Legislature(2013 - 2014)BARNES 124

04/16/2014 01:00 PM House RESOURCES

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01:06:30 PM Start
01:06:53 PM HCR22
02:12:31 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved CSHCR 22(RES) Out of Committee
-- Public Testimony --
                   HCR 22-IN-STATE REFINERIES                                                                               
1:06:53 PM                                                                                                                    
CO-CHAIR SADDLER  announced that  the only  order of  business is                                                               
HOUSE CONCURRENT RESOLUTION  NO. 22, Urging the  governor to take                                                               
all action necessary  to keep in-state oil  refiners in operation                                                               
and to keep oil refining operations in the state competitive.                                                                   
1:07:24 PM                                                                                                                    
CO-CHAIR FEIGE  moved to adopt the  proposed committee substitute                                                               
(CS),  Version  28-LS1536\C,  Bullock, 4/16/14,  as  the  working                                                               
REPRESENTATIVE SEATON objected for explanation of the changes.                                                                  
1:07:53 PM                                                                                                                    
REPRESENTATIVE T.  WILSON, Alaska  State Legislature,  as sponsor                                                               
of HCR 22,  explained the changes made in  the proposed committee                                                               
substitute.  She  said Version C removes  the sulfolane provision                                                               
because  the legal  appeal of  this issue  has changed  since the                                                               
committee last heard  HCR 22.  While the  resolution mentions the                                                               
problems of the Flint Hills  and Petro Star refineries, Version C                                                               
speaks more  to it being  an in-state refinery issue  rather than                                                               
an Interior refinery issue.   The resolution would direct some of                                                               
the major  issues being faced  right now, the quality  bank being                                                               
one of  those.  Although the  quality bank is run  by the federal                                                               
government, the  State of  Alaska receives  some of  those funds.                                                               
Alaska North Slope  (ANS) oil is about $6 a  barrel more than the                                                               
[West Texas Intermediate  (WTI)] price.  This big  gap results in                                                               
Alaska's crude starting out higher,  so for some facilities there                                                               
is a  very high energy  cost for  refining.  Version  C addresses                                                               
more of  what the administration needs  to do so that  during the                                                               
interim a look can be taken at what other things can be done.                                                                   
1:09:49 PM                                                                                                                    
REPRESENTATIVE  SEATON removed  his  objection.   There being  no                                                               
further objection, Version C was before the committee.                                                                          
1:10:30 PM                                                                                                                    
JOE BALASH, Commissioner, Department  of Natural Resources (DNR),                                                               
noted that  some of the  issues have  been worked on  since Flint                                                               
Hills announced last  February that it is closing its  doors.  In                                                               
particular,  a subset  of the  governor's cabinet  has been  very                                                               
actively  working the  sulfolane  issues with  regard to  cleanup                                                               
standards  of the  Department of  Environment Conservation  (DEC)                                                               
and the  issues associated with  the responsibility  for cleanup.                                                               
Some  of the  issues identified  in the  original version  of the                                                               
resolution have therefore fallen  away.  The administration would                                                               
like  to see  expeditious handling  of the  quality bank  dispute                                                               
that  is  ongoing at  the  Federal  Energy Regulatory  Commission                                                               
(FERC)  because it  is  a  critical step  to  keeping Petro  Star                                                               
operating.    A pair  of  pipelines  runs from  the  Trans-Alaska                                                               
Pipeline  System (TAPS)  to both  the Flint  Hills and  the Petro                                                               
Star  facilities.   The  revenue  requirement  for that  pipeline                                                               
system in  2013 was about  $4.5 million.   The split in  the load                                                               
between  the two  facilities was  85 percent  Flint Hills  and 15                                                               
percent Petro Star.   This year that revenue  requirement is very                                                               
likely to be  much larger for Petro Star and  will be even larger                                                               
in 2015 when Petro Star is the sole customer of that pipeline.                                                                  
COMMISSIONER  BALASH said  the administration's  approach on  the                                                               
quality bank  dispute is one where  the state has an  interest in                                                               
ensuring  that the  value of  the crude  oil that  goes into  the                                                               
system  at  the  top  is  accurately  reflected  in  the  royalty                                                               
payments received by  the state.  However, an  imbalance in these                                                               
in-state  charges  would  cause   the  state  to  be  benefitting                                                               
disproportionately than  any other  party, so  the state  has the                                                               
most to gain  or lose in such  a resolution.  He said  HCR 22 has                                                               
been  redrafted with  key points  to:   1) address  the statewide                                                               
perspective that  the co-chairs had expressed  interest in during                                                               
the first  hearing; and 2)  give some very specific  direction to                                                               
the  administration on  seeking  resolution of  the quality  bank                                                               
matters in front of  FERC by the first of next  year.  Given that                                                               
this is  a communication  from the  legislature to  the executive                                                               
branch, a concurrent  resolution is the appropriate  vehicle.  He                                                               
said he  feels a  little conspicuous in  that this  message urges                                                               
the governor and  the attorney general to seek  resolution, so he                                                               
would  be happy  to have  DNR added  if the  committee thinks  it                                                               
appropriate because of the royalty interest affected.                                                                           
1:14:33 PM                                                                                                                    
REPRESENTATIVE  SEATON drew  attention to  the whereas  clause on                                                               
page  2, lines  9-11,  of the  CS regarding  the  higher cost  in                                                               
Alaska of obtaining crude.  Noting  there has been talk about the                                                               
price differential between Brent Crude  and WTI, he asked whether                                                               
adopting something  that says "we are  going to sell some  of our                                                               
oil  at  WTI" would  cause  problems  in negotiating  prices  for                                                               
selling the rest of Alaska's crude.   He inquired how selling in-                                                               
state at one price and selling  out of state at another price can                                                               
be handled  so it does  not become  a liability for  lowering the                                                               
price of all Alaska crude.                                                                                                      
COMMISSIONER  BALASH replied  this point  was considered  earlier                                                               
this year.   When the closing of Flint Hills  was announced, [the                                                               
administration]  began conversations  with  Petro  Star and  gave                                                               
hard  consideration to  selling royalty  oil to  Petro Star  at a                                                               
discounted price,  but federal constitutional concerns  kept [the                                                               
administration] from exercising that option.   So, Version C does                                                               
not urge the  administration to sell royalty oil  at a discounted                                                               
price.   Currently,  imported jet  fuel is  effectively competing                                                               
against Alaska's  in-state refined  products, which is  putting a                                                               
lot of  the negative  pressure on overall  cash flow  and balance                                                               
sheets in  this state.   This Whereas  clause calls out  that the                                                               
price  differential  and the  quality  bank  charges are  causing                                                               
competitive   problems    for   in-state   refineries    and   is                                                               
substantiation for the resolve clause on page 2, lines 22-25.                                                                   
1:17:25 PM                                                                                                                    
CO-CHAIR FEIGE asked whether the  competing import is coming from                                                               
the US  West Coast  or Asia.   While the  [current] WTI  price is                                                               
about $6 below ANS crude,  that difference has been narrowing, he                                                               
related.  At  one point the WTI was significantly  lower than ANS                                                               
crude, but the WTI price has been gradually coming up.                                                                          
COMMISSIONER  BALASH responded  correct, saying  the differential                                                               
at one point  was in excess of $15 per  barrel, but more recently                                                               
it was  in the range of  $10 per barrel,  and right now it  is in                                                               
the  single  digits, which  is  good.   In  the  long  run it  is                                                               
believed there  will be  a return to  normalcy wherein  ANS crude                                                               
will price  similar to  WTI.   It is thought  that will  occur as                                                               
infrastructure moves more mid-continent oil  to the west and east                                                               
coasts and becomes part of  the fungible liquid market that crude                                                               
oil  trades in.    Regarding the  sources of  jet  fuel that  are                                                               
competing in  Alaska, he  said some  is from  the West  Coast and                                                               
some from overseas refineries.   Those overseas refineries get to                                                               
bring in  their product on  non-Jones Act vessels and  West Coast                                                               
refineries come in  on Jones Act vessels, so  Alaska is primarily                                                               
seeing stronger competition from those overseas outlets.                                                                        
1:19:34 PM                                                                                                                    
REPRESENTATIVE TARR related an article  in Petroleum News for the                                                             
week  of  2/16/14 reports  that  the  Flint Hills  complaint  was                                                               
dismissed and  an independent investigation  is being done.   She                                                               
understood  the goal  in  passing HCR  22 is  to  send a  message                                                               
regarding the independent investigation.                                                                                        
COMMISSIONER BALASH  believed this  correct.  He  understood that                                                               
the  specific complaint  and  remedy sought  by  Flint Hills  was                                                               
dismissed   by  an   administrative  law   judge  (ALJ)   and  an                                                               
investigation was underway, potentially  an action.  Exactly what                                                               
happens next  depends on  the full commission,  he said,  not the                                                               
ALJ decision.   Procedurally this  will spin out for  many months                                                               
if not years.  Since waiting  years cannot be afforded, seeking a                                                               
settlement by  the parties  is one way  to circumvent  that clock                                                               
and hopefully get a fair resolution sooner rather than later.                                                                   
1:21:13 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI  inquired  what  the  sponsor  means  by                                                               
"settlement and resolution" as stated on page 2, line 23.                                                                       
REPRESENTATIVE T. WILSON replied she  wants to ensure [the state]                                                               
is sitting  at the  table and  being proactive,  whether it  is a                                                               
settlement or a  resolution.  While she is unsure  what the state                                                               
can do at  this point, she does know the  state benefits from the                                                               
quality bank and  can therefore be part of  the conversation that                                                               
is currently ongoing.  So, it leaves the options open.                                                                          
REPRESENTATIVE KAWASAKI  asked what Commissioner Balash  thinks a                                                               
"settlement and resolution" is, as defined in the resolution.                                                                   
COMMISSIONER  BALASH responded  settlement suggests  a conclusion                                                               
will be  reached on  this matter sooner  than would  the process.                                                               
Procedurally, something  like this could take  upwards of another                                                               
18  months.   [The administration]  does  not think  that is  the                                                               
right  timeframe in  which to  get  a decision  and ultimately  a                                                               
resolution of this  matter.  A methodology is being  sought to be                                                               
employed in the quality bank for  points south of Pump Station 1,                                                               
so that  Alaska's in-state  refineries are  not paying  more than                                                               
they ought  to for the degradation  of the crude oil  stream that                                                               
results from their refining processes.                                                                                          
1:23:10 PM                                                                                                                    
REPRESENTATIVE KAWASAKI inquired whether  the state has argued to                                                               
the  point at  which there  is a  number in  place or  a type  of                                                               
valuation system in  place from which to go forward.   He said he                                                               
is unsure  about the process  at FERC and  how that works  and is                                                               
therefore confused with what the resolution does.                                                                               
COMMISSIONER  BALASH replied  the quality  bank is  a complicated                                                               
system  intended   to  keep   all  parties   economically  whole.                                                               
Production on the North Slope  includes multiple fields that have                                                               
multiple  varieties and  qualities of  crude.   For example,  the                                                               
crude produced  at Alpine  is extremely high  quality and  is the                                                               
most valuable  crude produced  on the North  Slope.   However, to                                                               
get to  market, that  oil must  go into TAPS  where it  joins the                                                               
slop  from  Milne, which  has  a  much lower  American  Petroleum                                                               
Institute (API) gravity.   The idea is that  everybody is getting                                                               
the  same  quality crude  down  at  the Valdez  Marine  Terminal.                                                               
Those  who  bring higher  quality  crude  to  the table  at  Pump                                                               
Station 1  are being harmed  economically and those  bringing the                                                               
lower  quality  crude  are  benefitting.   The  quality  bank  is                                                               
supposed to be a system where  the low quality players pay in and                                                               
the  high  quality  payers take  out,  keeping  everything  even.                                                               
Taking that  a step further,  when the refineries in  Alaska pull                                                               
the crude off of TAPS, take  out the high-end products of diesel,                                                               
home heating fuel,  and gasoline, and put the  residual back into                                                               
TAPS,  they have  degraded that  stream further,  only they  have                                                               
degraded it for all of the other  players in the system.  So, the                                                               
bank system uses a formula  that looks at the specific components                                                               
of the  crude stream and  the market values associated  with each                                                               
of those  components.  The  refineries contend that  the specific                                                               
formula  and pricing  mechanisms are  out of  balance and  do not                                                               
reflect the  market realities,  especially on  the West  Coast in                                                               
which these particular  barrels are being traded;  that they have                                                               
been contaminated, if  you will, by pricing  metrics and formulas                                                               
that are  more relevant  to the mid-continent  where the  glut is                                                               
taking place.   The administration's goal  is to see that  a fair                                                               
system  be in  place.   The administration  wants to  protect the                                                               
state's interest, the state's value, in  the crude that is put in                                                               
at  the North  Slope.   To the  extent that  the quality  bank is                                                               
extracting more  than it  should from  the refineries,  the state                                                               
treasury is benefitting to the tune  of 40 or 50 percent of those                                                               
overcharges  into  the quality  bank.    That  is caused  by  two                                                               
things.   First is the  state's royalty interest at  12.5 percent                                                               
and second  is the  state's marginal tax  rate on  production tax                                                               
value,  which  is  35  percent of  the  remaining  87.5  percent.                                                               
Altogether, [the  state] is somewhere  between 45 and  50 percent                                                               
of the benefit that might be  paid into the quality bank by these                                                               
refineries.    [The administration]  pegs  that  total impact  at                                                               
around $50 million for 2013.                                                                                                    
1:27:52 PM                                                                                                                    
CO-CHAIR SADDLER  observed Version C  states on page 1,  line 12,                                                               
that the refineries  change the temperature of the  crude in TAPS                                                               
by adding  heat.  He  asked whether  the quality bank  or another                                                               
factor  accounts for  that differential  in  temperature and  the                                                               
benefit to the state.                                                                                                           
COMMISSIONER  BALASH answered  he  does not  believe the  quality                                                               
bank specifically recognizes that  value, but he understood there                                                               
is  a least  one commercial  agreement in  which the  TAPS owners                                                               
compensate a refinery for the heat returned to the pipeline.                                                                    
1:28:27 PM                                                                                                                    
REPRESENTATIVE  SEATON,  regarding  the $4.5  million  [cost  for                                                               
getting oil  to the Petro  Star refinery], inquired who  owns the                                                               
pipeline and who gets that money.                                                                                               
COMMISSIONER BALASH responded  Golden Valley Electric Association                                                               
owns  that pipeline.   Because  it is  a regulated  facility, the                                                               
association receives a return on  its original cost plus a little                                                               
bit of profit.                                                                                                                  
REPRESENTATIVE SEATON asked whether that  is calculated on a per-                                                               
barrel basis or on the investment and costs.                                                                                    
COMMISSIONER BALASH  understood there  is a  revenue requirement,                                                               
meaning there  is an  annual allocation  for depreciation  of the                                                               
original investment made by Golden  Valley, plus a return and the                                                               
variable operating  costs, which adds  up to $4.5 million.   That                                                               
$4.5 million is recovered as the  cost of service.  The number of                                                               
barrels going through  can vary, so the charge might  be a little                                                               
higher or  lower in any given  year depending upon the  demand of                                                               
the refineries.  With Flint Hills  going from a very large number                                                               
to zero  in the  second half  of 2014,  the per-barrel  charge to                                                               
Petro Star is going to go up by a rather large percentage.                                                                      
1:30:22 PM                                                                                                                    
CO-CHAIR FEIGE inquired whether the  formula for the quality bank                                                               
is a national formula or an Alaska-specific formula.                                                                            
COMMISSIONER BALASH  understood there  are various  components of                                                               
the formula,  or products.   Pricing for  some of  those products                                                               
relies on national indices as opposed to West Coast indices.                                                                    
CO-CHAIR FEIGE  asked what  the cost  would be  for the  state to                                                               
purchase the pipeline from Golden Valley Electric Association.                                                                  
COMMISSIONER BALASH responded he has not inquired.                                                                              
CO-CHAIR FEIGE remarked it was just a random thought.                                                                           
1:31:24 PM                                                                                                                    
REPRESENTATIVE TARR  understood the original resolution  was more                                                               
specific to resolving the issue  at Flint Hills whereas Version C                                                               
addresses things in  a more comprehensive way by  focusing on how                                                               
the quality bank methodology impacts in-state refineries.                                                                       
REPRESENTATIVE  T. WILSON  replied it  was two  things.   One was                                                               
reacting to  the closure  of Flint Hills  and whether  there were                                                               
more actions that  could be taken immediately to  find someone to                                                               
buy the refinery sooner rather  than later.  The refinery portion                                                               
of the  facility is currently set  to close June 1,  2014.  Since                                                               
then, it  has come  to light  that Flint Hills  is not  seeking a                                                               
buyer  for the  refinery and  will instead  be importing  refined                                                               
product and  selling it  through the  refinery for  the Interior.                                                               
The refinery  also supplies  the Anchorage  airport and  will now                                                               
import that fuel directly to the  airport, which cuts down on the                                                               
refinery's transportation costs.   How Petro Star  is reacting to                                                               
this  was also  looked at.    Normally when  a competitor  closes                                                               
there is  opportunity for  that other entity,  but here  there is                                                               
not  because  [Flint  Hills] plans  on  meeting  its  obligation.                                                               
Thus, there have been no new  contracts for Petro Star to be able                                                               
to take  advantage of and now  it is being asked  to compete with                                                               
an import business.   The question is what the  problem really is                                                               
and  why there  is this  unevenness as  far as  competition goes.                                                               
The  quality bank  rose  to the  top  because it  is  one of  the                                                               
biggest payments, as  is the payment for the  two [Golden Valley]                                                               
pipelines.   Another payment  is the  railroad since  Flint Hills                                                               
was the  major entity.   Thus, Version C is  not as broad  as the                                                               
original resolution  and is saying [for  the state] to be  at the                                                               
table and to do something now to prevent closing.                                                                               
1:34:59 PM                                                                                                                    
REPRESENTATIVE SEATON  recalled that  in the TAPS  settlement the                                                               
state  got  stuck  losing  about  $6 billion  because  it  was  a                                                               
settlement and therefore  the state could not change it.   As was                                                               
stated  by the  commissioner, the  situation has  changed because                                                               
the  Brent crude  and WTI  "are quite  different the  other way."                                                               
When  prior   administrations  were   thinking  about   making  a                                                               
settlement they  were not trying  to create a large  windfall for                                                               
other companies at a  loss to the state.  If  the state pursues a                                                               
settlement  in this  issue,  the legislature  will  not have  any                                                               
impact on  it and will  be unable to  change the settlement.   He                                                               
inquired how the long-term financial  health of the state will be                                                               
protected given the resolution is open ended.                                                                                   
COMMISSIONER BALASH observed  the language in Version  C, page 2,                                                               
lines 23-24, states  "to seek a settlement and  resolution ... in                                                               
a  manner that  will provide  long-term quality  bank stability".                                                               
For something to  be stable over the long term,  he said, it must                                                               
be fair  to all parties and  may require adjustment from  time to                                                               
time.   Adjustment could  be a  broad re-opener  or simply  a re-                                                               
calibration of some  of the indices or  pricing mechanisms within                                                               
the quality  bank itself.  He  imagined it could work  similar to                                                               
how  the state's  royalty settlement  agreements function,  which                                                               
have big broad re-openers every 10  years or so, but specific re-                                                               
openers   every   couple  of   years   on   things  like   marine                                                               
transportation.   These agreements  are on a  three-year rotation                                                               
so only one  per year is dealt with.   He said the aforementioned                                                               
is how he would interpret the direction being given here.                                                                       
1:38:22 PM                                                                                                                    
REPRESENTATIVE  SEATON noted  the  language  also states  "before                                                               
January 1,  2015".  He  expressed concern  that there will  be no                                                               
involvement  by the  legislature for  ratification or  agreement.                                                               
The  resolution   calls  for  the  administration   to  negotiate                                                               
something to keep  somebody in business.  He said  this is almost                                                               
a  legislative appropriation  because it  is talking  about money                                                               
that the  state is not  going to have,  given the $50  million in                                                               
the quality  bank may  possibly be reduced  by an  unknown amount                                                               
for a  long time or  perhaps permanently.   Plus, it is  not just                                                               
one refinery,  it is all  refineries.  He  requested Commissioner                                                               
Balash  to   address  whether  legislative  approval   should  be                                                               
COMMISSIONER BALASH  answered if the two  remaining refineries on                                                               
TAPS were to shut down the  state would not receive that monetary                                                               
benefit anymore anyway.  He pointed  out that the nature of state                                                               
government settlements  is that they  generally do not  come back                                                               
to the legislature  for approval or ratification.  If  there is a                                                               
transfer  of  value  or  payment  required  by  the  state,  then                                                               
typically those require  an appropriation to support  them and he                                                               
cannot imagine a scenario where that  would be the case.  January                                                               
1, 2015,  would be taken by  the administration as a  very strong                                                               
suggestion but not  a requirement.  Many other  parties are being                                                               
dealt with  in this case, so  even if the state  has some urgency                                                               
those parties  will not necessarily  have the same urgency.   The                                                               
overarching message in the resolution is  "to get with it and try                                                               
to get done  because of the impact it is  having on the remaining                                                               
refineries."    He  believed  the cycle  for  annual  renewal  of                                                               
purchase contracts for  crude oil occurs at the end  of the first                                                               
quarter  each year,  so trying  to target  that timeframe  in the                                                               
calendar  would be  most  helpful for  the  decisions that  those                                                               
operations would need to make.                                                                                                  
1:42:02 PM                                                                                                                    
CO-CHAIR  SADDLER expressed  his support  for the  goals of  this                                                               
resolution.   He said  there is a  compelling interest  to ensure                                                               
that there is refining capacity  for providing jet fuel to supply                                                               
the military bases, as well as to supply the Interior.                                                                          
1:42:37 PM                                                                                                                    
CO-CHAIR SADDLER moved to adopt Amendment 1 as follows:                                                                         
     Page 1, line 1, after "governor":                                                                                          
       Insert "commissioner of the department of natural                                                                        
     Page 2, line 22, after "governor"                                                                                          
       Insert "commissioner of the department of natural                                                                        
There being no objection, Amendment 1 was adopted.                                                                              
CO-CHAIR SADDLER passed the gavel to Co-Chair Feige.                                                                            
1:43:19 PM                                                                                                                    
REPRESENTATIVE  T.  WILSON,  addressing  Representative  Seaton's                                                               
earlier question,  agreed the monies  that come to the  state are                                                               
important.  However,  in her opinion, the  reason legislators are                                                               
sitting here today  is due to the state's actions  to ensure that                                                               
the biggest bang for the buck comes  to the state.  A royalty oil                                                               
contract ended up  not being the best for the  entity it went to;                                                               
it did not keep that entity  economical so that entity then found                                                               
a different way  to be able to still get  contracts and therefore                                                               
closed  [its refinery].   The  question is  how important  an in-                                                               
state refinery is  to the State of Alaska.   Given military bases                                                               
and security  reasons, does  Alaska really want  to be  an import                                                               
state?  Does  Alaska want to export all of  its resources just to                                                               
import the rest of it?   She understood not wanting to give money                                                               
away, but said the state is  losing in the meantime because it is                                                               
so  focused on  that bottom  dollar for  state government  at the                                                               
expense of others.  If both  refineries stay open, the state will                                                               
be good.   If  one closes  and there is  just the  import, prices                                                               
will stay  low for  a while  but eventually  the price  will rise                                                               
because there is only "one game  in town."  It is unknown whether                                                               
the  state will  get  back  this lost  industry  and  it must  be                                                               
ensured that no more is lost.                                                                                                   
1:45:34 PM                                                                                                                    
REPRESENTATIVE SEATON said  he wants to ensure this  is looked at                                                               
holistically.   The railroad  has had a  hard problem  because of                                                               
the lack of  refining and the fuel being  imported for Anchorage.                                                               
Care  must  be  taken  by  the  legislature  to  not  get  inside                                                               
businesses to make them profitable  only to have them turn around                                                               
and  import  outside  fuel  anyway because  it  is  cheaper  than                                                               
retooling  the refinery.   He  emphasized he  is not  against in-                                                               
state refining,  he is always for  in-state value-added products,                                                               
but  the  question here  is  how  to get  there.    As he  stated                                                               
earlier,  he is  worried about  settlements and  the state  being                                                               
stuck for years.  The TAPs settlement  was a loss to the state of                                                               
at least  $6 [billion].   He suggested  that "settlement  and" be                                                               
deleted  from page  2, line  23, and  that only  a resolution  be                                                               
sought to  avoid possible problems  with seeking a  settlement in                                                               
which the legislature  is not involved.  He  inquired whether the                                                               
sponsor and commissioner would be comfortable with including re-                                                                
openers for a  settlement or leaving out the  settlement and just                                                               
calling for a resolution.                                                                                                       
The committee took an at-ease from 1:47 p.m. to 1:49 p.m.                                                                       
1:49:27 PM                                                                                                                    
REPRESENTATIVE SEATON moved to adopt Amendment 2 as follows:                                                                    
     Page 2, line 23, after "a":                                                                                                
          Delete "settlement and"                                                                                               
There being no objection, Amendment 2 was adopted.                                                                              
1:50:00 PM                                                                                                                    
REPRESENTATIVE  JOHNSON suggested  the word  "a" be  removed from                                                               
page 2, line 23, because there may be more than one resolution.                                                                 
REPRESENTATIVE  T.  WILSON  agreed this  suggestion  makes  sense                                                               
because tying the hands of DNR  or the governor is not wanted and                                                               
the date  of 1/1/15  is included  because it  needs to  be sooner                                                               
rather than later since later may not make a difference.                                                                        
1:50:45 PM                                                                                                                    
REPRESENTATIVE JOHNSON moved to adopt Amendment 3 as follows:                                                                   
     Page 2, line 23, after "seek":                                                                                             
          Delete "a"                                                                                                            
There being no objection, Amendment 3 was adopted.                                                                              
1:51:05 PM                                                                                                                    
REPRESENTATIVE HAWKER  stated that in accepting  Amendments 2 and                                                               
3, the  word "seek" has  no connotation of finding  a conclusion;                                                               
"seek" is to  look for.  The language "seek  resolution" does not                                                               
preclude resolving and settling the issues that are in play.                                                                    
CO-CHAIR FEIGE  observed committee  members nodding  their heads.                                                               
He invited a  representative of Petro Star  [an in-state refiner]                                                               
to provide testimony.                                                                                                           
1:52:45 PM                                                                                                                    
DOUG  CHAPADOS, President/CEO,  Petro Star  Inc., testified  that                                                               
while Petro Star  has made payments to the quality  bank prior to                                                               
nine years  ago, is has paid  over half a billion  dollars to the                                                               
quality bank during the past nine  years, and half of that amount                                                               
was paid in  the last three years.   He said he  is pointing this                                                               
out to  identify that the  quality bank  is getting worse  at the                                                               
same time  that Petro Star's  market conditions are  also getting                                                               
worse.  The quality bank is  currently taking a larger and larger                                                               
portion  of the  gross margins  between the  products that  Petro                                                               
Star  refines and  sells and  the raw  materials it  purchases to                                                               
produce  those.   For example,  during the  month of  March there                                                               
were times when  Petro Star's raw material cost  for Alaska North                                                               
Slope (ANS) crude oil, plus  quality bank, exceeded the delivered                                                               
cost of jet fuel to the Port  of Anchorage.  This suggests to him                                                               
that jet fuel  has more value mixed in with  the crude oil stream                                                               
than it does after Petro Star has  refined it and moved it to the                                                               
ultimate end  user.   This situation  is strangling  Petro Star's                                                               
business.   Petro  Star used  to  be able  to make  a very  small                                                               
profit on  very large volumes of  jet fuel, but today  that is no                                                               
longer the case and every gallon  is typically selling at a loss.                                                               
The quality  bank is  one reason  for that and  the other  is the                                                               
very  high cost  of  ANS crude  oil; HCR  22  addresses only  the                                                               
quality bank.                                                                                                                   
MR. CHAPADOS  noted committee members  are recognizing  that this                                                               
is not just a single impact to  a single refiner; it has a ripple                                                               
effect  throughout the  economy.   The  railroad is  experiencing                                                               
some difficulties given the smaller  volumes that are moving from                                                               
North Pole to  the Anchorage market.  Given  its current economic                                                               
circumstance, Petro  Star has  put a project  on hold  that would                                                               
ship  product by  railroad from  both its  North Pole  and Valdez                                                               
refineries.   The  quality bank  getting worse  at the  same that                                                               
Petro  Star's market  is getting  worse is  something that  Petro                                                               
Star cannot control.   The complaint filed by Flint  Hills goes a                                                               
long way toward  addressing what Petro Star sees as  the flaws in                                                               
the current quality bank methodology  and is something Petro Star                                                               
believes forms the  basis of what might be  a settlement position                                                               
in the future.                                                                                                                  
1:56:23 PM                                                                                                                    
REPRESENTATIVE  SEATON  reiterated  his concern  about  the  past                                                               
settlement that occurred for a  certain set of circumstances, but                                                               
then the circumstances changed and  caused a loss for many years.                                                               
He  inquired whether  Mr. Chapados  will be  looking at  a system                                                               
that is self-correcting for variables or that has a re-opener.                                                                  
MR.  CHAPADOS replied  the quality  bank  is intended  to have  a                                                               
self-correcting process; it values  the various components within                                                               
the  crude  oil or  values  according  to market  conditions  and                                                               
pricings in many  cases.  The basis of the  Flint Hills complaint                                                               
addresses the  valuation for  one of  those components  that does                                                               
not have a market price index  and so uses a very complex formula                                                               
for  a  determination.    Petro Star  supports  the  Flint  Hills                                                               
complaint  which sought  to change  that and  which has  now been                                                               
turned  into an  investigation  by FERC.   He  said  he thinks  a                                                               
settlement can  be struck  that is equitable  to all  parties and                                                               
that corrects  what Petro  Star sees  as a  flaw in  the existing                                                               
quality  bank  methodology and  that  would,  at the  same  time,                                                               
preserve Petro Star's ability to make  a profit on the gallons it                                                               
refines as  well as appropriately  compensate shippers  for Petro                                                               
Star degrading their  crude oil by re-injecting  streams from the                                                               
refinery after the processing.                                                                                                  
1:59:09 PM                                                                                                                    
REPRESENTATIVE  SEATON  asked how  this  would  impact the  other                                                               
refineries in the state.                                                                                                        
MR. CHAPADOS  answered the other  refinery similarly  situated to                                                               
Petro  Star is  Flint  Hills,  so the  three  refineries are  all                                                               
treated  in the  same  fashion  with respect  to  the return  oil                                                               
streams that the refineries send  back to TAPS.  Tesoro's Nikiski                                                               
refinery  is not  subject to  the quality  bank, but  the quality                                                               
bank is reflected  in the sales price of royalty  crude oil, both                                                               
at the  wellhead and in  terms of royalty-in-kind (RIK)  sales to                                                               
in-state refineries.                                                                                                            
2:00:16 PM                                                                                                                    
CO-CHAIR  FEIGE,  in  an  effort   to  conform  to  the  previous                                                               
amendments, moved to adopt Amendment 4 as follows:                                                                              
     Page 1, line 1, after "seek":                                                                                              
          Delete "a settlement and"                                                                                             
There being no objection, Amendment 4 was adopted.                                                                              
2:01:00 PM                                                                                                                    
CO-CHAIR FEIGE opened public testimony on HCR 22.                                                                               
MERRICK  PEIRCE   testified  regarding  his  concerns   with  the                                                               
original  version  of  HCR  22.   He  said  his  concern  is  the                                                               
sulfolane  issue and  that something  is still  missing from  the                                                               
resolution.  He drew attention to  the "Whereas" on page 2, lines                                                               
1-4, of the original resolution, which states:                                                                                  
          WHEREAS, if the Department of Environmental                                                                           
     Conservation  expeditiously  set a  reasonable  cleanup                                                                    
     standard  supported  by  science for  the  Flint  Hills                                                                    
     Refinery  and  appropriately  allocated  the  costs  of                                                                    
     cleanup to  all potentially responsible parties,  it is                                                                    
     possible that  a new  buyer for  the refinery  could be                                                                    
MR. PEIRCE said  there are two problems with the  clause.  First,                                                               
the  governor  has  already  said he  would  indemnify  a  future                                                               
purchaser  of  the  refinery  for   the  responsibility  for  the                                                               
contamination   issue,   making  the   aforementioned   statement                                                               
illogical.   Second, the  conclusion by  DEC's Division  of Water                                                               
regarding  acceptable  contamination   levels  of  an  industrial                                                               
solvent in  drinking water is in  error and there is  no evidence                                                               
to  support  that conclusion.    Of  main  concern, he  said,  is                                                               
creation of an economic dead  zone in this area of contamination.                                                               
When  two homes  are identical  in price  and size,  but one  has                                                               
contaminated drinking  water and  the other  does not,  which one                                                               
gets sold?   Further, which home  can be financed through  a bank                                                               
mortgage?   New homes will  not be built  here and the  owners of                                                               
existing homes will find it very  difficult to sell and over time                                                               
this  area will  look like  Detroit with  abandoned homes.   This                                                               
final "Whereas" is without merit and he is glad it was pulled.                                                                  
MR. PEIRCE  said he also  has concern  with what is  missing from                                                               
the CS, which is discussion about  what can and should be done to                                                               
improve the  economics of these  refineries.  So far  the Parnell                                                               
Administration has said  it wants to engage  in corporate welfare                                                               
by  throwing hundreds  of millions  of dollars  at these  private                                                               
companies to prop  them up at a time with  the administration has                                                               
created  multi-billion-dollar  deficits.     Rational  discussion                                                               
would  instead  place attention  on  trying  to route  a  gasline                                                               
around  Fairbanks.    Not  routing  the  gasline  down  the  TAPS                                                               
corridor means  it never gets  to Valdez or the  Valdez refinery.                                                               
The  cost of  energy is  a huge  concern for  any refiner  or any                                                               
large  energy user.   Flint  Hills has  publically described  its                                                               
cost of  operation as three  times higher than  other refineries.                                                               
All  refiners,   except  Petro  Star's  North   Pole  and  Valdez                                                               
refineries and Flint Hills' North  Pole refinery, use natural gas                                                               
to  run  process equipment  that  heats  crude to  the  requisite                                                               
temperatures.  A  refinery running on expensive ANS  crude has an                                                               
extreme  disadvantage  against  refineries   that  run  on  cheap                                                               
natural gas;  the difference  is roughly  $4 per  million British                                                               
Thermal Units  (BTUs) for heat versus  $30 per million BTUS.   To                                                               
address this  requires a large-diameter  gasline with  an economy                                                               
of  scale that  can deliver  natural gas  with distance-sensitive                                                               
rates of  around $4  per million  BTUs.   What is  happening with                                                               
these  refineries illustrates  that  Alaska  competes within  the                                                               
world markets.   The  US has three  trade agreements  with twenty                                                               
nations,  so  Alaska   does  not  look  viable   long  term  when                                                               
manufacturers can  access both cheaper energy  and labor overseas                                                               
without  tariff  restrictions.    If  Alaska's  refiners,  mines,                                                               
manufacturing businesses,  and military  bases are to  compete in                                                               
the world  markets, then a  final whereas would be  inserted that                                                               
makes note  of the benefit  of ensuring that these  entities have                                                               
proximate access  to a large-diameter gasline  that parallels the                                                               
TAPS corridor and delivers the lowest possible cost energy.                                                                     
2:05:19 PM                                                                                                                    
CO-CHAIR FEIGE closed public testimony  after ascertaining no one                                                               
else wished to testify.                                                                                                         
REPRESENTATIVE  TARR  noted  she   does  not  disagree  with  the                                                               
contents or problems  stated in Version C, but said  it is a vast                                                               
departure from the  original measure and it would  have been more                                                               
appropriate to do a new resolution.                                                                                             
2:06:12 PM                                                                                                                    
CO-CHAIR FEIGE  opined that keeping  a refining  industry running                                                               
in Alaska has security and strategic  benefits to the state.  For                                                               
example, Russian  tanks surprised Crimean citizens,  and while he                                                               
does  not  know  that  that  could happen  in  Alaska,  it  is  a                                                               
consideration to  always keep in  mind.  If the  sea-borne supply                                                               
routes  to Alaska  are threatened,  either up  the West  Coast of                                                               
North  America  or  across  the   northern  Pacific,  not  having                                                               
refineries could be an extreme  disadvantage to Alaska as well as                                                               
impacting its  economy.   The economic  benefit of  refineries in                                                               
the state is significant, especially  in the Fairbanks area.  The                                                               
arguments regarding  the quality bank  are valid issues  that can                                                               
be  resolved and  this resolution  will  go a  long ways  towards                                                               
helping the  state, industry,  and FERC come  to an  agreement on                                                               
how better to apply the concept of a quality bank.                                                                              
2:07:55 PM                                                                                                                    
REPRESENTATIVE SEATON  agreed that  value-added industry  for the                                                               
state's raw resources is very  beneficial; however, he continued,                                                               
it is a world  economy and it needs to be  ensured that Alaska is                                                               
competitive.  He said he is  happy the resolution does not seek a                                                               
cost differential for in-state because  he believes that would be                                                               
a huge liability  for sales of the state's  crude to out-of-state                                                               
refiners.    The  quality  bank  issues are  a  good  portion  of                                                               
resolving  the problems.   If  Petro Star  does not  have a  heat                                                               
contract  with  Alyeska Pipeline  Service  Company  it should  be                                                               
another element  in addition to  the quality bank  because adding                                                               
heat to the pipeline to keep  TAPS running during the winter is a                                                               
huge  issue  and  has  value   and  ought  to  be  recognized  in                                                               
commercial agreements.  Otherwise,  in-state refineries are being                                                               
asked to subsidize  Alyeska, although the state does  pay part of                                                               
that.  He said he will  be supporting the resolution but does not                                                               
think it is the only mechanism  for getting greater value for in-                                                               
state refineries.                                                                                                               
2:10:21 PM                                                                                                                    
REPRESENTATIVE  HAWKER moved  to  report  the proposed  committee                                                               
substitute  (CS),  Version   28-LS1536\C,  Bullock,  4/16/14,  as                                                               
amended,  out of  committee with  individual recommendations  and                                                               
the accompanying fiscal  notes.  There being  no objection, CSHCR
22(RES)   was  reported   from  the   House  Resources   Standing                                                               

Document Name Date/Time Subjects
HCR 22 CS Work Draft Version C.pdf HRES 4/16/2014 1:00:00 PM
HCR 22