contracts with third parties from private
suppliers. One of the provisions was that the refinery
could ask for no barrels for up to two consecutive months
or for three months with using the turnaround clause. The
clause was something to use if there was scheduled
maintenance of facilities and no need to buy royalty oil
in-kind. The refinery could also request a permanent
reduction of the nominations of royalty oil, subject to the
approval of the DNR commissioner.
Senator Wielechowski assumed that if there was a period of
time in which no barrels were nominated, the oil got
shipped down the pipeline and sold royalty in-value.
Mr. Meza answered in the affirmative.
Mr. Meza continued to address slide 6. He reiterated that
the contracts provided flexibility for the buyer and the
state. He added that if for some reason the producers had a
lower expectation for production, there was less royalty
oil for sale and the state would not be harmed by
guaranteeing any amount. There was a provision by which the
department could limit its delivery of royalty oil up to 95
percent. There was no guarantee related to the quality,
quantity, or the source of royalty oil to the buyers, which
would take whatever the state received. If there was excess
royalty to be offered and the buyers had the demand, the
contract would allow for incremental sale.
1:26:22 PM
Senator Wielechowski asked about the marketing for royalty
in-value oil, and whether the state paid a fee.
Mr. Meza informed that the state did not pay a fee. He
expanded that DNR looked at contracts and received proceeds
subject to other provisions in the oil and gas lease
contracts that allowed for the state to arrive at a fair
market valuation of the royalty oil.
Senator Wielechowski asked if there had been any sort of
look-back to see how the states prices compared to those
of major producers.
Mr. Meza affirmed that DNR did perform a look-back exercise
and thought that in the final best interest finding there
was a chart showing how much more revenue the state has
obtained by selling its royalty oil in-kind versus the
alternative. On average the state had received a premium of
$.93 for each barrel of royalty oil in-kind it sold.
Senator Wielechowski was curious how the state compared to
producers.
Mr. Meza informed that the $.93 was a comparison of the
price of royalty oil that the state obtained by selling via
its contracts for royalty oil in kind versus what the state
would receive from lessees or producers as proceeds from
contracts by the sale of their own equity oil.
Senator Wielechowski thought the amount was really good.
He wondered how it was possible that the state was getting
such a high premium in the oil industry.
Mr. Meza relayed that the success was mainly due to the
fact that the oil was not being transported to the U.S.
West Coast, and there was no deduction for marine
transportation. In place of the deduction, the state had a
much lower negotiated deduction (RIK differential).
1:29:10 PM
Mr. Meza advanced to slide 7, "CONTRACT TERMS FOR MARATHON
AND PETRO STAR - OTHER PROVISIONS," which showed a table of
contract comparisons which focused on the financial
assurance of contracts. He mentioned the risk of default by
the buyer (the refinery or its parent company or
guarantor), which was an area the state paid attention to.
He described that in the provisions, the guarantor offered
the state the options of a letter of credit, a surety bond,
or an opinion letter by a financial analyst attesting to
the quality of the guarantor. He discussed the calculation
for a financial assurance amount, which had varied for
different refineries and was an outcome of negotiations
between DNR and the refineries.
Mr. Meza continued that there was also a retroactivity
provision, because once the invoice was sent to the buyer
calculating the value of royalty oil and the amount to be
paid, there could be further changes to elements in the
calculation. Both the buyer and seller had the ability to
request a recalculation based on new information such as
Federal Energy Regulatory Commission (FERC) mandated
revisions or quality adjustments. There was an eight-year
period that allowed for such readjustments, even if the
contract was terminated before that time. Lastly there were
other provisions encouraging the buyer to use commercially
reasonable efforts to manufacture the refined product in
the state. As stated in the final best interest finding,
the refineries primarily provided refined products to
Alaska, and only a minor part of production went to Canada
or the Pacific Northwest. He mentioned a provision
encouraging the employment of Alaska residents.
Senator Wielechowski asked if Mr. Meza knew how many Alaska
residents were hired by Marathon and Petro Star and what
percentage the hires represented.
Mr. Meza thought his colleagues would have a precise number
to answer Senator Wielechowski's question.
1:32:22 PM
ADI CHAOBAL, COMMERCIAL ANALYST, DIVISION OF OIL AND GAS,
DEPARTMENT OF NATURAL RESOURCES (via teleconference),
addressed Senator Wielechowski's question. He relayed that
Marathon reported 220 full-time employees and 60
contractors hired from within Alaska for its Kenai
refinery. Marathon also reported an additional 40 employees
at terminals in Anchorage and North Pole.
Co-Chair Bishop asked about Marathons percentage of Alaska
hire.
Mr. Chaobal relayed that Marathon had not provided a
percentage for its Alaska hire.
Co-Chair Bishop asked Mr. Chaobal to provide the percentage
information at a later time.
Senator Wielechowski asked if Mr. Chaobal had the same
information related to Petro Star.
1:34:09 PM
CHALINDA WEERASINGHE, COMMERCIAL ANALYST, DIVISION OF OIL
AND GAS, DEPARTMENT OF NATURAL RESOURCES (via
teleconference), relayed that Petro Star had reported 80
full-time high paying positions at both refineries, and
employed 275 positions companywide. Petro Star reported
that the refineries were 100 percent staffed by residents
of Alaska, and 99 percent of the company was staffed by
Alaskan residents.
Mr. Meza addressed slide 8, "CONTRACT TERMS FOR MARATHON
AND PETRO STAR - CONTRACTS ARE IN THE BEST INTEREST OF THE
STATE," which showed a table comparing contract terms and
focusing on the addition of revenue that state would
obtain. He highlighted that beginning with a contract in
2016, the state obtained an additional $31 million in
incremental revenue. Had the state received the barrels in-
value, it would not have obtained the $31 million. He
listed revenue amounts from the contracts listed on table,
which were in addition to what the state would have
received if it had elected to take 100 percent of its
royalty oil in-value. For contracts that had not expired
there were estimates with a range of possible incremental
revenues.
Senator Wielechowski referenced many disputes over the
years related to tariff costs with producers. He wondered
if the state had similar legal disputes or other disputes
over what the RIK should be.
Mr. Meza had not seen any legal disputes with buyers of
royalty oil in-kind.
1:36:47 PM
AT EASE
1:37:06 PM
RECONVENED
Senator Wielechowski requested copies of the bid packet,
the best interest finding, and copies of the contracts the
state had approved. He asked if there were any dissenting
votes on the royalty board in approving the contracts.
Mr. Meza affirmed that the best interest findings,
responses to solicitation of interest and the proposed
contracts were all public, and the department would provide
them to Senator Wielechowski directly. He informed that
there were no dissenting votes and the board had given
unanimous recommendations of approval of the contracts.
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."
^Public Testimony: SB 239
1:38:05 PM
Co-Chair Bishop OPENED public testimony on SB 239.
1:38:21 PM
DOUG CHAPADOS, PRESIDENT, PETRO STAR (via teleconference),
testified in support of SB 239. He shared that he was in
support of Petro Stars proposed five-year royalty oil
contract. He shared that Petro Star was a wholly owned
subsidiary of the Arctic Slope Regional Corporation and was
the states only Alaskan-owned refiner. In addition to fuel
distribution terminals located in Anchorage, Valdez,
Kodiak, Dutch Harbor, and Interior Alaska, Petro Star also
operated two of the states three commercial refineries,
both of which drew crude oil directly from TAPS. He
emphasized that TAPS was Petro Stars only source of crude
oil, which meant that the contracts such as the one being
considered were crucial to operation.
Mr. Chapados continued his testimony. He described that
Petro Star produced a variety of products from crude oil
including jet fuel for commercial airlines, as well as over
90 percent of the jet fuel consumed at the United States
Department of Defense and United States Coast Guard
installations located across the state. He listed
additional products including heating oil, diesel fuels,
asphalt oil for road paving, and specialized fuel for two
Alaskan electrical associations. He referenced the best
interest finding, which concluded that the contract was
good for the state in maximizing revenues from Alaskas
royalty oil share and would help maintain the in-state
petroleum refining industry while preserving competition
within the states fuels market. He encouraged the
committee to approve the royalty oil contract.
Co-Chair Bishop commented that congratulations were in
order regarding Petro Stars Alaska hire numbers.
Mr. Chapados cited that Petro Star had approximately 275
employees, and all but two were located in the state.
Co-Chair Bishop CLOSED public testimony for SB 239.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 239 Sponsor Statement 3.23.22.pdf |
SFIN 4/5/2022 1:00:00 PM |
SB 239 |
| SB 239 Sectional Analysis 3.31.22.pdf |
SFIN 4/5/2022 1:00:00 PM |
SB 239 |
| SB 239 AOGA Comments SB239 3.31.22.pdf |
SFIN 4/5/2022 1:00:00 PM |
SB 239 |
| SB 239 and SB 240 DNR Presentation RIK 4.5.22.pdf |
SFIN 4/5/2022 1:00:00 PM |
SB 239 SB 240 |
| SB 240 Sectional Analysis 3.31.22.pdf |
SFIN 4/5/2022 1:00:00 PM |
SB 240 |
| SB 240 Sponsor Statement 3.23.22.pdf |
SFIN 4/5/2022 1:00:00 PM |
SB 240 |
| SB 240 AOGA Comments SB240 3.31.22.pdf |
SFIN 4/5/2022 1:00:00 PM |
SB 240 |
| SB 240 RIK Contract Letter_SOA_PSI_Sen. Bishop.pdf |
SFIN 4/5/2022 1:00:00 PM |
SB 240 |
| SB 240 Letter of Support Marathon Petroleum SEN FIN.pdf |
SFIN 4/5/2022 1:00:00 PM |
SB 240 |