Legislature(1995 - 1996)

04/27/1995 08:35 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
  HOUSE BILL NO. 320                                                           
                                                                               
       An Act approving the  sale of Prudhoe Bay  Unit royalty                 
                                                                               
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       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                 
                                                                               
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  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.                                                        
                                                                               
                                                                               
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  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.                    

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