Legislature(2013 - 2014)SENATE FINANCE 532
04/01/2013 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB49 | |
| SB47 | |
| SB86 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 47 | TELECONFERENCED | |
| + | SB 59 | TELECONFERENCED | |
| *+ | SB 86 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| = | SB 49 | ||
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."
10:20:20 AM
JOE BALASH, DEPUTY COMMISSIONER, DEPARTMENT OF NATURAL
RESOURCES, stated that the bill would grant legislative
approval for the sale of royalty oil to Flint Hills
Resources by the Department of Natural Resources (DNR). He
began with Slide 2 of the presentation, "Royalty In-Kind
Sale to Flint Hills Resources" (copy on file):
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.
10:22:13 AM
Mr. Balash spoke to Slide 3, "Non-Competitive RIK Sale
Process":
•Statute presumes State's Best Interest is met by
-Taking royalty in-kind-AS 38.05.182(a)
-With sale to in-state buyer-AS 38.05.183(d)
-Accomplished through a competitive process-AS
30.05.183(a)
•August 13, 2012 Informal Solicitation of Interest
sent to:
-North Slope Producers
-In-state Refiners
-Industry specific & general media
10:24:04 AM
Mr. Balash addressed Slide 4, "RIK Contract Terms":
•Proposed 2013 contract is similar to 2004 contract
•Proposed 2013 contract, like 2004 contract, does not
directly reference RIV valuation in RIK price
calculations
•Key Contract provisions
-Price
-Quantity
-Term
-Special Commitments
-In-State Processing and Local Hire
10:24:59 AM
Mr. Balash discussed 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.
-Reported by industry trade publications: Platts,
Telerate, Reuters
•$2.15 = RIK Differential
-Destination Value - Marine Costs so RIK •5,9
-Subject to a one-time adjustment of no more than
± $0.15 per barrel.
-This amount = $1.65 per barrel in the current
2004 contract.
•Tariff Allowance = TAPS and Pipelines Upstream of PS-
1.
•Quality Bank Adjustment = as reported by the TAPS
Quality Bank Administrator
•Line Loss = 0.0009 times the netback price
10:25:53 AM
Mr. Balash pointed to Slide 6, "RIK Contract Quality":
•Initial Quantity Range
-18,000 - 30,000 barrels per day
-May be adjusted after 12 months, with
Commissioner approval
•Termination of Contract
-No or zero nomination for 3 months terminates
contract
-Contract terms comparable to the private market
•Refinery Turnaround
-Contract allows FHR the flexibility to cease
royalty oil purchases during maintenance
•Guarantees, reserves and proration clauses included
-24,000 barrels per day with 15 percent reserves
for other RIV or RIK interests
10:27:31 AM
Mr. Balash addressed Slide 7, "2013 RIK Contract Term":
•FHR initially sought a ten-year contract
-Creates supply and price risk
-Increases counterparty risk
-Limits the State's ability to supply other RIK
buyers
•DNR negotiated a five year term
-April 1, 2014 to March 31, 2019
-Possible extension condition for:
•Large capital improvement at the North Pole
Refinery
•Binding support for a North Slope natural
gas transportation system
10:29:47 AM
Mr. Balash discussed Slide 8, "2013 RIK Contract Quantity",
which was a bar graph that illustrated the total expected
royalty oil and liquid natural gas volume and the expected
share committed to Flint Hills Resources.
10:30:54 AM
Mr. Balash spoke to Slide 9, "Commissioner's Decision
Criteria":
AS 38.05.183(e) states that the commissioner must sell
the State's royalty oil to the buyer who offers
"maximum benefits to the citizens of the state." In
making this determination the commissioner must
consider:
1)The cash value offered
2)The projected effects of the sale on the
economy of the state
3)The projected benefits of refining or
processing the oil in state
4)The ability of the prospective buyer to provide
refined products for distribution and sale in the
state with price or supply benefits to the
citizens of the state
5)The eight criteria listed in AS38.06.070(a), as
reviewed by the Royalty Board
Mr. Balash addressed Slide 10, "Royalty Board's Decision
Criteria":
AS 38.06.070(a) states that the Alaska Royalty Oil and
Gas Development Advisory Board must consider:
1)The revenue needs and projected fiscal
condition of the state
2)The existence and extent of present and
projected local and regional needs for oil and
gas products
3)The desirability of localized capital
investment, increased payroll, secondary
development and other possible effect of the sale
4)The projected social impacts of the transaction
5)The projected additional costs and
responsibilities which could be imposed upon the
state and affected political subdivisions by
development related to the transactions
10:32:09 AM
Mr. Balash continued with Slide 11, "Royalty Board's
Decision Criteria":
AS 38.06.070(a) states that the Alaska Royalty Oil and
Gas Development Advisory Board must consider:
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
10:32:32 AM
Mr. Balash addressed Slide 12, "Royalty In-Kind Sales." He
noted that it was difficult to read. He relayed that over
the course of the last 30 years the state had been engaged
in the continuous sale of royalty oil. He noted that there
were a variety of sales in the early 1980s and that there
had been a lot more oil during that time. He said that the
price crash of 1986 had caused the department to reconsider
how royalty oil was sold and to limit the number and
variety of sales.
10:33:58 AM
Mr. Balash spoke to Slide 13, "Best Interest of the State
Served by the RIK Contract with Flint Hills Resources (FHR)
":
•Cash Value Offered with Contract
-Cash value of $3.5-5.9 Billion over 5 years
•Analyzed for Consistent value between RIK
and RIV
•Volume 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.
-Support jobs and economy of Fairbanks North Star
Borough
10:35:00 AM
Mr. Balash addressed Slide 14, "FHR's North Pole Refinery":
•Strategically located on TAPS
•Current throughput of 82,000-84,000 barrels per day
of ANS crude
•Producing approximately 22,000-25,000 barrels of
refined product
•All crude and constituents that are not transformed
into refined product are injected back into TAPS (with
a penalty paid)
10:35:44 AM
Mr. Balash continued to Slide 15, "FHR's North Pole
Refinery":
•FHR produces approximately
-672,000 gallons of jet fuel per day
-143,000 gallons of gasoline per day
-41,000 gallons of home heating fuel per day
-68,000 to 194,000 gallons per day of product
consisting of HAGO, LAGO, naphtha, asphalt,
refining fuel, and a small volume of high-sulfur
diesel
•680,000 gallons per day shipped to Anchorage via the
Alaska Railroad
•230,000 gallons of ultra-low sulfur diesel and
gasoline on the backhaul to Fairbanks
•FHR owns 50 million gallons of storage facilities
-30.7 million in Anchorage and 19.3 million in
Fairbanks
10:36:42 AM
Mr. Balash addressed Slide 16, "Proposed Contract
Benefits":
•Proposed contract is expected to:
-Maintain status quo of in-state refining
behavior
-Produce 330 million gallons of refined product
or 18% of gasoline and 26% of jet fuel consumed
in Alaska
-Provide approximately $140 million per year in
gross regional product sales for the Fairbanks
North Star Borough (FNSB)
-Support 1,300 direct and indirect jobs in the
FNSB
-Sustain $100 million in annual earnings in FNSB
-Provide socio-economic stability against energy
costs
10:37:53 AM
Mr. Balash discussed Slide 17, "Projected Impacts if not
Approved":
•If FHR stops refining, anticipated effects include:
-Loss of approximately 1,300 direct and indirect
jobs in the Fairbanks North Star Borough
-State could experience increased utilization of
the social safety net
-Possibility of population redistribution
-Increased and decreased infrastructure
utilization and maintenance with population shift
-Impact to the fuel supply for the Fairbanks and
Anchorage airports, affecting trade and tourism
and the Alaska Railroad
-Loss of heat source for warming low flow in TAPS
10:39:14 AM
Senator Hoffman pointed to Slide 9. He requested further
explanation of bullet four:
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
Mr. Balash responded that the criteria had been examined
during the evaluation. He said that FHR distribution
patterns had been examined. He said that FHR had been able
to sell locally, in the interior at the refinery, as well
as the Port of Anchorage area. He stated that there was a
special contract commitment provision relative to the
pricing of gasoline in the Fairbanks market that help to
provide price discipline for the transportation segment of
the business line in the interior.
10:41:23 AM
Senator Hoffman wondered how that equated to "the citizens
of the state" versus "the citizens of Fairbanks."
Mr. Balash responded that that question encompassed the
tension that was embedded throughout the body of the statue
and regulations. He said it would be one thing if DNR were
to sell royalty oil at a steep discount to any refinery in
that region of the state that resulted in a lower price for
consumers of the region. He said that DNR worked to ensure
that one community was not benefitting at the expense of
others by getting at least royalty and value equivalent for
the price offered in the sale of the royalty oil itself. He
said that the price available in Fairbanks was a wholesale
price that was being offered to the retail outlets in the
area.
10:43:12 AM
Senator Olson asked what were the possibly penalties to the
state for not honoring the guarantees provided to FHR.
Mr. Balash turned to Slide 6. He said that the steepest
penalty could be grounds for termination of the contract
itself. He said that the refinery was required to maintain
a letter of credit in good standing. He said that the
credit quality of the parent company would be scrutinized
as well.
10:44:34 AM
Senator Olson restated the question.
Mr. Balash responded that he did not think there were any
specific penalties to the state. He said that the contract
itself would obligate the state to no more than 85 percent
of the total royalty volume. He assured the committee that
the state was protected to a certain degree.
10:45:24 AM
Senator Olson queried the future of the refinery in the
North Pole area that had been in decline.
Mr. Balash responded that both the refineries in North Pole
served distinct markets. He said that FHR was in the
business of making jet fuel for sale at Ted Stevens
International Airport; however, some products were sold in
the interior. He shared that the other refinery largely
supplied fuel to military installations and home heating
fuel in the residential market. He thought that if the
refineries could fire their plants with a cheaper fuel
product than was currently being used, overall business
would improve.
10:47:57 AM
JEFF COOK, REGIONAL DIRECTOR, EXTERNAL AFFAIRS, KOCH
INDUSTRIES PUBLIC SECTOR, FLINT HILLS RESOURCES, spoke in
support of SB 86.
10:53:46 AM
Senator Bishop inquired whether the bill could bring about
growth opportunities in jet fuel.
Mr. Cook responded in the affirmative.
10:54:52 AM
Senator Dunleavy requested a hard copy of the public
testimony.
10:55:07 AM
Co-Chair Meyer CLOSED public testimony.
SB 86 was HEARD and HELD in committee for further
consideration.
SB 59 was SCHEDULED but not HEARD.
10:55:27 AM