Legislature(1995 - 1996)
04/27/1995 08:35 AM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE BILL NO. 320 An Act approving the sale of Prudhoe Bay Unit royalty 2 oil by the State of Alaska to Tesoro Alaska Petroleum Company; and providing for an effective date. JOHN SHIVELY, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES testified in support of HB 320. He gave a brief overview of the legislation. He observed that HB 320 approves the sale of Prudhoe Bay Unit royalty oil by the state of Alaska to the Tesoro Alaska Petroleum Company. He noted that the Alaska Royalty Oil and Gas Development Advisory Board reviewed the contract with unanimous support. The contract allows: * Tesoro to buy 40,000 thousand barrels a day or 30 percent of the Prudhoe Bay Unit royalty oil; * The State to retain 108 thousand barrels of Prudhoe Bay Unit royalty oil; and * Grants Tesoro a three year contract based on the west coast value paid to Exxon. Commissioner Shively maintained that the contract provides the State with a premium. He noted that the Commissioner of the Department of Natural Resources is required by law to obtain the minimum price that would result from the sale of the oil by the British Petroleum Company (BP). He noted that Tesoro has provided the State with a letter of credit. Commissioner Shively emphasized that Tesoro provides local employment. He stressed that in-state processing has reduced the price of petroleum products in the state. In response to a question by Representative Mulder, Commissioner Shively reiterated that the contract runs for three years. He clarified that the contract would be renegotiated at the end of three years. BERNIE SMITH, TESORO ALASKA PETROLEUM COMPANY spoke in support of HB 320. He emphasized that Tesoro's current contract will end December 30, 1995. He noted that 80 percent of Tesoro's crude oil comes from the state of Alaska. He referred to statements made in "An Analysis of the Department of Natural Resources Three-Year Contract for the Sale of Prudhoe Bay Royalty Oil to Tesoro Alaska Petroleum Company" dated March 29, 1995 (copy on file). He observed that the contract would require that at least 80 percent of the oil purchased be processed at Tesoro's Nikiski refinery. He emphasized that there are no other stable long term sources of crude oil for the Nikiski refinery. He stressed that if the contract is not ratified before the legislature adjourns that Tesoro would lose 80 percent of its crude oil and its refinery would be jeopardized. Mr. Smith asserted that Tesoro is paying a premium for the 3 contract. He emphasized that Tesoro can live with the negotiated price. Mr. Smith noted that the contract states that if the North Slope Export Ban is lifted the price will be renegotiated. Representative Therriault summarized that 100 percent of the royalty constitutes 80 percent of Tesoro's crude oil at the Nikiski refinery. He asked why the contract allows Tesoro to use only 80 percent. Mr. Smith explained that the provision allows Tesoro to adjust refinery rates to meet demand. JOHN TILLINGHOUSE, COUNSEL, TESORO ALASKA PETROLEUM COMPANY explained the in value price. He referred to page 15 of Tesoro's analysis. He explained that the Exxon price has been $.19 cents a barrel higher than the in-value price. In response to a question by Representative Grussendorf, Mr. Commissioner Shively stated that any disadvantage in the contract effects Tesoro. He stressed that there is no risk to the State. He added that if the State audits and finds that Exxon has under reported, Tesoro could be required to pay additional money. Tesoro could also be disadvantaged by the reopening of the Export Ban. Representative Brown asked how the current in-value price compares to the settlement price in the Amerada Hess case. Mr. Tillinghouse stated that all the prices used by Tesoro's analysis flow from the Amerada Hess settlement. Commissioner Shively emphasized that the BP price was not used because the transportation cost was not included. He explained that the State has 6 years to audit the Exxon price. He added that the State's price is higher and the letter of credit submitted by Tesoro is longer. Mr. Smith noted that Tesoro's letter of credit has previously been for 60 days. The State requested a 90 day letter of credit. The contract represents a compromise of 75 days. Tesoro remains in negotiation with their charter shipper to reduce the letter of credit to 60 days. He acknowledged that the State needs assurance that if Tesoro defaults there is a ship to carry the oil. In response to a question by Representative Navarre, Mr. Smith noted that Tesoro would be required to pay within a three working days after billing. He emphasized that Tesoro has never failed to make a payment to the State. Representative Navarre maintained that the lengthening of the letter of credit puts Tesoro at risk by reducing their capital availability. 4 Mr. Tillinghouse noted that Mapco receives state royalty oil without posting a letter of credit. He emphasized that the additional banking costs will be $156.0 thousand dollars a year and will tie up $8 to $9 million dollars. Representative Navarre stressed that the State is well protected by the contract. Representative Brown asked if Tesoro has ever failed to take delivery of the oil. Mr. Smith could not recall any time Tesoro failed to take delivery. Mr. Tillinghouse pointed out that Tesoro is obligated for the oil regardless of their ability to take delivery. Tesoro would have to give the State six months notice to not take delivery. Mr. Smith anticipated that Tesoro will be able to use all the crude available. Mr. Tillinghouse added that if Tesoro gives six months notice on their inability to take delivery they would be assessed a penalty. Mr. Smith expressed confidence that Tesoro can maintain the terms of the contract. In response to a question by Representative Brown, Commissioner Shively stated that a competitive bid was not considered. He noted that the State is considering a competitive sale in the future. He emphasized that Tesoro provides the State with economic benefits as an in state producer. Mr. Bernie clarified that Tesoro is seeking a long term contract. Representative Navarre commended Tesoro in their success in Alaska. He MOVED to report HB 320 out of Committee with individual recommendations and with the accompanying fiscal notes. HCS CSSB 135 (FIN) was reported out of Committee with "no recommendation" and with three fiscal impact notes; one by the Department of Revenue, dated 3/30/95; one by the Department of Public Safety, dated 3/30/95; and one by the Department of Education, dated 4/11/95; and with two zero fiscal notes; one by the Department of Corrections, dated 3/30/95; and one by the Department of Law, dated 4/11/95.