Legislature(2021 - 2022)BARNES 124
04/06/2022 01:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| HB409|| HB410 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
| *+ | HB 409 | TELECONFERENCED | |
| *+ | HB 410 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
April 6, 2022
1:05 p.m.
MEMBERS PRESENT
Representative Josiah Patkotak, Chair
Representative Grier Hopkins, Vice Chair
Representative Zack Fields
Representative Calvin Schrage
Representative Sara Hannan
Representative George Rauscher
Representative Mike Cronk
Representative Ronald Gillham
Representative Tom McKay
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE BILL NO. 409
"An Act approving and ratifying the sale of royalty oil by the
State of Alaska to Petro Star Inc.; and providing for an
effective date."
- MOVED HB 409 OUT OF COMMITTEE
HOUSE BILL NO. 410
"An Act approving and ratifying the sale of royalty oil by the
State of Alaska to Marathon Petroleum Supply and Trading Company
LLC; and providing for an effective date."
- MOVED HB 410 OUT OF COMMITTEE
PRESENTATION(S): AKLNG UPDATE BY ALASKA GASLINE DEVELOPMENT
CORPORATION
- REMOVED FROM AGENDA
PREVIOUS COMMITTEE ACTION
BILL: HB 409
SHORT TITLE: APPROVE PETRO STAR INC. ROYALTY OIL SALE
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
04/04/22 (H) READ THE FIRST TIME - REFERRALS
04/04/22 (H) RES, FIN
04/04/22 (H) DNR, O&G BEST INTEREST FINDING AND
DETERMINATION REPORT
04/04/22 (H) RES AT 1:00 PM BARNES 124
04/04/22 (H) -- MEETING CANCELED --
04/06/22 (H) RES AT 1:00 PM BARNES 124
BILL: HB 410
SHORT TITLE: APPROVE MARATHON PETRO ROYALTY OIL SALE
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
04/04/22 (H) READ THE FIRST TIME - REFERRALS
04/04/22 (H) RES, FIN
04/04/22 (H) DNR, O&G BEST INTEREST FINDING AND
DETERMINATION REPORT
04/04/22 (H) RES AT 1:00 PM BARNES 124
04/04/22 (H) -- MEETING CANCELED --
04/06/22 (H) RES AT 1:00 PM BARNES 124
WITNESS REGISTER
JHONNY MEZA, Commercial Manager
Division of Oil and Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: During the hearing on HB 409 and HB 410,
provided a PowerPoint presentation, "The Process for the Sale of
ANS Royalty Oil In-Kind and the Proposed Contracts with Marathon
and Petro Star," dated 3/25/22.
JOHN CROWTHER, Deputy Commissioner
Office of the Commissioner
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: During the hearing on HB 409 and HB 410,
answered questions.
DOUG CHAPADOS, President, CEO
Petro Star Inc.
Arctic Slope Regional Corporation
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 409.
CASEY SULLIVAN, Government and Public Affairs Manager
Marathon Petroleum Corporation
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 410.
ACTION NARRATIVE
1:05:09 PM
CHAIR JOSIAH PATKOTAK called the House Resources Standing
Committee meeting to order at 1:05 p.m. Representatives
Hopkins, Hannan, Rauscher, Cronk, Gillham, McKay, and Patkotak
were present at the call to order. Representatives Schrage and
Fields arrived as the meeting was in progress.
HB 409-APPROVE PETRO STAR INC. ROYALTY OIL SALE
HB 410-APPROVE MARATHON PETRO ROYALTY OIL SALE
1:05:29 PM
CHAIR PATKOTAK announced that the first order of business would
be HOUSE BILL NO. 409, "An Act approving and ratifying the sale
of royalty oil by the State of Alaska to Petro Star Inc.; and
providing for an effective date." and HOUSE BILL NO. 410, "An
Act approving and ratifying the sale of royalty oil by the State
of Alaska to Marathon Petroleum Supply and Trading Company LLC;
and providing for an effective date."
CHAIR PATKOTAK explained that HB 409 and HB 410 relate to
approving the sale of royalty in-kind oil to Petro Star Inc. and
Marathon Petroleum Corporation, respectively. He noted that
both bills do the same thing with two different companies and
that the bills provide approval of the contracts for the sale of
Alaska's royalty oil. He pointed out that the bills cannot be
amended because they are negotiated, and the bills are subject
to the approval or denial of the legislature. He stated that
renewal of the contract must happen by April 21, [2022], or the
contract will not be renewed. He disclosed that he and his
family are shareholders of Arctic Slope Regional Corporation
(ASRC) which owns Petro Star Inc.
1:07:18 PM
JHONNY MEZA, Commercial Manager, Division of Oil and Gas,
Department of Natural Resources (DNR), provided a PowerPoint
presentation, "The Process for the Sale of ANS Royalty Oil In-
Kind and the Proposed Contracts with Marathon and Petro Star,"
dated 3/25/22 [hard copy included in the committee packet]. He
displayed slide 2, "AGENDA," and said he would be reviewing what
royalty in-kind is, the history of royalty in-kind sales, the
statutory and regulatory mandate for royalty in-kind, the
process that DNR has followed for this sale of royalty in-kind
oil, and the contract terms for Marathon and Petro Star.
MR. MEZA turned to slide 4, "1. WHAT IS ROYALTY IN-KIND?
STATUTORY REFERENCE." He explained that the DNR commissioner
can elect to take the state's royalty oil and gas in-value (RIV)
or in-kind (RIK). When selecting the royalty in-value, he said,
the department receives a share of the proceeds from the sale of
oil or gas by the producers, determined by the royalty rate.
When the department selects its royalty in-kind, he advised, the
department is in charge of marketing that royalty oil [or gas].
He drew attention to the [3/23/22] letter from DNR depicted on
the slide that informs the Senate president and the House
speaker that the state is electing to take its oil and gas
royalty in-value.
MR. MEZA moved to slide 5, "1. WHAT IS ROYALTY IN-KIND?
CONTRACTUAL REFERENCE." He said this is where the department
and the producers agree on the royalty share on the production.
He noted that the example on the left side depicts a contract
for an oil and gas lease and the example on the right side
depicts a contract for a unit agreement.
1:10:14 PM
REPRESENTATIVE RAUSCHER drew attention to the statute depicted
on slide 4, Sec. 38.05.182, which states that the royalty "may
be taken in-kind rather than in money if the commissioner
determines that the taking in-kind would be in the best interest
of the state." He asked whether it must also be in the best
interest of [the operator with which the commissioner is making
the agreement].
MR. MEZA replied that in this determination for RIK it must be
based on the best interest of the State of Alaska, including the
citizens of the state of Alaska.
REPRESENTATIVE RAUSCHER asked whether both sides must agree on
the agreement.
1:11:33 PM
JOHN CROWTHER, Deputy Commissioner, Office of the Commissioner,
Department of Natural Resources (DNR), responded that DNR leaves
it to the counterparty, the private company to enter this
negotiation and to conclude it, to determine if it's appropriate
for their economic interest. The private company can choose not
to receive RIK oil from the state if it determines that that's
in its economic interest.
1:12:16 PM
MR. MEZA resumed his presentation. He displayed slide 6, "1.
WHAT IS ROYALTY IN-KIND? STATE OWNERSHIP IN THE NORTH SLOPE (AS
OF JANUARY 2022)." He said the map highlights the fields from
which the state has ownership as the royalty owner, such as the
Kuparuk River Unit and Prudhoe Bay units. He noted that the
Bear Tooth and Greater Moose's Tooth units are federal land. He
explained that royalty oil in-kind in the context of the
proposed contracts before the committee, refers to the fields
where the state has ownership.
MR. MEZA proceeded to page 8, "2. HISTORY OF ROYALTY IN-KIND
ALASKA NORTH SLOPE OIL." He said the graph shows the total
royalty from the North Slope that the state has received from
November 1979 [to July 2021], with the grey line depicting the
portion that has been selected by the DNR commissioner
throughout this period to be taken in-kind. He related that the
state has historically selected royalty oil both in-kind and in-
value and that about 97 percent of royalty oil in-kind has been
from the North Slope. He explained that the amount of RIK oil
that the state can select depends on the level of production,
the royalty rates the state has on its leases, and the demand
from refineries.
MR. MEZA reviewed slide 9, "2. HISTORY OF ROYALTY IN-KIND TYPES
OF CONTRACTS AND BUYERS." He noted there are both competitive
and non-competitive, negotiated, sales. He said that 5 percent,
46 million barrels, is the royalty oil in-kind that the state
has sold via competitive sales. Most of the oil that has been
sold via this royalty in-kind program has been dedicated to in-
state buyers.
1:15:58 PM
MR. MEZA next discussed slide 11, "3. STATUTORY AND REGULATORY
MANDATE FOR ROYALTY IN-KIND LEGISLATIVE APPROVAL." He drew
attention to the statutory language depicted for Sec. 38.06.055,
which requires the DNR commissioner to get legislative approval
before executing the RIK contracts. He noted that per statute
the sale of royalty by the DNR commissioner requires the
[written] recommendation of the Alaska Royalty Oil and Gas
Development and Advisory Board. However, he continued, an
exception to this requirement is if the sale of royalty is to
relieve storage or market conditions, which can only be used for
up to one year.
CHAIR PATKOTAK asked whether the legislature has ever denied a
royalty in-kind negotiated contract that the administration has
put forward.
MR. MEZA answered that he does not know of any denials by the
legislature.
1:17:26 PM
MR. MEZA resumed his presentation. He displayed slide 12, "3.
STATUTORY AND REGULATORY MANDATE FOR ROYALTY IN-KIND RECENT
HISTORY OF APPROVAL." He explained that the table lists the
recent RIK oil contracts, beginning with Tesoro in 2016 [for
five years] and Petro Star in 2016 [for one year and for four
years]; with Marathon and Petro Star in 2021 [for one year], and
the currently proposed contracts with Marathon and Petro Star in
2022 for three years and five years, respectively. He noted
that for multi-year contracts the department has obtained the
support and recommendation of the Royalty Board as well as the
approval by the legislature. He further noted that in the cases
where the contracts were for one year, these contracts were
entered to relieve market conditions, so the department didn't
need the review of the Royalty Board nor the approval of the
legislature.
1:19:00 PM
REPRESENTATIVE HANNAN requested further detail on the one-year
contracts, which appear to have similar conditions to what the
legislature is currently being asked to approve for multiple
years.
MR. MEZA responded that the statute includes an exception to the
requirement for review by the Royalty Board or approval by the
legislature when DNR enters a contract to relieve storage or
market conditions. He said DNR entered these one-year contracts
to relieve storage or market conditions because at that time the
Royalty Board wasn't fully staffed and continuing the supply of
royalty oil to the in-state refineries was needed to meet the
demand by the citizens of the state.
REPRESENTATIVE HANNAN drew attention to the Marathon contract in
2021 which was 10,000-15,000 barrels per day. She noted that
that is the same size as the contract the legislature is being
asked to approve, but now it is over a period of three years
rather than one year.
MR. MEZA confirmed that is correct.
MR. CROWTHER noted that that is a daily volume, so it occurs
throughout the term, not over the full three-year term.
REPRESENTATIVE FIELDS asked whether the state gets a better deal
for multi-year contracts or for the shorter-term contracts.
MR. MEZA answered that the additional value that the state
obtains varies regardless of whether it is one year or multi-
year. He said that overall, on average, the state obtains
incremental revenue and besides the additional revenue which is
a benefit to the state there is the benefit of supplying crude
oil to in-state refineries and how that translates into refined
products for the citizens of Alaska.
1:22:31 PM
MR. MEZA resumed his presentation. He discussed slides 13 and
14, "3. STATUTORY AND REGULATORY MANDATE FOR ROYALTY IN-KIND
ROYALTY BOARD REVIEW." On slide 13, he drew attention to the
criteria the Royalty Board must consider under the statutory
language of Sec. 38.06.070. On slide 14, he drew attention to
the board review and recommendation required under the statutory
language of Sec. 38.06.050. He noted that the right side of the
slide depicts the documents that the Royalty Board has provided
to the legislature effectuating the board's recommendation of
the proposed contracts currently before the committee for
Marathon and Petro Star. Through the review process, he
continued, DNR must obtain unanimous vote for recommendation
from the Royalty Board for each of these two contracts.
MR. MEZA moved to slide 15, "3. STATUTORY AND REGULATORY MANDATE
FOR ROYALTY IN-KIND COMPETITIVE VS. NON-COMPETITIVE SALE." He
brought attention to the statute, Sec. 38.05.183, for the sale
of royalty. He said the statute requires the sale be by
competitive bid except when the DNR commissioner determines that
conducting a non-competitive sale is in the best interest of the
state. For that purpose, he explained, DNR issues a
solicitation of interest gauging the responses from the market
participants, and in the case of proposed contracts that are
non-competitive, this decision is in the best interest of the
state. He noted that about 95 percent of the department's sales
have been made in a non-competitive basis.
MR. MEZA reviewed slide 16, "3. STATUTORY AND REGULATORY MANDATE
FOR ROYALTY IN-KIND SALE WITHIN THE STATE OR FOR EXPORT?" He
stated that the map depicts where the refineries are located
within Alaska, and the map is intended to reflect that most of
the sales of royalty oil in-kind have been dedicated for in-
state refineries. He drew attention to the regulatory language
under AS 38.05.183(d), which states: "Oil or gas taken in kind
by the state as its royalty share or gas delivered to the state
under AS 43.55.014(b) may not be sold or otherwise disposed of
for export from the state until the commissioner determines that
the oil or gas is surplus to the present and projected
intrastate domestic and industrial needs."
1:25:11 PM
MR. MEZA proceeded to slide 17, "3. STATUTORY AND REGULATORY
MANDATE FOR ROYALTY IN-KIND INFORMATION ON IN-STATE REFINERIES."
He related that in the proposed contracts DNR has asked for and
received information from Marathon, which operates the Nikiski
refinery, and Petro Star, which operates the North Pole and
Valdez refineries. He reported that the production for the
Nikiski refinery is around 55,000 barrels per day of refined
product, which includes [30 percent jet fuel to Anchorage, 27
percent gasoline, and 43 percent a mix of liquid petroleum gas,
distillate, vacuum gas oil, fuel oil, and seasonal asphalt.] He
further reported that the North Pole and Valdez refineries have
maximum capacities of 22,000 and 60,000 barrels per day,
respectively, and the mix is [65 percent] jet fuel and [35
percent] ultra-low sulfur diesel, asphalt, and heating oil, with
no gasoline produced by these two refineries. For all three
refineries, he related, the majority of refined product is
dedicated for consumption within Alaska, only a minor component
is dedicated to outside of Alaska. Regarding where the refiners
obtain their crude oil, he said the Nikiski refinery obtains
about [60 percent] from the North Slope, [20 percent] from Cook
Inlet, and [20] percent from other sources in the U.S. or
foreign sources. For the two Petro Star refineries, he conveyed
that 100 percent comes from the North Slope. He drew attention
to the bottom of the table depicting the numbers of employees.
REPRESENTATIVE FIELDS asked where the 20 percent of non-Alaska
crude oil comes from that is obtained by the Nikiski refinery.
MR. MEZA replied that DNR doesn't know that information. He
suggested obtaining it directly from the company.
MR. CROWTHER related that Marathon has said in other legislative
testimony that in recent years it has been closer to 90 percent
within-Alaska sources. He offered his understanding that the
majority has been from other U.S. sources, but that the company
certainly also has international sources. He said the company
keeps that information proprietary for commercial reasons.
1:28:06 PM
MR. MEZA resumed his presentation. He continued to slide 18,
"3. STATUTORY AND REGULATORY MANDATE FOR ROYALTY IN-KIND PRICING
REQUIREMENT FOR RIK." He said the graph depicts a critical
piece of information for these contracts. He explained that the
zero line on the graph represents the point at which the price
of royalty oil in-kind equals the price of royalty oil in-value.
He said the blue circles represent that the price the department
received by selling royalty oil in-kind was greater than the
proceeds that DNR received from the producers when choosing this
royalty in-value. The red squares, he continued, show the few
instances where the department obtained a lower price for its
royalty oil in-kind than the royalty in-value. He pointed out
that overall, on average, from January 2008 to December 2021,
the state obtained 93 cents for each barrel of royalty oil in-
kind in addition to what it would have received had the state
elected all its royalty in-value. In other words, Mr. Meza
advised, the state generated an additional $137 million in
revenue by entering these royalty oil in-kind contracts, and
total proceeds from these RIK sales amount to almost $11
billion. He stated that this complies with the regulatory
language of 11 AAC 03.026(b) which requires that the price of
royalty oil in-kind should be at least equal to the price of
royalty oil in-value.
1:30:07 PM
MR. MEZA moved to the fourth section of his presentation. He
drew attention to slides 20 and 21, "4. THE PROCESS THAT DNR
FOLLOWED FOR THIS SALE OF RIK OIL." He displayed slide 20 and
stated that for the Marathon and Petro Star contracts, DNR has
followed the language from the statutes and regulations that
determine how the process for the sale of royalty oil in-kind
should be conducted. In this process, he said, DNR involved the
Royalty Board in the decisions making the determinations by the
commissioner required by the statute, but also the review by the
Royalty Board and the ability for the department to provide
comments. He related that slide 21 shows that DNR evaluated the
expiration date of these RIK processes and considered whether
the sale of RIK should be done on a competitive or
noncompetitive basis, and for sale within the state or for
export, and whether it should be long-term or short-term
contracts. He said the department published a Solicitation of
Interest gauging the information from the market and evaluated
those responses and decided to conduct a noncompetitive sale.
The department informed the Royalty Board of this position, he
continued, and conducted negotiations with the parties that show
interest, which were Marathon and Petro Star. He said the
department published a preliminary best interest finding showing
why these proposed contracts are in the best interest of the
state and DNR provided a 30-day public comment period. He
advised that DNR received no comments from the public but there
was an extensive review by the Royalty Board on these proposed
contracts and DNR obtained unanimous approval. After that, he
said, the department published a final best interest finding
which was provided to the legislature, which is where the
process currently is.
1:32:08 PM
REPRESENTATIVE FIELDS asked whether it is accurate to assume
that if DNR was doing a competitive sale, realistically the only
competing entities would be in-state refineries and not out of
state refineries.
MR. MEZA replied that in the publication of this solicitation of
interest, DNR obtained three responses from entities. Out of
those three responses, he continued, only two showed interest in
buying royalty oil in-kind. He said DNR therefore evaluated how
much benefit the department would obtain by doing an auction
with only two participants versus negotiating separately with
each one.
REPRESENTATIVE FIELDS observed from the history of the program
that the department has more frequently concluded that the
noncompetitive route gets a better deal for the state. He asked
whether that is primarily a result of the small number of
bidders, so a competitive environment really isn't that
competitive or whether other there are other factors that make
the noncompetitive sale approach more beneficial for the state.
MR. MEZA responded that besides the number of responses it is
also because of the requirement in regulations and statute that
the department make a written finding that in-state demand is
met and before there can be royalty oil for export, the
department needs to secure a price that is at least as much as
royalty in-value.
1:34:11 PM
The committee took a brief at-ease.
1:34:41 PM
MR. MEZA resumed his presentation and reviewed the fifth section
of his presentation provided on slides 22-28. He displayed
slide 23, "5. CONTRACT TERMS FOR MARATHON AND PETRO STAR
OVERVIEW OF RECENT AND PROPOSED RIK CONTRACT TERMS." He drew
attention to the column labeled "Netback pricing" and stated
that these contracts have the same valuation methodology, so
there was no change with respect to the current proposed
contract versus the ones that were entered about six years ago.
He explained that a netback methodology is followed which uses
the pricing of U.S. royalty oil in the U.S. West Coast and
considers all the components that are necessary to determine the
price of royalty oil at the field because that is the point
where DNR, the state, transferred title of its royalty oil to
the buyer. He advised that the state is not in charge of
transporting or taking any risk when transferring that royalty
oil. He said the column, "RIK differential," shows a key
negotiating term of these contracts, which is the dollar
deduction that determines the value of royalty oil. He noted
that the value has increased from $1.95 per barrel to $2.25 per
barrel for Petro Star and $2.23 per barrel for Marathon.
CHAIR PATKOTAK asked whether the refined product from the oil
that was taken in-kind is wholly used in the in-state market for
sale or used by any state agencies.
MR. MEZA answered that the department provides royalty oil to
the buyer, the refiner, and the refiner is the one extracting
refined product from that crude oil, [the state] does not enter
the market of refined products.
1:37:25 PM
REPRESENTATIVE RAUSCHER inquired whether there is a time
specific date.
MR. MEZA returned to slide 21 and pointed out that the 1-year
RIK contact with Marathon ends on 7/31/22. He said a provision
with which DNR must comply is to provide three-month notice to
the North Slope producers before electing this royalty oil in-
kind. This three-month notice, he explained, means DNR must
have the following contract with Marathon executed by 4/22/22.
Should DNR take one week or one month longer than that, he
continued, then it means the refinery will have one week or one
month to be done with the royalty oil. While the refiner still
has provisions from North Slope producers, he added, the royalty
oil is also important.
REPRESENTATIVE RAUSCHER inquired whether the market volatility
of the last month has given DNR pause on this or whether DNR
remains comfortable.
MR. MEZA replied that DNR believes these contracts have been
structured to account for that volatility, which has also
occurred in the past. He related that there was substantial
volatility during the 14-year period in which the state obtained
a premium of $0.93 per barrel, and so DNR is not that concerned
about volatility.
1:39:48 PM
REPRESENTATIVE HANNAN requested elaboration on Chair Patkotak's
opening reference to the date of 4/21/22.
CHAIR PATKOTAK offered his original understanding that it was
4/20/22.
REPRESENTATIVE HANNAN asked whether that is for a floor vote.
CHAIR PATKOTAK explained that both bills are moving through both
bodies. He deferred to Mr. Crowther to provide further detail.
MR. CROWTHER answered that DNR must execute the contract by
4/22/22, and to execute the contract DNR must have an enacting
bill from the legislature prior to that date. So, he stated, if
both bodies of the legislature pass the bills and the governor
signs the bills by 4/22/22, DNR can keep the contract and have
an uninterrupted supply.
CHAIR PATKOTAK noted that consideration must be given to the
time it takes for transmittal to occur after a vote.
MR. CROWTHER confirmed that is correct.
1:40:57 PM
REPRESENTATIVE HANNAN, regarding if that didn't happen, asked
whether there would be an interruption in the contract or
whether the bill would expire if not completed by 4/22/22.
COMMISSIONER CROWTHER responded that the bill does not expire on
that date, there would just be an interruption in the contract
and supply, and it would be up to the refinery, in this case
Marathon, to either limit runs or to seek an alternative source
of supply subject to that uncertainty.
REPRESENTATIVE HANNAN noted that she wanted it on the record as
to whether it would be a delay rather than a disappearance.
1:42:09 PM
REPRESENTATIVE MCKAY observed on slide 21 that the contracts
with Marathon and Petro Star go until 7/31/22 and 12/31/22,
respectively. He offered his understanding that if [the bill
was not signed by the governor by 4/22/22], then it would go
back to the previous contract.
MR. CROWTHER answered that the shortfall or interruption would
not occur in April; it would potentially occur at the end of
that contract because DNR must do the 90-day notification. So,
he continued, DNR would technically be tardy in not nominating
those barrels to receive them with the upstream producers, and
so in theory DNR wouldn't be eligible to receive them until
"that Q3 2022 period, later in that period."
1:43:22 PM
REPRESENTATIVE RAUSCHER thanked Representative Hannan for her
clarification because he was looking for the legislature's
timetable, not the department's.
CHAIR PATKOTAK asked whether the panel had further questions.
1:43:55 PM
MR. MEZA resumed his presentation. He displayed slide 24, "5.
CONTRACT TERMS FOR MARATHON AND PETRO STAR RIK DIFFERENTIAL IS
THE SOURCE OF THE PREMIUM OF RIK OVER RIV." He explained that
this slide provides a comparison of how the value of royalty oil
is determined when the state selects its royalty in-value versus
royalty in-kind. He drew attention to the chart on the left
depicting what happens when the state selects its royalty in-
value. For this, he said, DNR allows some deductions related to
the transportation of oil to the U.S. West Coast. He then drew
attention to the chart on the right depicting royalty in-kind,
which is not physically transported to the U.S. West Coast, but
rather sold to an in-state refinery in Alaska. He brought
attention to Step 2 highlighted in yellow on both charts for the
oil in-value marine transportation allowance and the oil in-kind
differential and noted that that comparison is what generates
the premium to which he referred earlier.
MR. MEZA proceeded to slide 25, "5. CONTRACT TERMS FOR MARATHON
AND PETRO STAR RIK DIFFERENTIAL IS THE SOURCE OF THE PREMIUM OF
RIK OVER RIV." He said the blue line at the top of the graph
represents the marine transportation allowance and the grey line
represents the RIK differential. The vertical distance between
those two lines, he continued, indicates the source of the
incremental revenue that the state obtains by selling its
royalty oil in-kind.
1:45:22 PM
MR. MEZA turned to slide 26, "5. CONTRACT TERMS FOR MARATHON AND
PETRO STAR FLEXIBILITY FOR BUYER AND SELLER." He explained that
there is some flexibility or benefits given to the royalty in-
kind buyers, the refinery, as well as benefits and flexibility
for the state. He advised that the buyer has the flexibility of
nominating zero barrels or reducing their nominations subject to
the approval of the commissioner. As the seller, he further
advised, DNR has the flexibility of not guaranteeing any
quantity, quality, or source of royalty oil because DNR is not a
North Slope producer, it is a royalty owner and therefore
protected from that type of risk. If the state were to have
excess royalty to dispose of and the buyers were to have more
demand for that, the contract would allow for additional sales
of that royalty oil.
MR. MEZA moved to slide 27, "5. CONTRACT TERMS FOR MARATHON AND
PETRO STAR OTHER PROVISIONS." He said DNR, or the state, being
a seller and the refiners being a buyer could involve a risk of
nonperformance or default of payment. To cover that risk, he
explained, the department and buyers have agreed that the
guarantor of these buyers, or refiners, provide either a letter
of credit, surety bond, or opinion letter to DNR to protect from
that default risk. The value of that financial assurance varies
by refinery; it could be equal to 90 days' worth of royalty oil
for Marathon or 50 days' worth of royalty oil for Petro Star.
There is a retroactivity clause in the contract in case there
are revisions in the future after an invoice is paid by the
buyer, allowing the buyer or the state to reflect more accurate
information in that calculation. Last, there are two provisions
that encourage the buyer, or refinery, to process the royalty
oil within the state as refined products for the benefit of the
citizens of Alaska and it encourages the buyer to employ Alaska
residents to the extent that they are available, willing, and at
least as qualified as other candidates.
MR. MEZA concluded his presentation with slide 28, "5. CONTRACT
TERMS FOR MARATHON AND PETRO STAR CONTRACTS ARE IN THE BEST
INTEREST OF THE STATE." He related that the additional revenue,
which DNR is required to earn for each of these contracts, was
$31 million and $23 million for the 2016 contracts. He said the
estimated additional revenue for the proposed contracts is $3-
$14 million for Marathon and $17-$19 million for Petro Star.
1:48:12 PM
CHAIR PATKOTAK explained he would now take public testimony on
each of the bills individually.
1:48:24 PM
CHAIR PATKOTAK opened public testimony on HB 409.
1:48:58 PM
DOUG CHAPADOS, President, CEO, Petro Star Inc., Arctic Slope
Regional Corporation (ASRC), testified in support of HB 409,
Petro Star's proposed five-year royalty oil contract. He noted
that Petro Star is a wholly owned subsidiary of Arctic Slope
Regional Corporation (ASRC) and the state's only Alaskan owned
refiner. He said Petro Star has fuel distribution terminals
located in Anchorage, Valdez, Kodiak, Dutch Harbor, and Interior
Alaska. He related that Petro Star also operates two of the
state's three commercial refineries, one in North Pole and the
other in Valdez, most of which draw crude oil directly from the
Trans Alaska Pipeline System (TAPS). He pointed out that TAPS
is the only source of crude oil supply to Petro Star, which
means contracts such as the one currently before the committee
are essential to Petro Star's continued operation. From this
crude oil, he continued, Petro Star produces a variety of
products, including jet fuel for commercial airlines, over 90
percent of the jet fuel consumed at Department of Defense and
U.S. Coast Guard installations located across the state, heating
oil for residential and commercial customers, ultra-low sulfur
diesel fuels for on- and off-road uses, marine diesel fuels,
asphalt oil for road paving projects, and specialty low-sulfur
turbine fuel for the exclusive use of Golden Valley and Copper
Valley electric associations. Mr. Chapados said that as
testified to by DNR staff and explained in the Best Interest
Finding (BIF), this contract is good for the state in terms of
maximizing the revenues generated from Alaska's royalty oil
share. It also benefits Alaskans, he added, by helping to
maintain the instate petroleum refining industry and preserving
competition within the state's fuels markets. He urged the
committee to approve the bill.
1:51:30 PM
CHAIR PATKOTAK closed public testimony on HB 409 after
ascertaining that no one else wished to testify.
1:51:42 PM
REPRESENTATIVE HOPKINS moved to report HB 409 out of committee
with individual recommendations and the accompanying fiscal
note. There being no objection, HB 409 was moved out of the
House Resources Standing Committee.
1:52:08 PM
CHAIR PATKOTAK opened public testimony on HB 410.
1:52:28 PM
CASEY SULLIVAN, Government and Public Affairs Manager, Marathon
Petroleum Corporation, testified in support of HB 410. He
stated that the availability, the flexibility, and the stability
that this contract offers will have a positive impact on
Marathon's ability to optimize its ongoing operation at its
Kenai refinery. He said the Kenai refinery has been one of
Alaska's longest in-state manufacturers producing quality
transportation fuels that have moved Alaskans since 1969. He
underscored that the legislation before the committee is the
result of constructive dialogue and productive negotiations
between the Division of Oil and Gas and Marathon, and the
contract provides a positive shared value to all Alaskans. He
pointed out that the division's best interest finding found that
the state will continue to receive a price for its royalty in-
kind oil that is in keeping with oil in-value. For Marathon, he
continued, the contract provides a stable supply of Alaska North
Slope crude while also giving Marathon the flexibility to
accommodate seasonal fluctuations in demand for refined product.
He said Marathon is committed to its longstanding legacy of
safely and reliably producing quality fuel. He urged the
passage of HB 410.
1:54:51 PM
CHAIR PATKOTAK closed public testimony on HB 410 after
ascertaining that no one else wished to testify.
1:55:02 PM
REPRESENTATIVE HOPKINS moved to report HB 410 out of committee
with individual recommendations and the accompanying fiscal
notes. There being no objection HB 410 was moved out of the
House Resources Standing Committee.
1:55:23 PM
The committee took a brief at-ease.
1:55:31 PM
ADJOURNMENT
[There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 1:55 p.m.]