Legislature(2013 - 2014)HOUSE FINANCE 519

04/08/2013 08:00 AM House FINANCE

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+ Bills Previously Heard/Scheduled 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                                                                       
   · August 13, 2012 Informal Solicitation of Interest sent                                                                     
        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                                                                     
        · 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                                                                         
        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                                                                        
   · 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                                                                      
             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                                                                          
     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                                                                    
        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                                                                        
     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                                                                           
   · 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                                                                     
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                                                                        
9:39:55 AM                                                                                                                    
Mr. Balash discussed slide 14: "FHR's North Pole Refinery."                                                                     
   · Strategically located on Trans-Alaska Pipeline System                                                                      
   · 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                                                                      
   · 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                                                                    
9:42:30 AM                                                                                                                    
Mr. Balash discussed slide 16: "Proposed Contract                                                                               
   · 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                                                                    
        o Sustain $100 million in annual earnings in FNSB                                                                       
        o Provide  socio-economic  stability against  energy                                                                    
Mr. Balash discussed slide 17: "Projected Impacts if not                                                                        
   · 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                                                                    
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                                                                    
Mr. Balash  replied that the refinery  produced a tremendous                                                                    
amount  of  jet  fuel,  but  he was  unaware  of  the  avgas                                                                    
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                                                                    
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                                                                    
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).                                                                                                                

Document Name Date/Time Subjects
HB 63 Audit Response.pdf HFIN 4/8/2013 8:00:00 AM
HB 63
Audit Report Digest.pdf HFIN 4/8/2013 8:00:00 AM
HB 63
Full Audit Report Bar Association.pdf HFIN 4/8/2013 8:00:00 AM
HB 63
HB063-NEW FN-OOG-EO-2-23-13.pdf HFIN 4/8/2013 8:00:00 AM
HB 63
HB63 Public Testimony--Thomas Obermeyer.pdf HFIN 4/8/2013 8:00:00 AM
HB 63
CSHB 102 (L&C) Letters of Support.pdf HFIN 4/8/2013 8:00:00 AM
HB 102
CSHB 102 (L&C) Sectional Analysis.pdf HFIN 4/8/2013 8:00:00 AM
HB 102
CSHB 102 (L&C) Summary of all Changes.pdf HFIN 4/8/2013 8:00:00 AM
HB 102
HB 102 Leg Legal Memo.pdf HFIN 4/8/2013 8:00:00 AM
HB 102
HB 102 Sponsor Statement.pdf HFIN 4/8/2013 8:00:00 AM
HB 102
HB 102 Supporting Document--American Bar Association All About Trusts.pdf HFIN 4/8/2013 8:00:00 AM
HB 102
HB 102 Supporting Documents Contracts Clause Issue.pdf HFIN 4/8/2013 8:00:00 AM
HB 102
HB 102 Supporting Documents Single Subject Rule.pdf HFIN 4/8/2013 8:00:00 AM
HB 102
HB 195 - Sectional Analysis.pdf HFIN 4/8/2013 8:00:00 AM
HB 195
HB195-NEW FN ACS-000-04-02-13.pdf HFIN 4/8/2013 8:00:00 AM
HB 195
HB 195 - Transmittal Letter.pdf HFIN 4/8/2013 8:00:00 AM
HB 195
HB 195 - Sectional Analysis.pdf HFIN 4/8/2013 8:00:00 AM
HB 195
HB195 NEW FN Leg 4-3-13 LFD.pdf HFIN 4/8/2013 8:00:00 AM
HB 195
SB 86 DNR FHR PBIF Presentation 4-8-13.pdf HFIN 4/8/2013 8:00:00 AM
SB 86
Final BIF FHR 3-25-13.pdf HFIN 4/8/2013 8:00:00 AM
SB 86
SB 86 Transmittal Letter.pdf HFIN 4/8/2013 8:00:00 AM
SB 86
SB 2 - IMCC Annual Report 2011.pdf HFIN 4/8/2013 8:00:00 AM
SB 2
SB 2 - IMCC Membership 2013.pdf HFIN 4/8/2013 8:00:00 AM
SB 2
SB 2 - IMCC Dues Assessments 2014 and 2015.pdf HFIN 4/8/2013 8:00:00 AM
SB 2
SB 2 - IMCC Welcome.pdf HFIN 4/8/2013 8:00:00 AM
SB 2
SB 2 - Letters of Support H FIN.pdf HFIN 4/8/2013 8:00:00 AM
SB 2
SB 2 - Sectional.pdf HFIN 4/8/2013 8:00:00 AM
SB 2
SB 2 - Sponsor Statement.pdf HFIN 4/8/2013 8:00:00 AM
SB 2
DOA_SB95- HB 195_BillOverview(April2013).pdf HFIN 4/8/2013 8:00:00 AM
HB 195
SB 95
SB 24 House Finance Committee Hearing packet.pdf HFIN 4/8/2013 8:00:00 AM
SB 24
SB 2 - IMCC Testimony on AK SB 2 -- House Finance (2).pdf HFIN 4/8/2013 8:00:00 AM
SB 2