Legislature(2013 - 2014)BUTROVICH 205
02/08/2014 09:00 AM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB146 | |
| SB109 | |
| SJR15 | |
| SJR16 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 146 | TELECONFERENCED | |
| *+ | SB 109 | TELECONFERENCED | |
| *+ | SJR 15 | TELECONFERENCED | |
| *+ | SJR 16 | TELECONFERENCED | |
SB 146-APPROVE TESORO ROYALTY OIL SALE
9:01:08 AM
CHAIR GIESSEL announced SB 146 to be up for discussion.
JOE BALASH, Commissioner-designee, Department of Natural
Resources (DNR), said SB 146 intends to seek the legislature's
approval of a royalty sale with Tesoro that is lasting more than
one year. He explained that in 2013, the DNR entered into a
royalty sale contract with Tesoro that was for less than one
year and now they want to extend the terms beyond one year and
that requires legislative approval.
As owner of the oil and gas on state land, the state gets a
royalty interest in the production of the hydro carbon and has a
choice of taking it in kind (RIK) or in value (RIV). Statutes
direct the department to take royalty in kind unless the state's
interest is better served to take it in value, but the state is
then restricted on how to go about disposing of or selling that
royalty to achieve value.
COMMISSIONER BALASH said the state tends to stay in value for
the most part, benefiting from the lessee's expertise in being
able to manage the disposition and custody transfers. When
taking in kind they do it at the unit or lease boundary, and in
the case of oil, typically, that custody is immediately
transferred to the buyer of oil right there.
9:04:13 AM
The sale process is governed by a few interwoven statutes, the
first one being AS 38.05; and AS 38.05.182 directs the
department to take it in kind if they are able to determine it
is in the state's best interest to sell to folks in state for
refining purposes, hopefully, and to accomplish that through a
competitive process (with some exceptions).
Keeping that in mind, in 2012, he sent out an informal letter to
a variety of parties when it became apparent that Flint Hills,
in particular, was interested in additional volume for sale.
Those letters went out to producers, refiners, both in state and
out of state and generally went out through media and trade
publications. They received expressions of interest from Tesoro
and Flint Hills, and instead of continuing down the competitive
auction process, they negotiated non-competitive contracts with
each party to serve their respective needs or interests.
9:05:42 AM
SENATOR FAIRCLOUGH asked if other places would have competed.
COMMISSIONER BALASH answered their effort to test the waters
with this expression of interest and solicitation was intended
to see whether or not an auction process or competitive bid
system would generate enough interest to generate additional
revenue over and above what he would receive in an RIV context,
and based on the responses they received, they determined that a
large number of parties would not be interested in bidding for
royalty sales.
9:07:11 AM
SENATOR FAIRCLOUGH asked if the department had ever done a full-
blown RFP or search for a competitive bid.
COMMISSIONER BALASH answered yes, and showing a graph of RIK
sales history explained that the department did some nominations
and auctions back in the early 80s when it had a lot more
royalty and was in the throes of litigation over its value.
SENATOR FAIRCLOUGH noted that it looked like that stopped in
2004.
COMMISSIONER BALASH said specific terms in this contract were
taken from a contract that originally was for less than one
year, and those deliveries had begun earlier in the month. The
current contract doesn't directly reference the RIV versus RIK
calculations, rather it relies on a pricing formula that
averages together an ANS spot price and reported prices with a
$1.95 deduction and a tariff allowance (intended to capture not
only the cost of moving the hydrocarbon oil from the Valdez
marine terminal to the refinery, but also to reflect the
difference in the location depending on which destination it's
going to) for a marine differential. It also has adjustments for
the pipeline tariff, the quality bank, and a line loss factor.
Ultimately that kicks out a price that Tesoro will pay the state
for the value of its royalty.
9:09:05 AM
SENATOR DYSON asked him to explain "quality price adjustment."
COMMISSIONER BALASH relied that the quality bank adjustment is a
mechanism intended to keep all parties whole when various
qualities of crude are co-mingled in the pipeline. He explained
that the North Slope has fields that produce different grades of
petroleum and when it all comes into the TransAlaska Pipeline
System (TAPS) it mixes up and at the other end you get a barrel
of crude that is different than what was put in.
In the case of some Interior refineries, because they are
pulling TAPS quality crude off and recovering some of the higher
value products and returning the residual, they actually have to
pay into the quality bank. That is not a big factor for Tesoro,
because they don't put anything into the pipe, but for reporting
purposes they have to make sure the quality bank differential is
getting tracked from top to bottom.
COMMISSIONER BALASH said the quantity for this particular
contract is dependent upon the nomination made by the buyer with
a certain amount of notice so that the department can nominate
in turn through its lease prerogatives the taking of the volume.
It ranges from 5,000-15,000 barrels/day and may be adjusted so
long as that is done through the commissioner's office. The
contract can be terminated by the refinery or if they fail to
nominate for three consecutive months it terminates
automatically. He said there is an allowance for refinery
turnaround, so in the event they do need to do major maintenance
or an upgrade it doesn't count against them in that three-month
period. And similar to the Flint Hills contract, reserves are
included in the event of some sort of default so that the state
is not stuck as a distressed seller of crude that it has taken
in kind.
9:13:04 AM
When the commissioner makes a decision to sell the state's
royalty, he said that AS 38.05.183(e) guides the process and it
interconnects with the Royalty Board's contract evaluation
process, especially when it is one that goes for more than one
year.
COMMISSIONER BALASH said generally speaking they are guided by
the principal of ensuring that the state is going to receive at
least the same value it would have had the royalty been taken in
value. Because this contract is going beyond the one year term,
the state's Royalty Board met and reviewed it and the findings.
It then considers a list of eight things that try to take into
account the various opportunities that in-state refining, in
particular, or any other in-state use might have on the broader
community, so that more than just the cash value can be
considered. Their economists work very closely with applicants
from this year and prior years, relying on Department of Labor
and Workforce Development (DOLWD) statistics to understand the
jobs impact and try to get a handle on impacts in the market
pricing for the products that come out. Some of that is
difficult because of the unregulated nature of refined products
like diesel, gasoline, and home heating fuel. It's not like
natural gas that has a fairly transparent system to track value
from a producing field to a consumer.
9:15:32 AM
SENATOR FAIRCLOUGH asked in consideration of the projects'
additional costs and responsibilities, which could be imposed on
the state and affect political subdivisions by the developments
related to this transaction, how Tesoro is gaining access to the
crude and if they are responsible for the transportation costs.
COMMISSIONER BALASH replied that when the state makes these
sales, they do so at the lease boundary; in this case that means
Tesoro is responsible for gaining and managing the capacity in
whatever lines are needed to the oil from the field all the way
down to the end of TAPS. An allowance for those costs is
provided in the pricing formula.
The state position in negotiations with this buyer, as well as
others, is to not take custody risk or the obligation to secure
capacity in any of the lines. He explained that if the sales
point would be at the Valdez Marine Terminal (VMT), then there
would be a much higher burden on the division's staff to take on
the task of obtaining and managing capacity in those lines to
get from the field all the way to the VMT.
SENATOR FAIRCLOUGH asked if the point the state chooses to sell
from would affect the tariff.
9:17:47 AM
COMMISSIONER BALASH replied if the point of sale were moved
further south, it wouldn't necessarily affect the tariffs but it
would have to be included in the price formula a different way.
CHAIR GIESSEL asked if Tesoro gets the oil in Valdez and puts it
in one of their vessels and transports it to Nikiski where it
gets refined, and the oil that they can't process because of
their refinery configuration is then put on another ship and
gets sent down to the Lower 48, does that mean they have a zero
liability in the quality bank allowance.
COMMISSIONER BALASH replied in their case, that was correct, but
the quality bank differential varies over time depending on what
is going in at the top, what is going on midstream in the
Interior, and what is going on with the quality bank in the
North Pole. It probably has more of an impact on the competition
between refineries in the state, he thought, but then said
someone from Tesoro could answer that specifically.
9:19:44 AM
He said slide 10 showed the history of the state's royalty sales
program. Historically, there have not been a tremendous number
of sales to industries or buyers other than the state's Interior
refineries. Some sales have happened to Tesoro in the past and
hopefully, they will become a long term customer. He said that
Tesoro is also in the process of running the regulatory process
to construct a pipeline from the west side of Cook Inlet to
their location on the east side in Nikiski, and they hope to see
some good developments on the west side that helps keep them
supplied with Alaskan crude as opposed to imports.
SENATOR MICCICHE asked if the RIK contract price on page 5 was
similar to all of the other prior purchases beginning soon after
construction of the pipeline.
COMMISSIONER BALASH replied that the methods the state uses to
value its oil have evolved over time since the startup of TAPS.
He explained that in the course of the litigation during the
1980s the state sought to sell much more of its royalty, in
part, because we weren't certain we were getting the full value
from the lessees. As the settlements around those valuation
disputes occurred, beginning in the early 90s, the state felt
less of a need to sell its royalty in order to get full value
for it. And as time moved on, there were also changes in the way
the TAPS tariffs were calculated and the marine differentials
were accounted for.
He explained that TAPS tariffs were governed by a settlement
until the early mid-2000s when FERC was asked to adjudicate them
and then there was a fully adjudicated tax tariff value. So, in
some ways things have gotten to be much more transparent for the
state and for potential buyers.
9:23:50 AM
COMMISSIONER BALASH explained there is about a 20 cent
difference in the price per barrel for the volumes it is selling
to Tesoro. Part of the difference has to do with the
considerations that were included in that other contract. In
that case, they agreed to do certain things that the state
determined were valuable to the local population and market, the
big deal being price parity for gasoline that the Interior gets
relative to sales in the Anchorage market. But in this case, the
state is not receiving the benefit of any special commitments
from Tesoro and so the price is a little higher than the one
with Flint Hills last year.
CHAIR GIESSEL said Flint Hills had recently announced their
closure and that means that the royalty oil sold to them will
now become available and asked if that would affect this
agreement.
COMMISSIONER BALASH answered that as someone who grew up in
North Pole he was shocked at the Tuesday announcement and didn't
think the last shoe had dropped. He said that Flint Hills
initially had approached the state about a second ten-year
contract and looking at projections for declining production on
the North Slope, he wasn't certain of having sufficient royalty
volumes. But if Flint Hills shuts down and another buyer doesn't
reopen the refinery, the state will have a larger volume of
royalty available to sell. A combination of the Flint Hills and
Tesoro volumes in the next couple of years gets to be a pretty
high percentage of the state's royalty overall. In fact, both
contracts contain pro-ration clauses in the event the state is
short.
9:27:42 AM
COMMISSIONER BALASH said in some ways those issues become less
of a concern in the Tesoro case if Flint Hills is not taking
royalty. He said they will talk to the Royalty Board about
disposition of royalty volumes. Their first interest is to see
whether or not there is an opportunity to supply an Interior
refinery so that the one remaining with Petro Star continues to
operate.
9:28:12 AM
SENATOR FAIRCLOUGH asked if the loss of Flint Hills is going to
affect the ability to reheat the crude that is moving through
the pipe.
COMMISSIONER BALASH answered that he asked that question of
Alyeska immediately through the State Pipeline Coordinator's
Office and Admiral Barrett assured him that they will have the
ability to get heat into the system but it will cost more and
that Flint Hills received some value for the heat they were
putting back into the line.
COMMISSIONER BALASH said maintaining the stability of the
Nikiski facility and supporting jobs in the Kenai should have a
positive effect on the state overall. The Nikiski facility began
operations in 1969 and it is the most sophisticated refinery in
Alaska making ultralow sulphur diesel including a significant
piece of the overall market for jet fuel and a large role in
gasoline production, heating oil to a lesser extent. They make a
variety of products and employ 200 Alaskans in high paying
positions; they have a variety of retail outlets and filling
stations. Petro Star's facility in Valdez either does or will
manufacture low sulfur road diesel.
9:31:36 AM
SENATOR MICCICHE asked why the fiscal note is not negative.
COMMISSIONER BALASH answered that the fiscal note reflects a
zero cost to the agency for this contract. The revenue line is
indeterminate because they think this will ultimately return
more value to the state than staying RIV. Assuming maximum
volumes, it's about a 20 cent/barrel benefit to the treasury or
$1 million per year.
9:32:44 AM
SENATOR DYSON asked why the state doesn't give a discount to
refineries that are producing fuel for instate use, because
Alaskans have to pay more at the pump than people in the Lower
48.
COMMISSIONER BALASH replied that the refining and motor fuels
industries are unregulated and have very little transparency and
it would be hard to rely on the fact that a discount would flow
through to the benefit of the purchasing public. Because the
price realized at the fuel pump is a function of competition,
supply and demand, and a variety of factors, if the state would
consider selling its royalty oil to instate refineries at a
discounted price, the first question he would be asked is "Why?"
because a $5 difference in the state's royalty value would add
up to tens if not hundreds of millions of dollars depending on
the volumes sold in less revenue to the treasury. If one can
demonstrate that it is being passed on to the consumer
ultimately, that calculation could be evaluated and answered,
but some of the buyers of crude oil in the state have zero
appetite to provide transparent accounting for a price break
flowing through to the consumer.
SENATOR DYSON added that they would also be giving a benefit to
only a portion of the state's citizen to the detriment of others
and impacting deposits to the Permanent Fund.
COMMISSIONER BALASH said he was correct on both points.
9:36:29 AM
CHAIR GIESSEL noted that the Royalty Oil and Gas Development
Advisory Board is comprised of citizens that are volunteering
their services to the state of Alaska and are often invisible
and asked who they are.
COMMISSIONER BALASH said the Chair is Bob Roses (intending to
resign); Steven Menard, Chuck Wiegers, Dana Pruhs, and Steve
Selvaggio are public members; the cabinet members include
himself at the DNR, the commissioner of the DOR whose designee
is Bruce Tangeman, and the commissioner of the Department of
Commerce, Community and Economic Development (DCCED) Susan
Bell's designee (vacant).
He said when the board reviewed the Flint Hills contract last
year they expressed a desire to meet more frequently than just
to review a contract, so they had many meetings educating them
on royalty management history, including disputes that lead to
practices they use today. The board's history suggests that it
can hire its own staff to be a check against the Division of Oil
and Gas and the department generally, although it's been over 20
years since they had staff.
CHAIR GIESSEL thanked them for volunteering their services to
the state.
9:39:14 AM
MATT GILL Senior Manager, External Affairs, Tesoro Corporation
Operations in Alaska and the Pacific Northwest, Anchorage,
Alaska, supported SB 146. He said Tesoro Corporation is an
independent refiner and marketer of petroleum products. They
started refining in Alaska in 1969; the Kenai refinery has
capacity to produce up to 72,000 barrels per day and is
primarily focused on jet diesel production followed by gasoline
and gasoline blend stocks, heating oil, heavy fuel oils,
propane, and asphalt. They operate a 68-mile common carrier
products pipeline that transports jet fuel, gasoline, and diesel
to the Port of Anchorage and the Anchorage International
Airport. The wholesale delivery of their products occurs through
their terminals at Kenai, Anchorage, the Nikiski dock, and the
Port of Anchorage.
In addition to being the largest tax payer in the Kenai
Peninsula Borough, Mr. Gill said the refinery provides about 210
family wage jobs along with about 30 full time contractors who
are working in and around the refinery year round. They are able
to employ another 200-plus employees around the state at their
31 company-owned Tesoro-To-Go retail outlets, as well as the
operators that work at their terminals at the Port of Anchorage
and Nikiski.
He said Tesoro is a major supporter of the Cook Inlet Regional
Citizens Advisory Council (CIRCAC) and the largest member of the
Cook Inlet Spill Prevention and Response Team (CISPRE). They
actively support a wide range of local events and programs from
employee contributions and fund raising efforts for the United
Way to local youth sports programs. Each year they sponsor all
the 5th and 6th grade classes on the Kenai Peninsula to conduct
a mission at the Kenai Challenger Learning Center and they are
now the signature sponsor of the Caring for the Kenai Program.
MR. GILL said he supported SB 146 and said it is a result of
constructive dialogue and productive negotiations between the
Department of Natural Resources (DNR) and the Tesoro Corporation
as described in the presentation. Their original negotiations
resulted in a one-year contract beginning this month and ending
in January 2015. The original contract received best interest
findings, was approved unanimously by the State Royalty Board,
and was signed by both parties in October 2013. On further
analysis of their future needs, they sought this amendment to
the contract to add one more year using identical terms that
would deliver royalty oil until January 2016. A new final best
interest finding was produced by DNR, and the State's Royalty
Board again voted unanimously for approval.
MR. GILL said the state understands their issues and they
arrived at a mutually beneficial agreement that is a win/win for
both parties. The state will continue to receive a price for its
RIK oil that exceeds the price it would have received if it
elected to keep its royalty oil in value and this contract will
provide Tesoro with a stable supply of ANS crude while also
giving them the volumetric flexibility to help accommodate
seasonal fluctuations in demand for refined products. The
availability, flexibility, and stability this contract offers
will have a positive impact on Tesoro's ability to maintain its
ongoing operations at the Kenai refinery.
9:44:06 AM
JAMES TANGARO* Vice President, Tesoro Corporation* Manager,
Tesoro Refinery* Kenai, Alaska* said he was available to answer
questions on SB 146.
SENATOR BISHOP asked how much asphalt the refinery can produce
and what that would do to Department of Transportation and
Public Facilities (DOTPF) pricing on building lane miles in the
state and if Tesoro would be able to meet the demand.
MR. TANGARO said they usually make asphalt as needed and had not
maxed capacity and they will do everything they can to make sure
the supply is there.
SENATOR FAIRCLOUGH asked if they have sufficient resources to
pick up Flint Hill's shortfall in jet fuel supply at the
Anchorage International Airport.
MR. GILL answered yes; between their Kenai refinery and their
West Coast operations they would be able to supply the jet fuel
needs for the state.
CHAIR GIESSEL asked him where his supply of crude comes from.
MR. GILL replied that it comes from TAPS and everything that is
being produced in Cook Inlet, and they were excited about the
uptick in production there. On occasion foreign crudes from the
spot market have been brought in.
MR. TANGARO said ANS and Cook Inlet make up 90 percent on an
annual basis of what they run in the refinery but they shop on a
world market looking for opportunities.
SENATOR MICCICHE commended Tesoro for keeping unit costs as low
as possible and if some of that is supplemented with foreign
product that is just the way the business works. The reality is
that too many jobs and too many community benefits depend on
their success and he hoped to see some expansion considerations
in the future.
9:48:18 AM
MR. GILL added that they take possession of the ANS crude at the
top of the TAPS and buy a quality 10; if it goes through the
Flint Hills refinery they process it and put back in a lesser
product, which means that the product coming out of the pipeline
at Valdez is a lesser quality than what they bought, and that is
where the quality bank adjustment comes in to make sure they are
getting the value for what they bought at the top of the pipe.
Answering another question he said that Petro Star produces
ultra-low sulphur diesel at their Valdez refinery.
CHAIR GIESSEL opened public comment; hearing none, she closed
it.
SENATOR FAIRCLOUGH moved to report SB 146, version A, from
committee to the next committee of referral with attached fiscal
note and individual recommendations. There were no objections
and it was so ordered.