Legislature(1997 - 1998)

05/01/1998 03:55 PM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
            SB 342 - APPROVE SALE ROYALTY OIL TO MAPCO                         
CHAIRMAN HALFORD called the Senate Resources Committee meeting to              
order at 3:55 p.m. and announced SB 342 to be up for consideration.            
MR. KEVIN BANKS, Division of Oil and Gas, said he is the person in             
the Division who negotiated this contract.  The contract is a five-            
year contract that will start on December 1, 1998 and go through               
December 31, 2003.  The termination of this contract coincides with            
the end of the contract that was awarded to Mapco in 1979.  So at              
the end of this contract, both contracts will come to an end.  The             
quantity of oil they will be delivering to Mapco under this                    
contract is about 28,000 barrels per day of Prudhoe Bay royalty                
oil.  This is calculated as a percentage of production starting at             
27 percent in the first year and by the end of the contract it will            
rise 33.5 percent.  The price is based on the value received from              
the lessees in royalty value.  They take the volume weighted                   
average price of the value calculated by BP, ARCO, and Exxon and               
the other lessees and add 15 cents to that.                                    
Some of the other terms are a letter of credit from Mapco that is              
the equivalent to 75 days worth of oil sold under the contract                 
which should protect the State in the unlikely event that Mapco                
defaults under the agreement and we have oil in hand that we have              
to sell to someone else.  There is also a provision in the contract            
that requires Mapco to process at least 80 percent of the oil in               
state at their refinery at North Pole and that there is a local                
hire provision, as well.  Residents of Alaska are defined in this              
contract in the same way they are defined in the North Star lease              
amendments approved by the Legislature in 1996.  There is a local              
hire provision as well.                                                        
CHAIRMAN HALFORD asked if when they say process 80 percent, that               
doesn't result in 80 percent of 28,000 barrels.  He asked what goes            
back into the pipeline.                                                        
MR. BANKS answered that Mapco's throughput through the term of this            
contract will run at about 210,000 barrels.  That's how much oil               
passes through the refinery.  But only about 65,000 barrels of that            
will be processed into products and of that 65,000, 28,000 will be             
under this contract.  The oil that goes back into the pipeline is              
not royalty oil.  It's oil that Mapco has borrowed from TAPS                   
shippers and he thought they paid a fee for that privilege and pay             
for the degradation in the quality bank caused by that return oil.             
CHAIRMAN HALFORD asked if there was any provision in the contract              
that deals with local construction.                                            
Number 104                                                                     
MR. BANKS replied that the local hire clause in the agreement is on            
page 29 saying they should comply with federal and state law and               
not discriminate against Alaskan residents and companies.                      
MR. JEFF COOK, Mapco, said this bill enables and expands a great               
partnership between Mapco and the state of Alaska.  It's a value               
added effort where they will take additional crude and refine an               
additional 14,000 barrels of jet fuel a day and 3,000 barrels of               
diesel fuel.  This will allow them to offset the current import of             
about 14,000 barrels per day deficit for the State.  To do this,               
they are expanding the refinery with a $70 million stand alone                 
crude unit that can only process diesel and jet and not any                    
gasoline.  He showed the committee pictures of their facilities,               
and said they have all Alaskan contractors on the job and about 150            
Alaskan workers, which will peak at about 375 on the project this              
summer.  He personally drives through the parking lot every day to             
make sure every license plate is an Alaskan plate.  He said their              
main contractor is TCI, Vern Boyles, who has been in Fairbanks for             
30 plus years.                                                                 
Last year, when Mapco got its  jet fuel tax equalization, they                 
committed to building an addition; they have complied with that and            
above and beyond in Alaska hire and will continue to meet and                  
exceed those requirements.  In 1997, they spent about $450 million             
with nearly 700 Alaskan vendors, such as Golden Valley ($8.5 plus              
$2 million), and the Railroad ($23 million per year plus $10                   
million).  Cook said it's a great project and the Royalty Board had            
hearings.  He pointed out that their prices dropped penny for penny            
with crude, and as of today, their gasoline prices have dropped                
ahead of crude by about eight cents.                                           
Number 185                                                                     
SENATOR LINCOLN said over the five years of the contract it says               
the State "could" receive an additional $7.6 million in gross                  
revenues over what they receive from other Prudhoe lessees for the             
royalty oil.  She asked what the factors are where we "could"                  
receive it.                                                                    
MR. COOK answered if they buy the full 28,000 barrels a day, and               
there is a mechanism where they could take less, and pay the 15                
cent a barrel premium on top of royalty and value and times that by            
365 days times 5 years, it comes up to the $7.655 million.  That's             
gross and the State has calculated that the potential revenue                  
increase to them is $6 million, which is probably correct.                     
SENATOR LINCOLN asked what he would anticipate to be the norm.                 
MR. COOK replied that they expect that to be the norm.  If they can            
sell the 14,000 barrels additional jet they are going to make, plus            
the diesel that the State has to import right now, they expect to              
use it all.                                                                    
CHAIRMAN HALFORD asked what would happen if this legislation didn't            
MR. COOK responded there aren't a whole lot of options out there.              
ARCO requires every barrel they send down the line, they already               
have a 9,000 barrel a day contract with Phillips.  The other option            
would be BP who has markets and uses for theirs, too.  It would be             
a challenge.                                                                   
CHAIRMAN HALFORD asked if he could get one year contracts from the             
State without legislative approval.                                            
MR. COOK acknowledged that is correct.                                         
CHAIRMAN HALFORD said the approval language only applies to multi-             
year contracts.                                                                
MR. COOK agreed that was correct, and added that from their                    
standpoint, they would rather not go through that every year.                  
CHAIRMAN HALFORD commented that he thinks there is a lot of feeling            
that prices are higher than they should be at the pump based on the            
current price of crude oil.                                                    
MR. COOK said charts show that the biggest drop in the price of                
gasoline at the wholesale level was on February 16, which was                  
before even the announcement of any of the hearings on gasoline                
prices, and those charts show that we've dropped penny for penny.              
He noted costs of labor, electricity, etc., are higher in Alaska,              
and he thinks the fact that they've been able to keep gasoline as              
low as it is is good.  Also, Mapco refines the gas, it goes to a               
wholesaler and then to a retailer, so there are a lot of people                
involved in the gasoline chain.  Mapco also pays a quality bank                
penalty of $30 million, so for the 600,000 gallons they sell a                 
year, that is five cents a gallon that is an additional cost for               
them.  He also pointed out that gasoline is just a small part of               
Alaska's market.  In the world, a daily consumption of gasoline is             
800 million gallons and a daily consumption of jet fuel is 170                 
million gallons.  Alaska is just the opposite so volumes have a big            
effect on the price at the pump.                                               
Number 335                                                                     
SENATOR LEMAN said there are some things that government requires              
that drives the cost up, and he asked Mr. Cook if Mapco has ever               
identified them.                                                               
MR. COOK responded that the federal requirements  on refining,                 
distribution and retailing of gasoline are pretty much the same.               
However, Alaska does have some of the strictest environmental                  
standards in the country and Mapco hasn't really put a cost to                 
that, but it does add cost to the refining level, the wholesale                
level and the retail level.                                                    
SENATOR LINCOLN made reference to a letter from a gentleman which              
said that Mapco sells gasoline for five cents a gallon less in                 
Anchorage than it does it Fairbanks and it amounts to a 10 cents               
per gallon rip-off.  She asked Mr. Cook if that is also related to             
the volume in their cost of doing business.                                    
MR. COOK replied that he disagreed with the gentleman's assertion.             
He said Mapco makes about a third of the gasoline produced in the              
state, which is 5,300 barrels a day out of the total consumption.              
Very little of that is sent to Anchorage because they have an                  
exchange agreement with Tesoro.  In Fairbanks, any gasoline that's             
bought at retail, whether it is flying a Texaco flag, or Tesoro, or            
Chevron, or Mapco, it all comes out of their rack so there is very             
little of their product that goes south.  By making additional                 
volumes, they spread their costs out for the existing consumers in             
Fairbanks because Fairbanks consumption of gasoline is really                  
small.  In Fairbanks, they do half the volume yet they have to pay             
much more for all of their utilities than in Anchorage.                        
Number 385                                                                     
SENATOR TORGERSON questioned if it is possible to amend the                    
CHAIRMAN HALFORD informed him that there has been heated debate on             
amending other contracts in the past, but he hasn't researched that            
question on this particular contract.                                          
SENATOR TORGERSON asked Mr. Cook if this royalty contract was                  
similar in pricing to what the State has with Tesoro.                          
MR. COOK thought it was identical in price.  Tesoro had a three-               
year contract, and he thinks they opted to do a one-year extension.            
SENATOR GREEN asked if this ties the life of the contract into one             
price or if there is a flexibility in evaluating differences as the            
market changes.                                                                
MR. COOK acknowledged that it is a variable contract.  It takes                
the sale prices, and there is a formula to take each of the                    
producers and their values and average those out, and then add in              
the 15 cents.  The reality is that they never know what they paid              
for the crude that they sell at retail until long after they've                
gotten billed for it and paid for it.                                          
Number 402                                                                     
CHAIRMAN HALFORD invited Representative Jerry Sanders, who has been            
working on this issue on the House side, to join the committee at              
the table and offer his comments.                                              
REPRESENTATIVE JERRY SANDERS informed Senator Torgerson that Kevin             
Banks could give him a good comparison between this contract and               
Tesoro's contracts.  He also related he was told by legislative                
legal counsel that this contract couldn't be amended.                          
Representative Sanders said in listening to eight hours of                     
testimony in the House Economic Development Committee, there is                
very little doubt that the price of fuel is having a retardant                 
effect on economic development in the state of Alaska, and not just            
with gasoline but all the fuel.  Silver Bay Logging testified that             
they buy their diesel fuel out of Anacortes, Washington for their              
operations and they save about 40 percent over what they could save            
buying it on the Kenai Peninsula.  It costs them about 10 percent              
to barge the fuel up for a net savings of roughly 30 percent.                  
However, it was testified that some of the mines in the Fairbanks              
area drive to Kenai, buy their diesel and haul it back up at a                 
savings of 30 cents a gallon,  and it costs them about 15 cents to             
truck it so they have a net savings of about 15 cents a gallon.                
Representative Osterman works during the summer months in Kodiak               
for a local bush airline that goes to Seattle and leases a tanker              
truck, fills it with aviation fuel, puts it on a barge and realizes            
a net savings of 25 cents a gallon.                                            
Representative Sanders said refineries say that they make very good            
money and they are simply charging what the market will bear.  They            
say the prices are not controlled by the price of crude but by                 
supply, demand and competition.  The supply in Alaska is controlled            
by shipping excess supply to the West Coast where it is sold at a              
very low profit or maybe a small loss to prevent oversupply in                 
Alaska which would drive the price down.  He questioned why the                
refineries would ship it and sell it at a three cent profit when               
they are getting  a 30 percent profit in Anchorage, and he was told            
that they would then be competing with Mapco and they'd probably               
put them out of business.                                                      
CHAIRMAN HALFORD commented that if the refineries reduced the price            
from $1.30 to $1.25 they would lose money but they wouldn't sell               
anymore fuel because the demand is inelastic as it applies to                  
REPRESENTATIVE SANDERS said while he still believes that Mapco and             
Tesoro are manipulating the Alaskan market for fossil fuels for                
their advantage and profit, he doesn't know that holding up their              
contract would have a positive effect on the situation at this                 
time.   However, he said he would encourage the Legislature, the               
Administration, and most of all the local refineries to work                   
together to ensure that the citizens of Alaska realize both the                
price and supply benefits from the sale and processing of our                  
royalty oil as laid out in the state statutes.                                 
CHAIRMAN HALFORD said he agrees that  the price is probably set by             
the marginal price of shipping crude out, refining outside and                 
shipping it back, but he wishes he could think of some way that                
wasn't a direct attack on the market system that would push that a             
little bit.                                                                    
Number 551                                                                     
CHAIRMAN HALFORD asked Jeff Cook what can be done to reduce the                
price of gasoline in the state.                                                
MR. COOK related that their rack price for gasoline is exactly the             
same as it is in Anchorage and the same as it is in Seattle and Los            
Angeles.  He said Alaska has a population of only 600,000 people,              
a pretty minimum road system and a high cost of doing business.                
Retailers  in these other areas are doing several hundred thousand             
gallons, if not a million gallons a month, and they can have much              
tighter margins.  However, he pointed out that even in California,             
for every place that has a lower price of gasoline than Anchorage,             
there is at least one or two places that have a higher price in the            
Lower 48.  He said there has been a big spike in gasoline prices at            
the rack levels in the Lower 48, and he thinks those are going to              
start coming back up.  He also pointed out that Mapco can only make            
about 5,500 barrels of gasoline a day of which 70 percent gets                 
consumed by stations and the rest by other.   The reason a lot of              
the areas in the states right now have low prices is because they              
have a crude surplus and they have a refined product surplus.                  
Mr. Cook said he thinks that until volumes are up and all other                
costs are down there will not be a big change, but he reminded the             
committee to keep in mind what the price is now versus the Lower 48            
versus what it used to be before the refineries.                               
Number 585                                                                     
SENATOR TORGERSON inquired about the price of heating oil.                     
MR. COOK said Mapco has dropped the price of heating oil three                 
times since February and that has not followed through at the                  
retail end in the interior.                                                    
TAPE 98-38, SIDE B                                                             
Number 560                                                                     
SENATOR TORGERSON asked Mr. Cook's response to Representative                  
Sanders' statement that Silver Bay Logging can buy diesel fuel in              
Anacortes, Washington and bring it up here for 30 cents a gallon               
MR. COOK said there are certain areas of the state which because of            
the volumes they use and  their location to Seattle or Anacortes,              
it is just be easier and cheaper to bring it in from those sources.            
Those areas have a better infrastructure and Alaska just doesn't               
have a good shipping infrastructure to get this product out.                   
MR. COOK noted that 61 percent of the daily demand of all fuels is             
jet fuel.  The Anchorage airport is booming; they can't get enough             
jet fuel over there from the port to serve that airport  without a             
new pipeline.  He said that market is not being hurt.  Lynden has              
got more trucks running up north because of all of the activity and            
is burning more diesel fuel than it was at the peak of the                     
pipeline, so some of these base economies are doing very well.                 
Number 539                                                                     
CHAIRMAN HALFORD asked what kind of refinery margin it takes in                
Alaska to make a profit.  He said a report shows refinery margins              
in California of only 22.5 cents and refinery margins in Alaska of             
45 cents.                                                                      
MR. COOK responded those margins are extremely off and Mapco's                 
refinery margins are no where near that.  To say that there is a               
same retail margin or a same margin across the country as across               
Alaska, is not right.                                                          
There being no further testimony on SB 342, CHAIRMAN HALFORD                   
requested a motion on the legislation.                                         
Number 530                                                                     
SENATOR TORGERSON moved SB 342 be passed out of committee with                 
individual recommendations.  Hearing no objection, it was so                   
There being no further business to come before the committee, the              
meeting adjourned at 4:48 p.m.                                                 

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