Legislature(2013 - 2014)HOUSE FINANCE 519
04/08/2013 08:00 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB195 | |
| HB63 | |
| HB102 | |
| SB86 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 21 | TELECONFERENCED | |
| + | HB 63 | TELECONFERENCED | |
| + | SB 51 | TELECONFERENCED | |
| + | HB 102 | TELECONFERENCED | |
| + | SB 65 | TELECONFERENCED | |
| + | HB 134 | TELECONFERENCED | |
| *+ | HB 195 | TELECONFERENCED | |
| + | SB 95 | TELECONFERENCED | |
| + | SB 2 | TELECONFERENCED | |
| + | SB 16 | TELECONFERENCED | |
| + | SB 24 | TELECONFERENCED | |
| + | SB 37 | TELECONFERENCED | |
| + | SB 38 | TELECONFERENCED | |
| + | SB 86 | TELECONFERENCED | |
| + | SB 18 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE BILL NO. 86
"An Act approving and ratifying the sale of royalty
oil by the State of Alaska to Flint Hills Resources
Alaska, LLC; and providing for an effective date."
9:29:36 AM
JOE BALASH, DEPUTY COMMISSIONER, DEPARTMENT OF NATURAL
RESOURCES, provided a presentation for orientation. He
provided a PowerPoint presentation: "Royalty In-Kind (RIK)
Sale to Flint Hills Resources." He noted that the state's
interest was generally 12.5 percent at legacy fields and
the royalty could be collected in cash value or in physical
possession of the product produced. The statutes that
governed the sale of royalty were laid out in title 38,
with the presumption that taking royalty in-kind was in the
state's best interest. He discussed slide 2: "Royalty in-
Value versus Royalty in-Kind:"
The state has a choice to take its royalty in-value
(RIV) or in-kind (RIK).
· When the State takes its royalty as RIV, the
lessees who produce the oil also market the
State's share along with their own production and
pay the State the value of its royalty share.
· When the State takes its royalty share as RIK,
the State assumes ownership of the oil, and the
commissioner disposes of it through the sale
procedures prescribed by AS 38.05.183.
9:30:50 AM
Mr. Balash discussed slide 3: "Non-Competitive RIK Sale
Process." He noted that an informal letter of solicitation
led to two interested parties; one was Flint Hills and the
other Tesoro.
· Statute presumes State's Best Interest is met by
o Taking royalty in-king - AS 38.05.182(a)
o With sale to in-state buyer - AS 38.05.183(d)
o Accomplished through a competitive process - AS
38.05.183(a)
· August 13, 2012 Informal Solicitation of Interest sent
to:
o North Slope Producers
o In-state Refiners
o Industry specific & general media
9:32:21 AM
Mr. Balash discussed slide 4: "RIK contract terms."
· Proposed 2013 contract is similar to 2004 contract
ƒProposed 2013 contract, like 2004 contract,
does not directly reference RIV valuation in
RIK price calculations
· Key Contract provisions
o Price
o Quantity
o Term
o Special Commitments
o In-State Processing and Local Hire
Mr. Balash detailed slide 5: "RIK Contract Price."
ANS Spot Price - $2.15 - Tariff Allowance + Quality
Bank Adjustment - Line Loss
· ANS Spot Price = Average US West Coast Price for
Alaska North Slope oil.
o Reported by industry publications: Platts,
Telerate, Reuters
· $2.15 = RIK DIFFERENTIAL
o Destination - Marine Costs so RIK > RIV.
o Subject to a one-time adjustment of no more
than + $0.15 per barrel.
o This amount = $1.65 per barrel in the
current 2004 contract.
· Tariff Allowance = TAPS and Pipelines Upstream of
PS-1.
· Quality Bank Adjustment = as reported by the TAPS
Quality Bank Administrator
· Line Loss = 0.0009 times the netback price
Mr. Balash discussed slide 6, "2013 RIK Contract Quantity:"
· Initial Quantity Range
o 18,000-30,000 barrels per day
o May be adjusted after 12 months, with
Commissioner approval
· Termination of Contract
o No or zero nomination for 3 months terminates
contract
o Contract terms comparable to the private market
· Refinery Turnaround
o Contract allows FHR the flexibility to cease
royalty oil purchases during maintenance
· Guarantees, reserves and proration clauses included
o 24,000 barrels per day with 15 percent reserves
for other RIV or RIK interests
Mr. Balash discussed slide 7, "2013 RIK Contract Term:"
· FHR initially sought a ten-year contract
o Creates supply and price risk
o Increases counterparty risk
o Limits the State's ability to supply other RIK
buyers
· DNR negotiated a five year term
o April 1, 2014 to March 31, 2019
o Possible extension condition for:
ƒLarge capital improvement at the North Pole
Refinery
ƒBinding support for a North Slope natural
gas transportation system
9:35:34 AM
Mr. Balash discussed slide 8: "2013 RIK Contract Quantity."
The graph illustrated a 10-year royalty profile. He
explained that the total contract demand for Flint Hills
was less than half of the state's total royalty volume. The
percentage increased throughout the years with a projected
82.1 percent of royalty value accounted for in a single
sale. He mentioned that the seasonal variability on North
Slope production made the terms instituted by Flint Hills
difficult for the state to meet.
9:37:04 AM
Mr. Balash discussed slide 9: "Commissioner's Decision
Criteria."
AS 38.05.183(e) states that the commissioner must sell
the state's royalty oil to the buyer who offers
"maximum benefits to the citizens of the state." In
making this determination the commissioner must
consider:
1. The cash value offered
2. The projected effects of the sale on the economy
of the state
3. The projected benefits of refining or processing
the oil in state
4. The ability of the prospective buyer to provide
refined products for distribution and sale in the
state with price or supply benefits to the
citizens of the state
5. The eight criteria listed in AS 38.06.070(a), as
reviewed by the Royalty Board
Mr. Balash discussed slide 10: "Royalty Board's Decision
Criteria."
AS 38.06.070(a) states that the Alaska Royalty Oil and
Gas Development Advisory Board must consider:
1. The revenue needs and projected fiscal condition
of the state
2. The existence and extent of present and projected
local and regional needs for oil and gas products
3. The desirability of localized capital investment,
increased payroll, secondary development and
other possible effect of the sale
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 transactions.
6. The existence of specific local or regional labor
or consumption markets or both which should be
met by the transaction
7. The projected positive or negative environmental
effects related to the transactions
8. The projected effects of the proposed transaction
upon existing private commercial enterprise and
patterns of investment
9:38:28 AM
Mr. Balash discussed slide 12: "Figure 1: Royalty In-Kind
Sales History." He stated that the refinery depicted had
purchased royalty oil from the state.
Mr. Balash discussed slide 13: "Best Interest of the State
Served by the RIK Contract with Flint Hills Resources
(FHR)."
· Cash Value Offered with Contract
Cash value of $3.5-5.9 Billion over 5 years
ƒAnalyzed for Consistent value between RIK
and RIV
ƒVolume weighted average of current reported
netback price (11 AAC 03.026(b))
Anticipated increases in marine transportation
allowance will favor RIK contract
· Positive effect on the State
Maintain stability in in-state refining and
distribution of refined products
Supports jobs and economy of Fairbanks North Star
Borough
Co-Chair Stoltze reflected on prior testimony about
pipeline physics and the importance of the facility.
Mr. Balash replied that the issue was discussed on slide
14.
9:39:55 AM
Mr. Balash discussed slide 14: "FHR's North Pole Refinery."
· Strategically located on Trans-Alaska Pipeline System
(TAPS)
· Current throughput of 82,000 - 84,000 barrels per day
of ANS crude
· Producing approximately 22,000 - 25,000 barrels of
refined product
· All crude and constituents that are not transformed
into refined product are injected back into TAPS (with
a penalty paid)
9:41:33 AM
Mr. Balash discussed slide 15: "FHR's North Pole Refinery."
· FHR produces approximately
o 672,000 gallons of jet fuel per day
o 143,000 gallons of gasoline per day
o 41,000 gallons of home heating fuel per day
o 68,000 to 194,000 gallons per day of product
consisting of HAGO, LAGO, naphtha, asphalt,
refining fuel, and a small volume of high-sulfur
diesel
· 680,000 gallons per day shipped to Anchorage via the
Alaska Railroad
· 230,000 gallons of ultra-low sulfur diesel and
gasoline on the backhaul to Fairbanks
· FHR owns 50 million gallons of storage facilities
o 30.7 million in Anchorage and 19.3 million in
Fairbanks
9:42:30 AM
Mr. Balash discussed slide 16: "Proposed Contract
Benefits."
· Proposed contract is expected to:
o Maintain status quo of in-state refining behavior
o Produce 330 million gallons of refined product or
18 percent of gasoline and 26 percent of jet fuel
consumed in Alaska
o Provide approximately $140 million per year in
gross regional product sales for the Fairbanks
North Star Borough (FNSB)
o Support 1,300 direct and indirect jobs in the
FNSB
o Sustain $100 million in annual earnings in FNSB
o Provide socio-economic stability against energy
costs
Mr. Balash discussed slide 17: "Projected Impacts if not
Approved."
· If FHR stops refining, anticipated effects include:
o Loss of approximately 1,300 direct and indirect
jobs in the Fairbanks North Star Borough
o State could experience increased utilization of
the social safety net
o Possibility of population redistribution
o Increased and decreased infrastructure
utilization and maintenance with population shift
o Impact to the fuel supply for the Fairbanks and
Anchorage airports, affecting trade and tourism
and the Alaska Railroad
o Loss of heat source for warming low flow in TAPS
9:44:02 AM
Representative Gara stated that the less oil in TAPS the
more expensive the tariff. The more expensive the tariff,
the less money the state received in taxes for the oil. He
asked if a discount for royalty in-kind oil would increase
the cost in taps and impact state revenue.
Mr. Balash replied that if the state received royalty in-
value and the current contract returned approximately $120
million more than the expected value. He stated that the
current terms in the contract would not achieve the same
monetary surplus or addition due to the short term and
small volume. The department was confident that they would
receive an increment of value for the state.
Representative Gara understood that taking less oil from
North Pole would increase the tariff south of North Pole.
If the oil was not purchased from the state, it would be
purchased from the oil companies, which would also increase
the tariff.
Mr. Balash concurred, if supply was available from another
source.
9:46:24 AM
Representative Gara noted evidence that refiners had
increased the mark-up for gas produced and sold by 100
percent in the last five or six years, which might be
responsible for the high cost of gas in Alaska. If the
state offered oil to the refinery, would the department
offer a return on limitation of markup for consumer gas?
Mr. Balash replied that investigations by the Department of
Law evaluated the market behavior of Alaska's refineries
and distributors. The conclusion of the investigation was
that collusion or anti-competitive behavior was not an
issue. The contract continued a term written in the
previous one. The term stated that when Flint Hills
produced and sold wholesale gasoline, they must offer a
price comparable to that sold in Anchorage. Anchorage was a
water-born market with an additional refinery.
9:48:53 AM
Representative Costello asked about the commissioner's
identification of the economic effect. She asked if the
department accounted for the 26 percent loss of avgas,
which was supplied through Flint Hills to the state's
economy.
Mr. Balash replied that the refinery produced a tremendous
amount of jet fuel, but he was unaware of the avgas
production.
9:50:28 AM
Co-Chair Stoltze asked the connection for defending the
army bases in Alaska.
Mr. Balash replied that Petro Star Inc. was owned by Arctic
Slope Regional Corporation (ASRC) and enjoyed certain
contracting preferences with the United States Department
of Defense. He stated that Petro Star Inc. supplied most of
the fuel for the military bases in the interior. He stated
that Flint Hills was supportive of the Interior community
at large. The families supported by their employment with
Flint Hills provided the backbone of the community.
Co-Chair Stoltze asked about the military facilities.
Mr. Balash replied that the military facilities must
consider the loss of Flint Hills as a back-up to the Petro
Star facility. He mentioned a provision in the contract
intended to enable Flint Hills to become a customer of the
North Slope Transportation Project. If natural gas was made
available to the Interior the cost of operating the bases
would be reduced. The contract could help with the
retention of those installations.
9:53:14 AM
Co-Chair Stoltze noted that an effect felt in one region of
the state impacted all of Alaska.
Representative Wilson stated that one tower was shut down
resulting in an unforeseen impact in her district. The fuel
provided allowed for electric energy for the district.
9:54:31 AM
Representative Kawasaki asked about the special commitment
contract extension on page 22. He noted that the special
commitment was tied as a reward for substantial investment.
He read about a request for an extension. He wondered if
the issue would be revisited with the royalty board.
9:55:11 AM
Mr. Balash replied that the initial step included
negotiations with the department. Upon conclusion of the
negotiation process, the royalty board and legislature
would provide the next steps. The provision was intended to
truncate the negotiation process. The terms would be agreed
upon and presented to both the board and the legislature in
five years.
9:56:04 AM
JEFF COOK, REGIONAL DIRECTOR, EXTERNAL AFFAIRS, FLINT HILLS
RESOURCES, NORTH POLE, spoke in support of SB 86. He
mentioned his productive negotiations with the Division of
Oil and Gas through the Department of Natural Resources. He
stated that he began working for the refinery in 1994 and
he had seen the oil enter the refinery at increasingly
lower temperatures. He explained the refinery's important
task of returning oil to TAPS. He pointed out that the
refinery had only one source of crude and electricity costs
were four times higher than refineries in the state of
Washington without the benefit of natural gas.
Mr. Cook continued that the five year contract would
provide the stability and certainty of crude oil at a fair
price with expansion as a result. Though the current
contract did not expire until April 1, 2014 the pressure to
pass the bill was strong this session. He discussed the
negotiation process regarding one-year supply contracts for
jet fuel and other projects.
9:59:01 AM
Representative Thompson understood that the refinery
produced 26 percent of the jet fuel consumed in Alaska. He
stated that the Anchorage port had storage tanks for the
import of jet fuel for Ted Stevens International Airport.
He asked about the change in competitiveness.
Mr. Cook replied that his refinery was limited to one
source of crude. He added that the change in energy costs
placed Flint Hills at a disadvantage.
Representative Thompson asked about the impact of the large
transportation cost required to bring jet fuel to Alaska
from Asia.
Mr. Cook replied that the differential in his refinery's
energy cost was $12 higher than the West Texas Intermediate
(WTI).
Representative Thompson asked if natural gas in the
Interior would help with competitiveness.
Mr. Cook replied yes. He hoped for projects that would
allow the company to enter the export business again and
expand for greater competitiveness in the jet fuel market.
10:01:02 AM
REPRESENTATIVE DOUG ISAACSON testified in support of the
legislation.
Co-Chair Stoltze CLOSED public testimony.
10:02:11 AM
Co-Chair Stoltze noted that he placed great emphasis on
Interior issues.
Representative Costello discussed the zero fiscal note.
Co-Chair Stoltze stated that the bill's fiscal terms were
best described in the contract.
Mr. Balash agreed.
10:03:24 AM
Representative Wilson MOVED to REPORT SB 86 out of
committee with individual recommendations and the
accompanying fiscal note.
SB 86 was REPORTED out of committee with a "do pass"
recommendation and with one previously published fiscal
note: FN1 (DNR).