Legislature(1993 - 1994)
03/18/1993 05:00 PM Senate O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATOR LEMAN called the Special Committee on Oil and Gas meeting to order at 5:00 p.m. and announced SB 134 CREDITS AGAINST PURCHASE OF ROYALTY OIL to be up for consideration. JIM EASON, Director, Division of Oil and Gas, gave the Committee background and perspective on the Amerada Hess litigation saying that much of the materials prepared in support of SB 134 is misleading and inaccurate. The refiners who potentially have an obligation to Amerada Hess adjustments were not surprised by that fact nor by the amounts involved. Mapco currently has a contract, signed in 1978, called the IRCA contract showing that both parties, at that time, knew the adjustments for Amerada Hess liabilities would be considerable and that they might accrue over a long period of time. In 1985 when the legislature approved the Petro Star contract, it was clear to everyone there was considerable exposure for Amerada Hess adjustments. It was for that reason the state recommended that Petro Star, not only pay a premium, but pay also $1.12 per barrel into escrow. This also led to Tesoro beginning a series of appeals, ultimately leading to litigation and, finally, to settlement this year. Number 223 The 1991 10-K filing by Mapco acknowledged the potential claims might total between $120 million and $160 million including interest on the retroactive amounts claimed by the state, MR. EASON said. MR. EASON explained that the settlement the State negotiated with Tesoro was very sensitive to their financial position - and with the intent of being able to maintain the viability and competitiveness of that refinery in Alaska. The state remained subordinated to the underlying creditors and agreed, in advance, to subordinate its interest to an additional $175 million worth of borrowing by Tesoro to finance any expansions it might undertake. Number 280 MR. EASON said there is a suggestion that the refiners are being treated in a relatively disadvantageous way relative to the North Slope producers. It's critical for the Committee and legislators to understand that the state has only 12 1/2% of the oil whether we take it in-value or in- kind. So we don't have a claim on royalties on oil above that 12 1/2%. Of that amount, about 3 1/2% were not subject to Amerada Hess adjustments for a variety of reasons. However, from the state's point of view, it's the value of the oil that went through the refineries that's important. It's also important to realize the value of the investments that have been made by the producers relative to asset values of the purchasers. Based on the value of the oil the state sent through the refineries, they have estimated the total value of the oil is estimated to be worth about $15 billion. The producers have also had to make very large investments (around $32 billion) against which they also must spread those costs, he pointed out. Number 356 SENATOR LEMAN asked what were the specific dates over which the adjustments have accrued. MR. EASON explained that a 10 year pay back is in the Tesoro agreement. The Amerada Hess litigation actually began in the fall of 1977. The Mapco agreement is the only contract of all the royalty contracts that allows repayment of the obligation over the same time period as that in which it accrued. SENATOR LEMAN asked if the in-state refiners were paying at the new rate now? MR. EASON replied yes. SENATOR ADAMS asked Mr. Eason to explain the difference between the exploration incentive credits (EICs) in SB 151 and the credit program in SB 134. MR. EASON said the first thing that is different is under Title 38 the decision to use EICs is up to the discretion of the Commissioner. Under SB 134, the decision is not discretionary unless you present good evidence that benefits don't result. There are no limits on the timing and period to qualify for EICs in SB 134 and there are in Title 38. This means the purchasers would have the ability to create new disputes at any time and subsequently have them declared in default or subject to judgment and thereby create new credits for themselves. MR. EASON said in the past they have always tied EICs to net profit shares, so if there is a discovery, the state not only gets a royalty, but a share of the net profit. SB 134 does not provide for any of the profits to come back to the state that might be realized from an underwritten expansion on behalf of the refiners. EICs are designed to encourage competition; they are available to all lessees. The Department believes SB 134 is anti-competitive and EICs always return some measurable benefit. With EICs, at a minimum, the state will get the well data and the ability to understand more about its resources for use in future lease sales and lease management activity. SB 134 may or may not provide those benefits. EICs present no forgiveness of contractual debt. SB 134 obviates contractual debt and encourages non-compliance with valid contracts. EICs apply only to projects in the state's interest. SB 134 provides that all projects not disallowed by clear and convincing evidence to produce commensurate results would by definition qualify for credits. SB 151 limits EICs to a total amount of $50 million over a 10 year period and any one EIC is limited to $5 million regardless of the cost of the project. It will also be limited to a cap of either 25% if it's conducted on private land or 50% if it's conducted on state land. Number 462 SENATOR HALFORD asked what credit would be justified in dealing with a retroactive royalty adjustment? MR. EASON said he personally did not think there was any justification. A royalty is a contract obligation and it is a slippery slope when you encourage non-compliance with contracts. It is bad public policy to allow forgiveness of contract debts as opposed to establishing a policy encouraging a certain type of behavior, in advance, open to all participants. SENATOR HALFORD asked how big was the original contract. MR. EASON said it was 35,000 barrels a day and it is correct that Mapco already has the ability to spread payment over 10 or 12 years. He could not recall the specific interest rate Mapco was paying. They are all different, he added. MR. EASON pointed out that they are in the middle of very intense negotiations with Mapco and one of the principal disputes involves the interest rate and the timing of interest. It would be best to not discuss these issues in Committee. Number 510 SENATOR SHARP asked what the adjustment was for the reinjection of one barrel per four barrels of crude. MR. EASON said there were arrangements for exchanges with others to pick up additional oil on the North Slope at pump station 1. The value of those exchanges was not known to him. Number 528 SENATOR ADAMS asked if the public could view the contracts between the state and other parties. MR. EASON said they were available to the public. Number 540 RANDY POZDENA, Eco Northwest, presented a slide show showing the effects of a major capital investment at a refinery on the tax revenues and the economy of Alaska. The model he presented had a $46.5 million expenditure for capital equipment, labor, and material over an 18-month period beginning in 1993. Annual operating costs would run $5 million and would generate an increase in demand for the crude oil of about 15,000 barrels a day which represents about $82 million per year. These are the expenditures that would be hitting the Alaskan economy. There are three classes of impacts, MR. POZDENA said, where the spending occurs: 1) raw materials and labor, 2) indirect impacts which are the further spending between Tesoro, and their suppliers, and 3) induced impacts, which are paychecks spent on general goods and services. With graphs and charts he showed the impacts to the Committee using a 20-year assumed operating span. He said the firm does not build inflation into their models, because that makes the numbers too speculative. Tax revenue impacts were done in present value, an economic term that leaves the least amount of room for speculation. They determined sales tax is to bring in $4 million and property and corporate income tax would each bring in more than $20 million. Miscellaneous charges, like unemployment insurance, workers compensation, and regulatory charges were $6 million. So the project's first round of capital expenditure is $46.5 million and generates $51.33 million in ultimate tax revenue to the state. TAPE 93-5, SIDE B Number 700 MR. POZDENA pointed out that you don't want to burden people who didn't anticipate a burden or who don't participate in the benefits of a project. Alaska's tax structure is very helpful, because of its reliance on corporate income tax and property taxes. In conclusion, MR. POZDENA said, Alaska would enjoy significant benefits from this hypothetical project; the biggest effects coming from ongoing refining operations. Another important point to note is that Tesoro is a nationally financed company, he said. Its capital expenditures are underwritten by investors elsewhere in the nation who essentially lend their money to Tesoro to develop activities, say in Alaska, and Alaskans get to enjoy both the income impacts of that out-of-state spending and to tax the income enjoyed by Tesoro as a corporate entity before the out-of-state entities get paid back. This is an important feature of this kind of capital development done by a company like Tesoro as opposed to a local enterprise that develops its capital expenditure from its own internal savings. SENATOR LITTLE asked if the anticipated taxes would accrue to the city of Kenai directly from the project since it is located outside of the city limits. MR. POZDENA said Kenai would receive sales tax revenue generated when householders spend their paychecks in local stores. Number 645 BUKI WRIGHT, Vice President, Mapco Alaska Petroleum, said due to litigation with the state, their situation isn't that clearly defined. Therefore, the ability of Mapco to participate in this program is a bit nebulous right now. They support the legislation, however, because it is good public policy. Commenting on the litigation, MR. WRIGHT said the possible $300 million of contested past due taxes did not go to profit the refineries. He said it was passed on to the Alaskan people, because of the competitive environment of the market place. Number 518 MR. WRIGHT supported some of the points raised by Attorney General Cole. He disagreed with others. One of them was the bill would encourage people not to pay their bills and default on obligations. Another was that this bill is bad because it allows the larger refiners to use this as a way to compete with small independently owned businesses. He stated that Mapco has no intention, if this legislation passes, to go out and build gas stations to compete with the existing gas station business. In response to Mr. Eason's comment on Mapco's 10-K filing with the SEC from 1991, MR. WRIGHT said that by 1991 the state had indicated the magnitude of the monies involved, and their contract has provisions that protect them from some of the charges the state wants to make. And they felt strongly enough about their position to make the statement publicly that they felt there would be no material impact. They also said they intended to vigorously contest that claim. MR. WRIGHT said it is true that their contract has a provision for extended payment of any retroactive obligation that would be determined which is different than other royalty oil purchase contracts. However, in no event can they take longer than the end of their contract, the year 2003, to pay back. Number 444 REPRESENTATIVE NAVARRE said he felt that 25% of the monies should go into the Permanent Fund and asked what Mapco's position was. MR. WRIGHT said he had heard the two sides of the issue and wouldn't stand in the way of money going into the Permanent Fund, but he would have to know what the obligation really was, before he could take a position. REPRESENTATIVE NAVARRE said the argument that the money hasn't been received, therefore, doesn't have to go to the Permanent Fund is absurd and there would be a class action suit filed immediately if that was the case. He also commented if the state helps build a project through a credit like this, the company gets an asset to use to borrow capital for whatever they want to use it for. MR. WRIGHT suggested looking to other similar situations for guidance. Number 350 RICHARD CLINE, Cline's Texaco, opposed SB 134, because competition can and will continue to control consumer price. Independent small business can only compete on a fair and level playing field. Government subsidy going to big business causes small businesses to be put to a competitive disadvantage. He supported a divorcement act so that a big business could not own gas from the pipeline to the tank, thus eliminating the big business monopoly we might be getting into. Number 285 NORM PRESTON, N & S Texaco, opposed SB 134, because it would subsidize big business which would put him out of business. He said that in-state refiners are making large profits from cheap crude supplied by the state of Alaska. Number 217 BRUCE GABRIEL, Soldotna, supported SB 134 and asked the Committee to consider the positive aspects of this legislation. Number 198 HAROLD HEINZE, Resource Development Advisor to the Governor, acknowledged the correctness of a number of the observations Attorney General Cole made yesterday. This bill is just bad policy, because it delegates the legislature's power to appropriate which can't and shouldn't be done. Second, if you want to deal with economic stimulus and job creation, the current Title 38 royalty in-kind provisions have plenty of recognition and criteria for investment, job creation, and even savings passed on to Alaskans. The companies need to come to the state under the existing statutes and make an application. The burden of proof is on them to show the economic impact. Number 124 JIM PAZSINT, owner of Boniface Texaco, opposed SB 134 agreeing with previous comments in opposition to the bill. TAPE 93-8, SIDE A Number 001 It would lead to the rapid loss of his livelihood and eventually result in higher gas prices, because it would lead to the elimination of competition as it exists in the market today. He thought Mapco's record could be audited and a very strong case be made for violations of federal anti-trust laws in terms of price fixing. He, too, supported divorcement legislation. Number 99 EDDIE BURKE, Eddie's Chevron, opposed SB 134 saying it would cause unfair competition. He pointed out that he was not being offered the same deal to create jobs with tax credits at his service station.
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