Legislature(2003 - 2004)

02/26/2004 09:03 AM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
     SENATE BILL NO. 348                                                                                                        
     "An Act approving the sale of royalty oil by the State of                                                                  
     Alaska to Flint Hills Resources Alaska, LLC, and Flint Hills                                                               
     Resources, LLC; and providing for an effective date."                                                                      
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Co-Chair  Wilken  informed  that  this  legislation   would  provide                                                            
legislative  approval of a  royalty oil contract  between the  State                                                            
and Flint Hills  Resources, Alaska,  LLC, regarding the sale  of the                                                            
State's North Slope royalty oil.                                                                                                
Co-Chair Wilken  explained that a new version of the  bill is before                                                            
the Committee  solely because the  original version of the  bill was                                                            
drafted before the February 25, 2004 signing of the agreement.                                                                  
Co-Chair  Green moved  to adopt  the Version  23-LS1772\D  committee                                                            
substitute as the working document.                                                                                             
Senator Bunde  objected in order to clarify that the  reason for the                                                            
committee  substitute  was to  update  information  specific to  the                                                            
signing of the agreement.                                                                                                       
Co-Chair Wilken concurred.                                                                                                      
Senator Bunde withdrew his objection.                                                                                           
There  being no  further  objection,  the committee  substitute  was                                                            
TOM IRWIN, Commissioner,  Department of Natural Resources,  informed                                                            
the  Committee  that the  Department  distributed  several  handouts                                                            
including one  titled "Best Interest  Finding and Determination  For                                                            
the Sale of Alaska North  Slope Royalty Oil To Flint Hills Resources                                                            
Alaska, LLC" dated  February 12, 2004 [copy on file],  a copy of the                                                            
contract between the State  and Flint Hills Resources (FHR) [copy on                                                            
file],  a copy  of  "The  Alaska Royalty  Oil  and  Gas Development                                                             
Advisory  Board Resolution  04-1" dated February  17, 2004  [copy on                                                            
file]  from   the  State's  Royalty   Board,  and  a  copy   of  the                                                            
Department's  Division  of  Oil  and  Gas forthcoming  presentation                                                             
titled  "Sale of  North Slope  Royalty  In-Kind Oil  to Flint  Hills                                                            
Resources" [copy on file}.                                                                                                      
Commissioner Irwin read  a section from the Introduction on page one                                                            
of the Best Interest Findings handout as follows.                                                                               
     From  an  in-depth consideration  of  the  potential  economic,                                                            
     environmental,    and   social   impacts,   and   the   various                                                            
     requirements for sale  of the State's royalty oil, with a focus                                                            
     on the  criteria specified under  the terms of AS 38.05.183(a)                                                             
     and  (e) and  AS 38.06.070(a),  the commissioner  finds that  a                                                            
     negotiated  long-term  contract  for the  sale  of the  State's                                                            
     royalty oil to FHR is in the State's best interest.                                                                        
Commissioner  Irwin  explained   that  AS 38.05.183   obligates  the                                                            
Commissioner  of the Department of  Natural Resources to  review the                                                            
proposal and AS 38.06.070  obligates the Royalty Board to review it.                                                            
He  declared that  "this  is an  incredibly  good contract  for  the                                                            
State"  as well as  a good  contract for  FHR. It  moves that  State                                                            
forward.  He acknowledged  the efforts  of the  State's negotiating                                                             
team  which included  Kevin  Banks,  Senior Analyst,  Department  of                                                            
Natural Resources; Philip  Reeves, Assistant Attorney General, Civil                                                            
Division  (Juneau),   Department  of  Law;  Mark  Myers,   Director,                                                            
Division of  Oil & Gas, Department  of Natural Resources;  and Janet                                                            
Wilson  Baxter, Legislative  Liaison,  Office of  the Commissioner,                                                             
Department of Natural Resources.                                                                                                
Senator  Olson  recalled  that  news  releases  pertaining  to  this                                                            
agreement  as specifying  that  FHR  agreed that  the  price of  its                                                            
petroleum   products  in  Fairbanks   would  not  exceed   those  of                                                            
Anchorage.  He supported the  concept and  wondered if this  benefit                                                            
could be extended throughout the State.                                                                                         
Commissioner Irwin  stated that the FHR and the State's  negotiating                                                            
teams worked  hard to develop  this agreement.  The State  considers                                                            
the arrangement  of aligning the wholesale prices  in Fairbanks with                                                            
those in Anchorage "as  a major step forward." This would not impact                                                            
retail  prices as  other issues  such as volume  and transportation                                                             
come into  consideration.  While this  agreement  does not apply  to                                                            
other areas  of the  Alaska, some  benefit is  anticipated as  other                                                            
locations'  wholesale purchasing originates  in either Fairbanks  or                                                            
Senator Bunde  asked whether  it would "be  fair to assume  that the                                                            
cost of producing  would be the same" in Fairbanks  or Anchorage "so                                                            
that the wholesale prices would reflect actual costs.                                                                           
Commissioner  Irwin responded that  two issues are involved  in this                                                            
discussion:  one being the dynamics  of open market competitiveness                                                             
of products  that are brought  in California  and other places  from                                                            
outside of the State. The  second dynamic is that there is an active                                                            
refinery  in   Fairbanks.  In  theory,   due  to  the  open   market                                                            
competitiveness,  prices should  be less expensive  in Anchorage  as                                                            
"that  is where  the cheapest  route  is." On  the  other hand,  the                                                            
Fairbanks  refinery  is  using Alaska  gas.  Utilizing  that  logic,                                                            
Fairbanks  should  be  cheaper   as  there  are  no  shipping  costs                                                            
involved. The  negotiating team considered addressing  the wholesale                                                            
price to be the fairest approach for Alaskans.                                                                                  
Senator  Bunde  applauded  the  fairness  efforts.   An alternative                                                             
suggestion  would be to allow higher  wholesale prices in  Anchorage                                                            
to support the wholesale price in Fairbanks.                                                                                    
Commissioner  Irwin  stated that  the intent  was not  to raise  the                                                            
price  in  one  location  to  make   it  fairer  for  the  other  as                                                            
competitiveness  with the outside world must continue.  In addition,                                                            
this Company must be competitive "across the board."                                                                            
Senator  Bunde  acknowledged.  He  asked  that  further information                                                             
regarding efforts  to develop a fuel system in Fairbanks  that would                                                            
allow  it to  be  more  competitive  with the  Anchorage  system  be                                                            
Commissioner  Irwin expressed that  these issues would be  addressed                                                            
in the forthcoming presentation.                                                                                                
KEVIN BANKS,  Analyst, Commercial  Section,  Division of Oil  & Gas,                                                            
Department  of  Natural Resources,  stated  that  his presentation,                                                             
portrayed in the aforementioned  handout titled "Sale of North Slope                                                            
Royalty in-Kind  Oil to  Flint Hills Resources,"  would provide  the                                                            
background of the State's  Royalty In-Kind (RIK) oil program and the                                                            
highlights of the agreement  with FHR, including the RIK arrangement                                                            
with them.                                                                                                                      
Mr. Banks recounted that  two years prior, Williams Alaska Petroleum                                                            
Inc. decided  to sell its  North Pole refinery  to FHR. To  make the                                                            
sale attractive,  securing a long-term  oil contract with  the State                                                            
was a  condition of that  purchase. This  legislation would  provide                                                            
FHR  with ten-year  long-term  contract with  the  State that  would                                                            
allow the refinery  purchase to transpire.  He noted that  Williams'                                                            
gas stations  and convenience  stores  would be  sold to a  separate                                                            
entity.   FHR  would  acquire   the  refinery   and  some   of  "the                                                            
terminalling  facilities  in  Anchorage  and  Fairbanks."  Williams'                                                            
interest in the Trans-Alaska  Pipeline System (TAPS) property at the                                                            
Anchorage International Airport would not be included.                                                                          
Mr. Banks explained  that the State owns approximately  one-eight of                                                            
the production  of oil on the North Slope. This oil  could either be                                                            
received  as Royalty in Kind  (RIK) or Royalty  in Value (RIV).  The                                                            
RIV process would  allow the lessee to sell the product  and pay the                                                            
State its share of the  revenue. In the RIK process, the State would                                                            
take possession  of the oil and sell it to its own  customers. These                                                            
arrangements have  been in place in excess of 25-years.  He reviewed                                                            
some previous RIK and RIV contract terms.                                                                                       
Mr. Banks shared that the  decision to contract with Flint Hills was                                                            
made  after a  thorough  overview  of the  marketplace.  During  the                                                            
negotiations  with FHR, the  State's negotiating  team was  provided                                                            
expert assistance  by a private consultant firm. Negotiations  began                                                            
in July 2003.                                                                                                                   
Senator Bunde asked how  the negotiations addressed pertinent issues                                                            
such as how  volume purchasing would  affect jet fuel price  parity.                                                            
Mr. Banks  stated that  while high  volume customers  might enjoy  a                                                            
lower price  than smaller operators,  the contract expressly  states                                                            
that similar customers  would pay the same price whether they are in                                                            
Anchorage or Fairbanks.                                                                                                         
Senator  Bunde   asked  whether  they  would  pay   the  same  price                                                            
regardless of the cost to FHR.                                                                                                  
Mr. Banks  responded that  in addition  to price,  demand is  also a                                                            
consideration.  While high volume  customers might pay a  lower cost                                                            
than small  volume purchasers,  the fairness  lies in the fact  that                                                            
the  same  price  would  be  charged  to  that  customer  in  either                                                            
Senator  Bunde commented  that this  sounds like  "artificial  price                                                            
supports,"  a  practice  that  did  not bode  well  in  the  farming                                                            
Mr. Banks noted  that, as specified  in its Resolution, the  Royalty                                                            
Board has reviewed  and approved this  agreement. The Department  is                                                            
requesting that the Legislature also approve the contract.                                                                      
Mr. Banks  reviewed  some of the  contract components:  sale  of oil                                                            
would range  between 56,000 and 77,000  barrels per day which  would                                                            
allow  for seasonal  demands; once  every twelve  months, FHR  could                                                            
request  a change  in the  volume with  the minimal  quantity  being                                                            
specified at 24,000 barrels  per day for the first five years of the                                                            
contract and  the maximum being 77,000  barrels a day or  85-percent                                                            
of the State's royalty  production on the North Slope. In the second                                                            
five-year portion  of the contract,  while FHR would be required  to                                                            
continue  to meet  the special  commitment components  of the  bill,                                                            
which would be  addressed later in the presentation,  FHR could only                                                            
reduce  the  quantity  to  less  than  24,000  barrels  per  day  by                                                            
receiving  zero  barrels per  day  for twelve  months.  After  those                                                            
twelve  months,   they  could  request  to  increase   their  barrel                                                            
consumption;  however, the Commissioner  must approve the  quantity,                                                            
as the Department  might have agreed to provide other  customers its                                                            
oil allotment. Therefore,  FHR "would be taking a chance" were it to                                                            
reduce its barrel quantity,  as it might not be able to increase it.                                                            
The State has  attempted to establish an agreement  that would limit                                                            
FHR's ability  to arbitrage the State's oil against  the marketplace                                                            
to the State's  or other producers'  disadvantage. The goal  was not                                                            
to establish "some kind of price cap."                                                                                          
Mr.  Banks  referred the  Committee  to  the  "Price" chart  in  the                                                            
        · State will get a premium of $0.30 per barrel above the                                                                
          price of Royalty in-Value ("RIV")                                                                                     
        · State will receive additional annual revenue ranging from                                                             
          $2.6 million and $8.4 million per year, depending on                                                                  
Co-Chair  Wilken  asked  the  volume  that  Williams  has  typically                                                            
acquired from the pipeline.                                                                                                     
Mr. Banks specified  that while approximately 220,000  barrels might                                                            
flow through  the refinery  each day, Williams'  actually  purchases                                                            
50,000 or 55,000  barrels per day  from the State and an  additional                                                            
20,000  barrels from  other producers.  The balance  is re-injected                                                             
into the pipeline.                                                                                                              
Co-Chair  Wilken asked how  recently the  refinery purchased  24,000                                                            
barrels per day.                                                                                                                
Mr. Banks responded  that while it  might have been within  the last                                                            
three or four years, it was only on a month-by-month basis.                                                                     
Mr. Banks  noted that, as  depicted in the  "Example Calculation  of                                                            
FHR RIK Price"  chart in the handout,  the formula utilized  in this                                                            
agreement is modeled  after those utilized by the  producers and the                                                            
in-State refineries  when Alaska oil is sold at Pump  Station No. 1.                                                            
     Example Calculation of FHR RIK Price                                                                                       
                                  ANS Spot Price                                                                                
     -                                      $1.55                                                                               
     -                    Interstate TAPS Tariff                                                                                
     -         PSVR Ref. Stream-IPA/Lisb.  Stream                                                                               
     -                                  Line Loss                                                                             
     -                                  FHR Price                                                                               
     -    Royalty  Field Cost Payment  to Lessees                                                                             
     =                                  RIK Value                                                                               
Mr. Banks continued  that the negative  $1.55 is the component  that                                                            
represents   the  deduction  applicable   to  the  cost   of  marine                                                            
transportation  of Alaskan  oil to the West  Coast. In this  number,                                                            
the State  is also  "capturing  the market  value of  our oil."  The                                                            
industry utilizes  a factor of approximately  $1.85 and the  State's                                                            
utilization  of the $1.55  price would result  in a higher  price in                                                            
Mr. Banks noted  that, "looking back  in time demonstrates  that the                                                            
proposed  RIK  contract  price  would have  been  favorable  to  the                                                            
State." This is  depicted on the chart on page four  of the handout.                                                            
He noted that  the destination price  agreed upon in royalty  prices                                                            
has been lower than anticipated.  This benefits the State. "The real                                                            
difference  in the  premium that  we expect  to  receive under  this                                                            
contract  is  developed   in  the  difference  between   that  $1.55                                                            
deduction  and  the  transportation  deduction  that  the  producers                                                            
Mr. Banks stated that commitments  that are unique in this agreement                                                            
include the following.                                                                                                          
   Special Commitments/State Benefits                                                                                           
     · Equipment Installation for Clean Fuels Processing                                                                        
     · Anchorage Tank Removal and Tank Farm Evaluation                                                                          
     · Shipment by Rail                                                                                                         
     · Fairbanks International Railroad                                                                                         
     · Wholesale Gasoline Rack Price Parity                                                                                     
Mr. Banks stated  that as specified  in the agreement, FHR  would be                                                            
investing up  to one million dollars  in equipment to support  clean                                                            
fuels processing  in order to meet  Environmental Protection  Agency                                                            
(EPA) requirements  by the end of 2006. In addition,  FHR has agreed                                                            
to work with the  Government Hill Community Council  in Anchorage to                                                            
expedite  tank removal  in one area  while constructing  a new  tank                                                            
farm  in another  location.  FHR would  also  address environmental                                                             
issues  at  the former  site.  FHR  would also  transport  fuel  and                                                            
gasoline between  Anchorage and Fairbanks  via the Alaska  Railroad.                                                            
Senator  Bunde asked  why  the commitment  to  ship  via the  Alaska                                                            
Railroad  was pursued rather  than shipping  it "as economically  as                                                            
Mr. Banks responded  that the Railroad was concerned  that FHR might                                                            
construct  a pipeline  as  an alternative  mode  of transportation.                                                             
However, rail  shipment is the most  economic and consistent  manner                                                            
with which  to ship product from Fairbanks  to Anchorage.  FHR would                                                            
have not have agreed to this component were that not the case.                                                                  
Co-Chair Wilken stated  that further discussion in this regard would                                                            
occur during FHR's testimony.                                                                                                   
Senator Bunde  opined that were the  Railroad to increase  business,                                                            
perhaps it could pay a dividend to the State.                                                                                   
Mr. Banks noted  that FHR has also agreed to work  with the State to                                                            
evaluate  improvements to  the fuel supply  system at the  Fairbanks                                                            
International Airport terminal  and its hydrant system. In addition,                                                            
they have agreed to promote Fairbanks among air cargo carriers.                                                                 
Mr. Banks stated that Fairbanks  is ideally geographically suited to                                                            
ship cargo  from Asia to  Europe whereas  Anchorage is more  ideally                                                            
suited to handle  cargo shipments  from Asia to the Lower  48. While                                                            
there is competition between  the two airports, some shipping routes                                                            
are more  suitable to  one than  the other.  Therefore, total  cargo                                                            
movement  for the  whole  State would  be  the goal,  with  shipment                                                            
centers  being  moved  to  Fairbanks  from  Russian   locations.  As                                                            
discussed earlier, gas price parity would be instituted.                                                                        
Senator  B.  Stevens asked  whether  the  "Interstate  TAPS  Tariff"                                                            
identified  in the  RIK pricing  calculation  would  be the  "Tariff                                                            
Allowance"  discussed  in Section  3,  on page  eight  of the  "Best                                                            
Interest Findings and Determination" handout.                                                                                   
Mr. Banks affirmed that it is.                                                                                                  
Senator B.  Stevens opined that the  "Line Loss" component  detailed                                                            
on the  chart  and in  Section 5,  page nine  of  the Best  Interest                                                            
Findings booklet,  would appear to be "an insignificant  number." He                                                            
asked  whether  the fact  that  the  pipeline  is not  operating  at                                                            
capacity is a factor.                                                                                                           
Mr. Banks stated  that the "Line Loss"  component was previously  "a                                                            
much larger  number"  as the pump  stations along  TAPS removed  oil                                                            
from the line for fuel.  This is no longer the case. Therefore, Line                                                            
Loss is truly  a change in volume  as the oil cools in the  pipeline                                                            
and the balances  on each end of the line fluctuate.  He agreed that                                                            
it is a fairly  small number, equating  to a penny or a penny  and a                                                            
Senator B. Stevens asked  whether information pertaining to the "FHR                                                            
Price," as specified  in the calculation, is that  as located in the                                                            
paragraph on page eight  of the "Best Interest Findings" handout. He                                                            
asked whether  the State would bear the expense of  transporting the                                                            
crude oil to Pump Station No. 1.                                                                                                
Mr. Banks responded no.  The "Royalty Field Cost Payment to Lessees"                                                            
provides the Lessees with  a field cost deduction, whether the State                                                            
receives  its oil through  RIK or RIV. Setting  the FHR price  above                                                            
that deduction  as specified  on the calculation  chart would  allow                                                            
the State  "to receive sufficient  credit to  pay the RIV fuel  cost                                                            
Senator B.  Stevens voiced confusion  as to whether the State  bears                                                            
the cost of the tariffs north of Pump Station No. 1.                                                                            
Mr.  Banks  responded  that  the Price  graph  in  the presentation                                                             
handout  assumes that  the crude oil  being taken  from Prudhoe  Bay                                                            
occurs at Pump  Station No. 1 rather than from another  site such as                                                            
Kuparuk  River Unit  which has  another  set of  tariffs that  would                                                            
apply between it and Pump Station No. 1.                                                                                        
Senator  B. Stevens asked  whether those  transportation  deductions                                                            
are factored into  this tariff rate or would be absorbed  in another                                                            
Mr. Banks responded  that the deduction  would be incorporated  into                                                            
the price, and would, therefore, result in a lower price.                                                                       
Senator  B. Stevens  understood  that fuel  taken  from Kuparuk  and                                                            
other sites would be incorporated into the price.                                                                               
Mr. Banks commented  that oil from  Kuparuk would have a  "net back"                                                            
which would  be lower than the pump  price for Prudhoe Bay.  This is                                                            
similar to how the lessees' RIK is calculated.                                                                                  
Mr. Banks clarified that  wholesale rack price parity would apply to                                                            
posted  wholesale  prices in  Anchorage  and Fairbanks.  This  would                                                            
allow the  Division to  ascertain whether  similar prices are  being                                                            
charged in these  markets. There is concern that higher  expenses in                                                            
Fairbanks might  increase prices in Anchorage. However,  the markets                                                            
are different  as there is an excess supply of gasoline  produced in                                                            
the Anchorage  market  that must  be exported.  Anchorage  producers                                                            
could either  export their  excess supply to  a refinery in  another                                                            
location or decrease production.  These pressures serve to result in                                                            
lower prices in Anchorage  than experienced in Fairbanks. This would                                                            
serve  to benefit  customers  in  Fairbanks.  Fairbanks'  conditions                                                            
would not result in lowering Anchorage's price.                                                                                 
Mr. Banks noted  that FHR has agreed to hire locally  when possible.                                                            
It is anticipated  that the $100 million  Clean Fuels project  would                                                            
have a significant  construction and  employment impact for  a short                                                            
term. Currently,  the refinery has  150 full time positions  with an                                                            
annual payroll  of approximately  $8 to $12  million. He noted  that                                                            
the  State's  previous  agreement  with Williams  required  that  80                                                            
percent of  the RIK oil sold to them  must be used in the  refinery.                                                            
The  agreement   with  FHR  specifies  that  they   would  make  all                                                            
commercially  reasonable  efforts to  use the royalty  oil in  their                                                            
refinery.  This  would  insure  that  employment  efforts  would  be                                                            
Senator Hoffman  asked whether  any consideration  was given  to the                                                            
tax structure  and liabilities of  FHR due to the fact that  it is a                                                            
Limited Liability Corporation (LLC).                                                                                            
Mr. Banks replied yes,  that "sometimes painful discussions" in this                                                            
regard occurred,  particularly  since the State  could not  view the                                                            
financial   strength  of   FHR,  "an  LLC   and  a  privately   held                                                            
corporation,"  as opposed  to Williams,  which was  a publicly  held                                                            
corporation  and subject  to certain  reporting  requirements.  As a                                                            
result, a provision was  incorporated into this agreement specifying                                                            
that an advisor would be  retained to examine FHR finances and their                                                            
future perspectives  and a report would be provided  to the State in                                                            
regards to these  matters. Were the "health of FHR"  to fall below a                                                            
certain bond  rating it would be required  to post a Standby  Letter                                                            
of Credit  (LC) with the  State equating to  the sale of 90  days of                                                            
sale oil. This would be approximately $120 million LC.                                                                          
Senator Hoffman  asked for the difference  between a LC and  a bond.                                                            
Mr.  Banks replied  that,  "an LC  is made  out to  the State."  For                                                            
example, this  would provide the State  with "an unfettered  ability                                                            
to cash it" were this contract to go into default.                                                                              
Senator  Hoffman asked  whether  there is  a difference  in the  tax                                                            
structure of an LLC and a corporation.                                                                                          
Mr. Banks replied that he was unsure.                                                                                           
Senator  Bunde understood  that  an LLC  would not  pay a  corporate                                                            
income tax.                                                                                                                     
Senator  Hoffman asked regarding  the Department's  fiscal  note. He                                                            
also asked  the amount of  money the State  would receive at  24,000                                                            
barrels per day level.                                                                                                          
Mr. Banks responded  that 24,000 barrels  per day would provide  the                                                            
State $2.6 million a year  based on the previously discussed thirty-                                                            
cent premium.  An expected range would  be between $2.6 million  and                                                            
$8.4 million. It is anticipated  that the initial volume would range                                                            
between 56,000 and 77,000 barrels per day.                                                                                      
Senator  Hoffman asked  that the  tax impact  in regards  to an  LLC                                                            
verses a corporation be provided.                                                                                               
Co-Chair Wilken supported that request.                                                                                         
Senator  Bunde  questioned  how the  State  would benefit  from  FHR                                                            
shipping  product via  the Alaska  Railroad  as the  Railroad is  "a                                                            
quasi private  enterprise" and that the property tax  generated from                                                            
the refinery would not be contributed to the State.                                                                             
Co-Chair Wilken thanked  the Department of Natural Resources for its                                                            
ALLEN WRIGHT Vice President,  Public Affairs, Flint Hills Resources,                                                            
introduced himself and  Mr. Allen Lasater, the prospective President                                                            
of Flint Hills  Resources, Alaska. Both currently  reside in Wichita                                                            
SFC 04 # 21, Side B 09:50 AM                                                                                                    
Mr.  Wright complimented  the  State's  negotiating  team for  their                                                            
professional  and thorough  approach  to the  negotiations. The  end                                                            
product is considered to be beneficial to both entities.                                                                        
Mr. Wright reviewed  a handout titled "Flint Hills  Resources Who We                                                            
Are, Culture  and Philosophy, Commitment  to adding value"  [copy on                                                            
file]. FHR  is one of the leading  producers of fuels and  base oils                                                            
for  lubricants  and other  petrochemical  and  commodity  products.                                                            
Headquartered  in Wichita Kansas and  owned by Koch Industries,  FHR                                                            
has sixty years  of experience in this field. It is  tightly focused                                                            
on its goals, growth, and  success based on a "culture of principled                                                            
entrepreneurship"  with a  commitment to integrity  and to  consumer                                                            
needs. Its  innovative approach to  business, combined with  safety,                                                            
efficiency,  and environmental  protection  operational  goals,  has                                                            
resulted in the development  of value-added fuels for customers. Its                                                            
2,000  employees  support  these  endeavors.  The  company  will  be                                                            
sustainable for the long run.                                                                                                   
Mr.  Wright shared  that  the company  has  two refineries;  one  in                                                            
Minnesota  with  a 280,000  barrel  a day  refinery  capacity and  a                                                            
refining and  chemical plant in Texas,  which produces in  excess of                                                            
300,000  barrels  a day.  FHR  is one  of  largest heavy  crude  oil                                                            
refineries in the United  States. The production of clean fuels is a                                                            
Mr. Wright  expressed that  the purchase and  sale agreement  of the                                                            
Williams'  refinery   that  was  announced  in  November   2003,  is                                                            
contingent upon  the approval of this contract with  the State. This                                                            
is an exciting  opportunity. FHR is  committed to the "clean  fuels"                                                            
enhancements outlined by Mr. Banks.                                                                                             
Mr. Wright  reviewed  some the  company's projects  that would  lend                                                            
expertise to this proposed undertaking.                                                                                         
Senator  Bunde asked whether  the company  has other transportation                                                             
agreements that  specify that its products must be  transported by a                                                            
specific  mode of  transportation,  such as the  proposed  agreement                                                            
with the Alaska Railroad.                                                                                                       
Mr.  Wright responded  that  the Texas  operation  utilizes its  own                                                            
proprietary rail line.  The Minnesota refinery is serviced either by                                                            
truck or other common carrier lines.                                                                                            
ALLEN LASATER, Vice President,  Environmental Health & Safety, Flint                                                            
Hills Resources  and the future President of Flint  Hills Resources,                                                            
Alaska, clarified  that no specific transportation  mode is required                                                            
at the other operations.                                                                                                        
Mr. Wright noted that FHR  has a joint venture interest in a company                                                            
called Excel  Paralubes, which is  located in Louisiana.  This plant                                                            
produces base  oils and other lubricants.  FHR also has developed  a                                                            
diverse  fuels marketing  system  that  has 160  terminal  locations                                                            
throughout  the United  States. This  system  markets gasoline,  jet                                                            
fuel, diesel, heating oil, and performance fuels.                                                                               
Mr.  Wright stated  that  in  regards to  Environmental  health  and                                                            
safety  issues, "the  company strives  for 100  percent compliance"                                                             
with   environmental   and   safety  issues   "while   meeting   the                                                            
expectations  of the commodities in  which we operate." Clean  fuels                                                            
have  been  brought  to the  market  "well  in  advance  of  federal                                                            
guidelines." Environmental  standards measures support the company's                                                            
Senator  Bunde voiced  appreciation  of the  fact  that the  company                                                            
could meet  the environmental  standards of  Minnesota, as  they are                                                            
quite  stringent.  Continuing,  he  asked  regarding  the  company's                                                            
Minnesota  plant's   "BluePlanet"  gasoline;  specifically   how  it                                                            
compares  to what  is currently  being  produced at  the North  Pole                                                            
Refinery  and  whether  the  company  would   be implementing   this                                                            
approach in Alaska.                                                                                                             
Mr. Wright responded that  BluePlanet is similar to the product that                                                            
would be produced at the North Pole refinery.                                                                                   
Mr. Lasater explained that  BluePlanet is a low sulfur gasoline that                                                            
meets  Minnesota's  2006  environmental  requirements.  The  company                                                            
completed this requirement  years prior to the deadline. The company                                                            
would be producing fuel  similar to BluePlanet in Alaska, as similar                                                            
requirements would become effective in Alaska in January 2007.                                                                  
Mr. Wright  noted that "transparency"  is very important  to FHR. An                                                            
alliance has been formed  with communities in Minnesota to develop a                                                            
website  that would  allow  access to  the  company's environmental                                                             
performance.  The company's  efforts  in Environmental,  Health  and                                                            
Safety issues have also been acknowledged in Texas.                                                                             
Mr. Wright also  conveyed that the company is an active  participant                                                            
in the  communities in which  it operates.  He reviewed some  of the                                                            
partnerships,  sponsors, and other sorts of participation  that have                                                            
occurred in its various locations.                                                                                              
Co-Chair   Wilken   noted  that   the   company  has   provided   an                                                            
"Environmental,  Health and Safety  Facts" brochure [copy  on file].                                                            
Mr. Lasater stated  that FHR is committed to operating  a successful                                                            
refinery  in  Alaska,   as  supported  by  its  commitment   to  the                                                            
production of clean fuels.                                                                                                      
Co-Chair Wilken  recalled that Williams had conducted  a significant                                                            
expansion  of this refinery  in the  mid 1990s  which increased  the                                                            
refinery's  production by up to 60-percent.  He asked the  amount of                                                            
that investment  as this would assist  in placing the proposed  $100                                                            
million investment in perspective.                                                                                              
Mr. Lasater  stated that Williams's  third crude oil refinery  unit,                                                            
which produces  100,000 barrel per day, became operational  in 1998.                                                            
He recalled that the investment might have totaled $80 million.                                                                 
JEFF  COOK,   Representative,   Williams'   Alaska  Petroleum   Inc,                                                            
clarified that Williams' expended $71 million on that project.                                                                  
Co-Chair  Wilken understood,  therefore, that  the $100 million  FHR                                                            
diesel  conversion   upgrade  slated  for  the  refinery   would  be                                                            
Co-Chair  Wilken asked whether  the $100  million diesel  conversion                                                            
would result  in there being more  than one type of diesel  produced                                                            
at the North Pole Refinery.                                                                                                     
Mr. Lasater responded that  the conversion would allow for two types                                                            
of diesel to  be produced. Federal  rules for on-road diesel,  which                                                            
becomes  effective   in  2006,  would  prohibit  a  sulfur   content                                                            
exceeding 15-parts  per million. Off-road and other  diesels such as                                                            
heating  fuel could  contain higher  sulfur levels;  however,  it is                                                            
anticipated that  these fuels sulfur content would  be restricted in                                                            
the future.                                                                                                                     
Co-Chair Wilken  asked whether the proposed conversion  would affect                                                            
the  quantity  of oil  that  would  be removed  from  the  pipeline,                                                            
specifically whether it would increase demand.                                                                                  
Mr. Lasater replied that it should not increase the demand.                                                                     
Co-Chair Wilken asked when the conversion project might begin.                                                                  
Mr. Lasater stated that  the engineering of the project began in the                                                            
fall of 2003. The timing  is considered "critically tight" for 2006.                                                            
Engineering  would be completed  in 2004,  the project's  foundation                                                            
would be constructed  in 2005, and the equipment would  be installed                                                            
in  2006. The  company  is confident  that it  would  meet the  2007                                                            
gasoline timeline  requirement. The 2006 diesel requirement  date is                                                            
June 2006. The short construction  season in the State might present                                                            
an obstacle.                                                                                                                    
Senator  Bunde asked  whether this  $100 million  improvement  might                                                            
impact the wholesale price of gasoline and diesel.                                                                              
Mr. Lasater  replied  that the  cost of production  would  increase.                                                            
However,  historically the  refining business  has not been  a cost-                                                            
plus based  business, as the price  would be more dependent  on free                                                            
market competition.  While the cost  to the company might  increase,                                                            
the market conditions would  have more affect on the price consumers                                                            
would pay.                                                                                                                      
Co-Chair Wilken  asked FHR's position in regard to  transporting its                                                            
products via the Alaska Railroad.                                                                                               
Mr. Lasater understood  that this relationship, which  was developed                                                            
at the request  of the State, was based on a couple  of factors. The                                                            
refinery currently  accounts for approximately fifty  percent of the                                                            
revenue  generated  by the  Railroad.  The only  alternate  shipping                                                            
method would be  a pipeline and, were that avenue  pursued, it would                                                            
"have quite  an impact to the State  as far as the viability  of the                                                            
Railroad." However, at  the conclusion of the contract, construction                                                            
of a pipeline would be an option.                                                                                               
Senator Bunde  understood therefore, that FHR had  not initiated the                                                            
Railroad provision.                                                                                                             
Mr. Lasater affirmed,  however, clarified that for  "the foreseeable                                                            
future" no other option exists.                                                                                                 
Co-Chair  Wilken   inquired  as  to  when  Williams'   sale  of  its                                                            
convenience stores might occur.                                                                                                 
Mr. Lasater explained that  the sale of the convenience stores would                                                            
coincide with the date that FHR acquires the refinery.                                                                          
Co-Chair  Wilken asked  regarding  the company's  position on  local                                                            
Mr. Lasater stated that  the current workforce is viewed by FHR as a                                                            
key element  in the success of this  acquisition. While the  company                                                            
might bring  in some of  its management team  to run the  operation,                                                            
the intent  is to not  reduce the  work force to  save money,  as it                                                            
common in some  acquisitions. Instead, he continued,  the refinery's                                                            
direction combined  with the clean fuel investment  would require an                                                            
expanded work base including increased contractual work.                                                                        
Senator Olson  expressed that  one of concerns  in the State  is the                                                            
environmental  affect of industry,  specifically in regards  to such                                                            
things as spills  that might negatively  affect fishing grounds  and                                                            
the fragility  of the tundra. Therefore he voiced  concern that Koch                                                            
Industries,  FHR's parent  company, has been  sizably penalized  for                                                            
environmental  violations in recent years. He asked  what safeguards                                                            
could be established to prevent violations from occurring.                                                                      
Mr. Wright  responded that the Company  assumes full responsibility                                                             
for the company's  environmental record, good and  bad, and that the                                                            
company "has  learned a great deal  from those experiences  and as a                                                            
result has implemented  management and compliance monitoring systems                                                            
that  allow the  company  to  prevent similar  situations  from  re-                                                            
occurring.  Specifically, the Texas  facility's Clean Air  violation                                                            
occurred  due to employee  error. The error  was uncovered  during a                                                            
company audit,  the employee was dismissed, and the  company alerted                                                            
the EPA  to the violation.  The Company is  currently on  probation.                                                            
While   a  separate   subsidiary   of  Koch   Industries  had   been                                                            
investigated  for  inaccurate   measurements  relating  to  its  oil                                                            
acquisitions,  a  jury  did not  find  that FHR  had  committed  any                                                            
wrongdoing  in this  regard and,  even  though FHR  settled in  that                                                            
lawsuit,  it provided no  admission of guilt.  Furthermore,  in this                                                            
agreement,  FHR would not be purchasing  crude oil at the  wellhead.                                                            
Senator Hoffman asked whether  the Koch Industries subsidiaries that                                                            
had  the violations  filed  against  them  were established  as  LLC                                                            
Mr.  Wright  replied that  he  unsure  as, at  various  times,  Koch                                                            
Industries has utilized  different business structures. He recounted                                                            
the  names of  the entities  involved  in the  violations;  however,                                                            
could  not recall  their business  structure.  He  stated that  this                                                            
information would be provided.                                                                                                  
Senator Hoffman  voiced that this  information would be appreciated                                                             
as LLCs "have  less liability and that is the reason"  that they are                                                            
established.  The  State should  investigate  this  further as  were                                                            
negative  circumstances to  occur, the liability  on the part  of an                                                            
LLC might differ from the specified violation determinations.                                                                   
Mr. Wright stated  that the current company structure's  performance                                                            
is  one that  has  received  high ratings  from  the EPA  and  other                                                            
environmental  groups.  "It  is performing  at  an  industry  leader                                                            
Co-Chair  Wilken  thanked  Mr.  Wright  and Mr.  Lasiter  for  their                                                            
comments  and  voiced that  the  State  is looking  forward  to  the                                                            
development of a mutually  beneficial working relationship with Koch                                                            
PHILIP REEVES, Assistant  Attorney General, Civil Division (Juneau),                                                            
Department  of Law noted that, at  the Department of Law's  request,                                                            
the Department  of Revenue has specified that the  State's corporate                                                            
income tax  utilizes the same guidelines  as the federal  income tax                                                            
which treats  most LLCs  as corporations  for most  tax purposes.  A                                                            
definitive answer in this regard would be provided.                                                                             
Co-Chair Wilken  stated that this would be further  monitored as the                                                            
legislation advances.                                                                                                           
Co-Chair  Green  moved  to  report  the  bill  from  Committee  with                                                            
individual recommendations and accompanying fiscal note.                                                                        
There  being  no  objection,  CS SB  348  (FIN)  was  REPORTED  from                                                            
Committee with a new zero  fiscal note, dated February 26, 2004 from                                                            
the Department of Natural Resources.                                                                                            
AT EASE: 10:22 AM / 10:23 AM                                                                                                    

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