Legislature(2021 - 2022)BUTROVICH 205
03/30/2022 03:30 PM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| SB121 | |
| HJR34 | |
| HB304 | |
| SB239|| SB240 | |
| SB240 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 121 | TELECONFERENCED | |
| *+ | HB 304 | TELECONFERENCED | |
| *+ | HB 209 | TELECONFERENCED | |
| + | HB 148 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| *+ | HJR 34 | TELECONFERENCED | |
| += | SB 239 | TELECONFERENCED | |
| += | SB 240 | TELECONFERENCED | |
SB 239-APPROVE PETRO STAR INC. ROYALTY OIL SALE
[The hearing on SB 240 begins at 5:04:21 pm, after the DNR
presentation that describes the requirements for royalty oil
sales.]
4:17:58 PM
VICE CHAIR MICCICHE announced the consideration of 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."
He recognized John Crowther and Jhonny Meza and advised the
committee that the presentation applied to both SB 239 and SB
240. SB 239 addresses legislative approval of the Petro Star
royalty oil sale and SB 240 addresses legislative approval of
the marathon Petro royalty oil sale.
4:18:53 PM
JOHN CROWTHER, Deputy Commissioner, Department of Natural
Resources (DNR), Anchorage, Alaska* introduced Jhonny Meza.
4:18:53 PM
JHONNY MEZA, Commercial Analyst, Commercial Section, Division of
Oil and Gas, Department of Natural Resources (DNR), Anchorage,
Alaska, introduced SB 239 with the presentation titled The
Process for the Sale of ANS Royalty Oil In-kind and the Proposed
Contracts with Marathon and Petro Star.
MR. MEZA explained that the forthcoming presentation describes
two proposed contracts for the sale of royalty oil in-kind, both
of which need legislative approval before the contracts can be
executed.
MR. MEZA reviewed the agenda on slide 2:
AGENDA
1. What is Royalty In-Kind?
2. History of Royalty In-Kind Sales
3. Statutory and regulatory mandate for Royalty In-
Kind
4. The process that DNR has followed for this sale
of Royalty In-Kind oil
5. Contract terms for Marathon and Petro Star
4:19:41 PM
MR. MEZA advanced to slide 4, What is Royalty In-Kind? Statutory
Reference. He reviewed the statutory authority under AS
38.05.182:
Sec. 38.05.182. Royalty on natural resources.
(a) Any royalty provided for in AS 38.05.135
38.05.181 may be taken in kind rather than in money if
the commissioner determines that the taking in kind
would be in the best interest of the state. However,
royalties on oil and gas shall be taken in kind unless
the commissioner determines that the taking in money
would be in the best interest of the state.
(b) The commissioner shall submit a determination to
take royalty in money to the legislature at the first
opportunity during a current session or, if the
legislature is not in session, at the next regular
session. The legislature, within 60 days or by the
adjournment of the session, whichever comes sooner,
may revoke the determination by concurrent resolution.
MR. MEZA pointed to the letter from the DNR commissioner
informing the legislature of the determination to take the
state's oil and gas royalty in-value (RIV). He reviewed what
royalty in-value (RIV) means as opposed to royalty in-kind
(RIK):
The State has the option to take its royalty oil and
gas in-value (RIV) or in-kind (RIK).
• RIV: Lessees market the royalty oil or gas
alongside their own equity production. Then the
State receives a portion of the proceeds subject
to fair market value.
• RIK: Lessees provide royalty oil or gas (of sales
quality) to the State. Then the State becomes
responsible for the marketing of its royalty oil
or gas.
4:21:27 PM
MR. MEZA advanced to slide 5, What is Royalty In-Kind?
Contractual Reference. He stated that given the statutory
language, DNR enters into a contract with the lessees for the
oil and gas lease, which provides a definition of the percentage
of the royalty rate, and the ability of the commissioner to take
the oil and gas royalty either in-value or in-kind. He pointed
out that from the inception of the lease, the language in
statute and the contract allows DNR to participate in the market
as a resource owner by selling its royalty owner in-kind. He
directed attention to the example of an oil and gas unit
agreement that reflects such language when there's a unitized
collection of oil and gas leases:
Within ninety days of receipt of that notice, the
Commissioner will give the Working Interest Owners
written notice of its elections to take in kind all,
none, a specified percentage, or a specified quantity
of its royalties in any Unitized Substances produced
from the Participating Area.
4:22:17 PM
MR. MEZA advanced to slide 6, What is ROYALTY IN-KIND? STATE
OWNERSHIP IN THE NORTH SLOPE (AS OF JANUARY 2022). He pointed to
the map of the North Slope that details the oil and gas units
where the state has a resource ownership interest. In this
context, royalty oil in-kind refers to the sale of royalty oil
from the fields that the state is the resource owner. Prudhoe
Bay and Kuparuk are examples.
The state doesn't have any resource ownership on the Greater
Moose's Tooth and thus would not be able to take royalty in kind
from that field.
4:23:02 PM
MR. MEZA advanced to slide 7, History of Royalty In-Kind and
slide 8, History of Royalty In-Kind Alaska North Slope Oil. He
directed attention to the graph on slide 8 that shows the
history of the royalty oil from the North Slope colored light
blue and the black line that represents the share of the royalty
oil that the state took in-kind. The state started taking
royalty in-kind in November 1979 and consistently continued to
do so until recently.
He highlighted the following:
1) The State has historically selected to receive its
royalty oil both in-kind and in-value.
2) About 97% of the royalty oil in-kind selections by
the State has been for oil from the North Slope.
• The State has never nominated Cook Inlet royalty
gas in-kind.
• Cook Inlet royalty oil in-kind has gone to the
Nikiski refinery (in the 1970s-1980s) and to
Chinese Petroleum (1987-1991).
3) The amount of RIK oil that the State sells varies,
and depends on?
• ANS oil production from State-owned mineral
resources.
• The royalty rates for State oil and gas leases.
• The State's selection of the fields from which to
choose RIK oil (as not all fields may be
selected).
• The quantity of crude oil demanded by the in-
state refineries or other potential buyers.
• The competitiveness of ANS royalty oil versus
other sources of crude oil for the in-state
refineries or other potential buyers.
4:24:41 PM
MR. MEZA advanced to slide 9, History of Royalty In-Kind Types
of Contracts and Buyers. He reviewed the following:
a) Of all RIK oil sold to date - over 900 million
barrels (mmbbls) the majority has been sold via
non-competitive sales.
b) b) Less than 5% of RIK oil (46 mmbbls) has been
sold via competitive sales. The effective terms
of these contracts were short in duration.
c) c) The large majority of RIK oil sold to date has
been to in-state entities, but there are a few
historical cases where RIK oil was sold for
export outside of Alaska.
In-state buyers for negotiated sales:
• Alpetco: export refinery (oil-based petrochemical
plant)
• Chevron: Nikiski refinery (built in 1963,
dismantled in 1991)
• Mapco/Williams/Flint Hills Resources: North Pole
refinery (1977)
• Petro Star: North Pole (1985) and Valdez (1992)
refineries
• Tesoro/Marathon: Nikiski refinery (1969)
MR. MEZA stated that the table shows the duration of the royalty
in-kind contracts. It shows that the state has participated in
these sales since nearly the beginning of production on the
North Slope.
4:26:35 PM
MR. MEZA advanced to slide 10, Statutory and Regulatory Mandate
for Royalty In-Kind and slide 11, Statutory and Regulatory
Mandate for Royalty In-Kind Legislative Approval. He highlighted
AS 38.06.055 that states that legislative approval is required
before the DNR commissioner can execute these contracts. He
reviewed the following:
• Per statute, the sale of royalty by the DNR
commissioner requires:
• The written recommendation of the Alaska
Royalty Oil and Gas Development and Advisory
Board, and
• The approval of the Legislature via the
enactment of legislation.
• There are also statutory exceptions to when
legislative review is required:
• If the sale of royalty is to "relieve storage
or market conditions" (which can only be used
for a contract of up to 1 year)
• If the sale of royalty oil is at most 400 bpd
4:27:23 PM
MR. MEZA advanced to slide 12, Statutory and Regulatory Mandate
for Royalty In-Kind Recent History of Approval. He explained
that the chart reflects the most recent contracts for the sale
of royalty oil in-kind. Tesoro (2016) was a five year contract,
Petro Star (2016) was also multi-year. The last two columns
reflect that these multi-year contracts were reviewed by both
the royalty board and the legislature. By contrast, the one-year
contracts in 2021 with Marathon and Petro Star only required one
review and in these cases it was by the legislature. Currently
multi-year contracts with Marathon and Petro Star have been
reviewed by the board and DNR is submitting that written
recommendation as part of the packets seeking legislative
approval for both sales.
4:28:46 PM
MR. MEZA advanced to slide 13, to review the Statutory and
Regulatory Mandate for Royalty In-Kind Royalty Board Review.
Royalty Board Review Statutory Criteria
(a) In the exercise of its powers under AS
38.06.040(a) and 38.06.050 the board shall 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 and by-products, the effect of state or
federal commodity allocation requirements which might
be applicable to those products and by-products, and
the priorities among competing needs;
(3) the desirability of localized capital
investment, increased payroll, secondary development
and other possible effects of the sale, exchange, or
other disposition of oil and gas or both;
(4) the projected social impacts of the transaction;
(5) the projected additional costs and
responsibilities which could be imposed upon the state
and affected political subdivisions by development
related to the transaction;
(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 and negative
environmental effects related to the transaction; and
(8) the projected effects of the proposed
transaction upon existing private commercial
enterprise and patterns of investments.
DNR criteria used for finding that a contract is in
the best interest of the State
(e) When a sale, exchange, or other disposal of oil or
gas taken in kind by the state as its royalty share,
or a sale, exchange, or other disposal in whole or in
part of a right to receive future royalty oil or gas,
under a state lease under this chapter is made other
than by competitive bid, or when a sale, exchange, or
other disposal of gas delivered to the state under AS
44.55.014(b) is made other than by competitive bid,
the sale, exchange, or other disposal shall be awarded
by the commissioner to the prospective buyer whose
proposal offers the maximum benefits to citizens of
the state. The commissioner shall consider
(1) the cash value offered;
(2) the projected effects of the sale, exchange,
or other disposal on the economy of the state;
(3) the projected benefits of refining or
processing the oil or gas in the state;
(4) the ability of the prospective buyer to
provide refined products or by-products for
distribution and sale in the state with price or
supply benefits to the citizens of the state; and
(5) the criteria listed in AS 38.06.070(a)
• The Preliminary and Final Best Interest Findings,
published by DNR, provides an analysis for how
these criteria are met.
4:29:42 PM
MR. MEZA advanced to slide 14 and stated that this slide
provides samples of the reports that the Royalty Review Board
wrote and submitted to the legislature on March 15, 2022.
MR. MEZA advanced to slide 15, Statutory and Regulatory Mandate
for Royalty In-Kind Competitive vs. Non-Competitive Sale. He
reviewed the following:
1) By statute, the default is a competitive sale.
• Competitive sales of RIK oil occurred in 1981,
1985, and 1986.
• Less than 5% of the RIK oil (46 mmbbls) sold to
date has been via competitive sales.
2) A non-competitive sale requires a written finding
by DNR.
3) How does DNR decide between a competitive and non-
competitive sale?
• DNR publishes a "Solicitation of Interest" letter
with the goal of gauging the interest of the
market.
• In this letter, DNR establishes its preferred
method of sale (i.e., competitive disposition)
with non-binding parameters for such sale.
• Interested parties are invited to comment on
their willingness to buy RIK oil and their
preferred terms.
• DNR analyzes those responses and makes a written
determination of the method of sale that is in
the best interest of the State.
MR. MEZA highlighted the statutory requirements for the sale of
royalty:
Sec. 38.05.183. Sale of royalty. (a) The sale,
exchange, or other disposal of a mineral obtained by
the state as a royalty under AS 38.05.182, the sale,
exchange, or other disposal in whole or in part of a
right to receive future mineral production under a
state lease under this chapter, or the sale, exchange,
or other disposal of gas delivered to the state under
AS 43.55.014(b) shall be by competitive bid and the
sale, exchange, or other disposal made to the highest
responsible bidder, except that competitive bidding is
not required when the commissioner, after prior
written notice to the Alaska Royalty Oil and Gas
Development Advisory Board under AS 38.06.050,
determines that the best interest of the state does
not require it or that no competition exists.
(c) If the commissioner determines that a sale,
exchange, or other disposal of a mineral obtained by
the state as a royalty under AS 38.05.182, of a right
to receive future mineral production under a state
lease under this chapter, or of gas delivered to the
state under AS 43.55.014(b) shall be made otherwise
than by competitive bid, and the Alaska Royalty Oil
and Gas Development Advisory Board has been notified
in writing of that determination, the commissioner
shall make public in writing the specific findings and
conclusions on which that determination is based.
4:30:59 PM
MR. MEZA advanced to slide 16, Statutory and Regulatory Mandate
for Royalty In-Kind Sale Within the State or for Export? He
related that the state map identifies the locations of the
different refineries. In the Interior and Southcentral regions
are the Petro Star refineries in North Pole and Valdez and the
Nikiski refinery operated currently by Marathon and formerly by
Tesoro. He highlighted the presumption in 38.05.183(d in that
the sale of royalty oil and gas must meet local demand before a
decision can be made to sell the royalty oil for export.
(d) Oil or gas taken in kind by the state as its
royalty share or gas delivered to the state under AS
43.55.014(b) may not be sold or otherwise disposed of
for export from the state until the commissioner
determines that the oil or gas is surplus to the
present and projected intrastate domestic and
industrial needs.
MR. MEZA advanced to slide 17, Statutory and Regulatory Mandate
for Royalty In-Kind Information on In-State Refineries. He
directed attention to the chart that provides information about
Petro Star's North Pole and Valdez refineries and Marathon's
Nikiski refinery, addressed respectively in SB 239 and SB 240.
The Nikiski refinery operated by Marathon currently produces
55,000 barrels per day (bpd), including a mix of jet fuel,
gasoline and other refined products. Most are consumed in
Alaska, although some heavy oils are shipped to other Marathon
refineries outside of Alaska.
The Petro Star refinery at North Pole produces a maximum of
22,000 bpd and its refinery at Valdez produces a maximum of
60,000 bpd. Production is a mix of jet fuel; ultra-low sulfur
diesel, asphalt, and heating oil; but no gasoline. The refined
products are primarily sold in Alaska, although refined products
are occasionally sold in Canada and the Pacific Northwest.
For Marathon, the typical sources of crude oil come from the
North Slope and Cook Inlet for the Nikiski refinery, with 20
percent coming from other refineries in the US and foreign
countries. The source of crude oil for the Petro Star refineries
is entirely from the Alaska North Slope.
Employment numbers are also considered in the best interest
findings for these contracts. The chart shows that the Marathon
and Petro Star refineries each employ between 200 and 300
people.
4:33:30 PM
MR. MEZA advanced to slide 18, Statutory and Regulatory Mandate
for Royalty In-Kind Pricing Requirement for RIK. He related that
the graph on the left shows yet another element for why these
proposed contracts meet the regulatory requirement regarding
revenue to the state. In particular, it shows that the value the
state receives from selling royalty oil in-kind yields more for
the state than if the state had chosen to take the royalty in-
value.
The gray on the graph shows the volumes of oil sold since 2008.
The blue dots represent the instances where the price of royalty
oil in-kind generated a premium over what the state received
when it took a portion of the royalty in-value from the
producers. The red squares reflect the 21 cases in 168 months
when the royalty value in-kind was lower than the royalty in-
value.
MR. MEZA highlighted the following:
• For the 2008 2021 period, the price of RIK oil
was, on average, greater than the price of RIV
oil by $0.93/bbl.
• The State sold 148 million barrels of royalty oil
during this period.
• Total proceeds from these RIK sales amount to
$10.99 billion.
• This translates into $137 million of revenue in
addition to what DNR would have obtained had it
decided to receive these royalty barrels in-
value.
4:35:12 PM
MR. MEZA advanced to the next slides to describe the process DNR
followed for the sale of royalty oil in-kind. He restated that
the process is transparent as mandated by both statute and
regulations. He directed attention to the 11 step process
starting with the approach of expiration of existing royalty in-
kind contracts and ending with legislative approval and
execution of the royalty in-kind contract. He described the
steps in more detail, the basics of which are:
Step 1. Decide whether or not to offer RIK ANS oil for sale and
inform the royalty board. Considerations are whether the sale
will be competitive or non-competitive; whether the royalty oil
should be dedicated to in-state or for export; and the duration
of the contracts.
Step 2. DNR publishes a Solicitation of Interest letter,
continuing to inform the royalty board. This leads to
Step 3. DNR evaluates the responses from the marketplace.
Step 4. In this example, the decision was to have non-
competitive sales. The royalty board was informed.
Step 5. DNR conducted bilateral negotiations with the RIK buyers
and agreed on tentative terms.
Step 6. DNR published the preliminary best interest finding
(BIF) for the proposed RIK contracts.
Step 7. The preliminary BIF was subject to royalty board review
and it underwent a 30-day public comment period. He noted that
there were no comments from the public for the proposed Marathon
and Petro Star contracts.
Step 8. The royalty board recommended the legislature approve
the contracts for both Marathon and Petro Star.
Step 9. DNR published the final best interest finding.
Step 10. SB 239 and SB 240 were submitted to the legislature.
These are the bills the committee is considering today.
Step 11. The DNR commissioner may not execute these RIK
contracts without the approval of the legislature.
4:37:12 PM
VICE CHAIR MICCICHE returned attention to the chart on slide 18
and related that he calculated that on average from 2008 to
2021, the royalty in-value proceeds were about 1.5 percent more
than the royalty in-value valuation. He asked Mr. Meza if he
agreed.
MR. MEZA answered that he believed that was correct.
VICE CHAIR MICCICHE asked if an appropriate way to view the
difference was that the RIK was closer to 14 percent compared to
12.5 percent for RIV.
MR. MEZA answered that could be one interpretation, but in this
case the extra percentage comes from the refiners, not the
producers.
VICE CHAIR MICCICHE responded that he was looking at the bottom
line, not the source of the premium.
4:38:32 PM
MR. MEZA advanced to slide 21 and described the chart of the
timeline for the proposed sale of RIK oil for Marathon and Petro
Star, all of which was described previously. The legislature is
doing its review, which is required prior to execution of the
contracts.
MR. MEZA moved on to discuss the contract terms for Marathon and
Petro Star. He directed attention to the chart on slide 23 that
provides information about recent contracts for the sale of
royalty oil in-kind. It's the same chart depicted on slide 12,
but the last two columns provide information about Netback
pricing and the RIK differential. He pointed out that since 2016
the royalty barrels for sale has dropped and now the production
of refined products is 10-20 percent less.
MR. MEZA stated that what these contracts have in common is that
the value of royalty oil in-kind is calculated using the netback
methodology for pricing. Because DNR sells the royalty oil at
the field, they netback all the costs associated with
transportation and the adjustments for quality of the different
sources of oil. The calculation also includes an RIK
differential that is tied to the royalty price at the field. The
last column shows how the RIK differential has gone up since
2016 when it was $1.95/bbl. The proposed contracts under review
have an RIK differential value of $2.23/barrel for Marathon and
$2.25/barrel for Petro Star.
4:41:39 PM
MR. MEZA advanced to slide 24, Contract Terms for Marathon and
Petro Star RIK Differential is the Source of the Premium of RIK
over RIV. It provides a graphical representation of the netback
methodology to calculate the price of royalty in-kind at the
field. The graphic on the left is a representation of what the
royalty oil price would be if the state were to select its
royalty in-value. When the state selects RIV, the producers
typically sell the oil into the Lower 48 and the state receives
a share of the proceeds from the lessees. To calculate the price
of RIV oil at the field, transportation costs, including the
allowance for marine transportation, are calculated. He
clarified that the costs shown were for illustrative purposes
and to show how the RIK compares to RIV.
The graphic on the right illustrates the royalty in-kind oil
sale. The primary difference is that the oil is sold inside the
state. There is no marine transportation allowance but there is
the RIK differential. This shows where the premium comes from
that Senator Micciche referenced. It's the difference between
the per barrel cost of the marine transportation allowance and
the RIK differential. In this illustration the difference is
$1.25 per barrel.
4:43:46 PM
MR. MEZA advanced to slide 25 Contract Terms for Marathon and
Petro Star RIK Differential is the Source of the Premium of RIK
over RIV. The graph provides historical information of the
difference between the marine transportation allowance and the
value of the RIK differential. The gray line reflects the
weighted-average RIK differential; the blue line the weighted-
average marine transportation allowance, and the green dashes
reflect the DOR location differential. The distance between the
blue line and the gray line gives evidence of the source of the
premium that DNR has gotten through its sales of RIK oil. The
green dashes shows the increase in the location differential for
the proposed contracts. [Further explanation from slide 25 is
provided below:]
• 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?
• 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.
• In doing so, they use a "location
differential."
• DOR publishes the weighted average of these
location differentials for all contracts for
the sale of ANS oil within Alaska.
• 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.
4:44:35 PM
MR. MEZA advanced to slide 26 Contract Terms for Marathon and
Petro Star Flexibility for Buyer and Seller. He said this chart
provides a description of all the provisions in the contracts.
It highlights that both the refineries as buyer and the state as
seller have flexibility. He reviewed the following:
Flexibility for the RIK buyer (refineries)
RIK buyer may?
1. nominate 0 barrels for up to 2 consecutive months
or for 3 months under "turnaround" clause.
2. request, subject to DNR approval, a permanent
reduction of nominations below what was agreed.
3. temporarily reduce royalty oil purchase under
force majeure event.
4. request, subject to DNR approval, additional
royalty oil for purchase.
• RIK buyer may temporarily nominate below the
agreed range but must meet a minimum annual
amount.
Flexibility for the RIK seller (DNR)
1. Proration: If nominations by all RIK buyers is
greater than 95% of ANS royalty oil, then DNR
will prorate nominations of RIK buyers consistent
with the 95% threshold.
2. No guarantee in the quantity, quality, or source
of royalty oil
3. Excess royalty: DNR can sell additional ANS
royalty oil if all nominations are below the 95%
threshold and RIK buyers wish to buy more royalty
oil.
4:45:46 PM
MR. MEZA advanced to slide 27 Contract Terms for Marathon and
Petro Star Other Provisions. It shows the details in the
contract such as financial assurance in the event the buyer is
unable to pay the invoices for the sale of the royalty oil. The
grantor of the RIK buyer has the option of providing the state:
1. Letter of credit
2. Surety bond or
3. Opinion letter by an independent financial analyst that the
current and projected credit rating of guarantor is at
investment grade
MR. MEZA stated that the value of the assurance is valued at 90
days' worth of royalty oil in the Marathon contract and 50 days
worth of royalty oil in the Petro Star contract. The contracts
also have the following retroactivity provisions:
• There could be grounds for changing the amount
for an invoice already paid (in terms of the
price or quantity)
• There is an 8-year period allowed for adjustment
of invoices (even after termination of the
agreement).
MR. MEZA reviewed the provisions in the contracts to encourage
the buyers to process the royalty oil in the state and to hire
Alaska residents:
• Instate processing: RIK buyer agrees to use
commercially reasonable efforts to manufacture
refined products from the royalty oil in Alaska.
• Employment of Alaska residents: RIK buyer agrees
to employ Alaska residents and Alaska companies
to the extent they are available, willing, and at
least as qualified as other candidates
4:47:14 PM
MR. MEZA advanced slide 28 Contract Terms for Marathon and Petro
Star Contracts are in the Best Interest of the State. He said
this slide highlights the cash benefits of the proposed sales.
It is the revenue in addition to what the state would have
received had it elected to take 100 percent of its royalty oil
in-value. He described the following:
Additional revenue to the State
Tesoro 2016 $31 million
Petro Star 2016 multiyear contract $23 million
Marathon (2021) $3 million
Petro Star 2021 $0.7 million
Marathon (2022) estimate $3-14 million
Petro Star (2022) estimate $17-19 million
4:48:15 PM
SENATOR BISHOP asked if the provision on slide 27 about
employment of Alaska residents was in statute or regulation.
MR. MEZA answered that it it's a provision in the contract.
JOHN CROWTHER, Deputy Commissioner, Department of Natural
Resources (DNR), Anchorage, Alaska, added that the department's
statutory basis for that provision is the general authority to
negotiate terms in a contract.
Because he's "an Alaska hire guy."
4:49:40 PM
SENATOR KIEHL noted that a lot more royalty barrels than were
being sold in-kind. He asked what factors go into the decision
to sell oil from a particular field.
MR. MEZA answered that there are two considerations:
1. When the department expects the royalty in-value to be the
lowest value it substitutes the lowest value of royalty oil
with the comparatively higher value of royalty oil in-kind.
2. DNR also selects royalty oil in-kind from fields that
generate the largest amount of royalty oil, such as Prudhoe
Bay and Kuparuk.
4:50:50 PM
SENATOR KIEHL asked about the chart on slide 25 that compared
the marine transportation allowance to the royalty in-kind
differential. The chart looks like $2/barrel but it has to be
$0.80-0.90/barrel to get ahead. He asked Mr. Meza to describe
the difference.
MR. MEZA answered that the main source of the premium for the
royalty in-kind contracts does come from the difference between
the marine transportation costs and the RIK differential, but
other elements in the netback methodology could create
differences in the initial premium. The graph that shows the
$0.93/barrel premium is the combined effect of the differences
between these elements of the netback methodology.
4:52:27 PM
SENATOR KIEHL asked if he would provide a few examples of the
factors that ultimately reduce the premium.
MR. MEZA referred to slide 24. The only difference in the values
on the right of the two graphics comes from the difference
between the marine transportation allowance and the RIK
differential. The other transportation costs and adjustments in
Step 3 of both graphics reflect -$6/bbl, but there are slight
variations. For the purposes of valuing RIV, this valuation is
determined by a set of agreements that the state entered with
producers in the early '90s. These settlement agreements have
unique ways of determining things such as how the price of ANS
oil should be calculated on the US West Coast. That alone
creates a difference between RIV and RIK. By design it's
impossible for the valuations to be identical because the
settlement agreements differed between producers on the North
Slope where the state receives its royalty in-value.
4:54:20 PM
SENATOR KIEHL asked for help squaring what he read in the
discussion in the best interest finding about not being able to
retroactively adjust transportation charges unless they were
required by FERC with the retroactivity provision on slide 27
that provides eight years to adjust invoices.
MR. MEZA said he'd like to follow up after the presentation
because the contracts are sometimes changed by FERC or RCA
directives regarding tariffs in some pipelines and he didn't
precisely recall the cases DNR did not retroactively adjust.
SENATOR KIEHL said that was acceptable.
4:56:19 PM
VICE CHAIR MICCICHE referred to the chart on slide 28 to
highlight the reason the state sells it oil RIK. He said the
first four boxes on the far right are actuals although the Petro
Star 2021 contract probably isn't up to date, but the $56
million in actuals are based on the contract price. He said the
question he has is the estimate between $3 and $14 million for
Marathon 2022 and the $17-19 million in Petro Star is the likely
potential differential of marine transportation costs in
relation to oil price. He asked if that was correct.
MR. MEZA answered yes but other elements in the pricing
methodology could expand or reduce that estimate. How much the
buyer/refiner decides to buy from the state also affects the
estimate, and both refiners have a range. As the table shows,
the royalty barrels Marathon has ranges from 10,000 15,000
barrels per day and for Petro Star the range is 10,000 12,500
barrels per day. Additionally, the contract allows the buyer to
nominate zero barrels.
VICE CHAIR MICCICHE asked whether there was a possibility that
the state could go into deficit in an RIK contract.
MR. MEZA answered it's theoretically possible if oil prices
dropped into the negative range like happened for a day or so in
2020, but the price of RIK oil is determined as an average for
the month.
VICE CHAIR MICCICHE asked if he agreed that the probability was
essentially nonexistent.
MR. MEZA answered yes.
5:00:03 PM
VICE CHAIR MICCICHE opened public testimony on SB 239.
5:00:27 PM
DOUG CHAPADOS, President/CEO, Petro Star, Anchorage, Alaska,
stated support for SB 239 to approve Petro Star's five-year
royalty oil contract. He related that Petro Star is a wholly
owned subsidiary of Arctic Slope Regional Corporation. It is the
state's only Alaska-owned refiner with fuel terminals in
Anchorage, Valdez, Kodiak, Unalaska Island, and the Interior.
Petro Star owns commercial refineries in North Pole and Valdez,
and the Trans Alaska Pipeline System (TAPS) is its only source
of crude oil. Thus the proposed contract is essential for the
company to continue operation.
MR. CHAPADOS recounted the variety of products that Petro Star
produces. These include jet fuel for commercial airlines and
over 90 percent of the jet fuel consumed at the Department of
Defense and U.S. Coast Guard installations in the state. The
refiner also produces heating oil for residential and commercial
customers, ultra-low-sulfur diesel, fuel for on and off road
uses, asphalt, and specialty low sulfur turbine fuel exclusively
for the Golden Valley and Copper Valley electric associations.
MR. CHAPADOS highlighted that the best interest finding
explained that this contract is good for the state in terms of
maximizing revenues generated from Alaska's royalty oil share
and by helping maintain the in-state petroleum refining
industry, which preserves competition within the state's fuel
market. He encouraged the committee to pass SB 239 and approve
the RIK contract.
5:03:08 PM
VICE CHAIR MICCICHE closed public testimony on SB 239. Finding
no questions or comments, he solicited a motion.
5:03:20 PM
SENATOR STEVENS moved to report SB 239, work order 32-GS 2121\A,
from committee with individual recommendations and attached
[fiscal note(s)].
VICE CHAIR MICCICHE found no objection and SB 239 was reported
from committee.
SB 240-APPROVE MARATHON PETRO ROYALTY OIL SALE
5:04:20 PM
VICE CHAIR MICCICHE reconvened the meeting and announced the
consideration of 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."
VICE CHAIR MICCICHE noted that SB 239 and SB 240 were moving in
tandem and that the committee understood the concept that was
described in the presentation that was delivered during the
hearing on SB 239. He asked the DNR representatives Mr. Meza and
Mr. Crowther if they had any comments.
JOHN CROWTHER, Deputy Commissioner, Department of Natural
Resources (DNR), conveyed that they did not have any additional
comments of statements.
VICE CHAIR MICCICHE clarified for the public that the concept
for SB 240 and SB 239 was the same but the royalty contracts
were for different refiners.
5:04:54 PM
VICE CHAIR MICCICHE opened public testimony on SB 240.
5:05:17 PM
CASEY SULLIVAN, Government and Public Affairs Manager, Marathon
Petroleum, Anchorage, Alaska, noted that he submitted a letter
as part of the record. He stated that it was Marathon's pleasure
to share its support for Senate Bill 240. He stressed that the
flexibility, and stability that the contract offers will have a
positive impact on Marathon's ability to optimize the ongoing
operations at the Kenai refinery.
MR. SULLIVAN reminded the committee that the Kenai refinery was
the first refinery in the state and had been operating for more
than 50 years. It provides the state with core supplies of jet
fuel, diesel, gasoline, propane, and asphalt from Nikiski to
North Pole.
He described the legislation as the result of constructive
dialog and productive negotiations between DNR and Marathon. He
expressed appreciation for the professional work by the division
and confidence that the contract provides positive shared value
for all Alaskans.
MR. SULLIVAN concluded his testimony stating that Marathon
believes in Alaska's future and is committed to continue its
legacy of safely and reliably producing quality fuel produces
day in and day out for Alaskans. He thanked the committee for
considering SB 240 and urged its passage.
5:07:20 PM
VICE CHAIR MICCICHE closed public testimony on SB 240.
5:07:28 PM
SENATOR STEVENS moved SB 240, 32-GS 2122\A, from committee with
individual recommendations and attached [fiscal notes].
VICE CHAIR MICCICHE found no objection and SB 240 was reported
from the Senate Resources Standing Committee.