Legislature(1993 - 1994)
03/18/1993 05:00 PM Senate O&G
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
SENATE SPECIAL COMMITTEE ON OIL & GAS
March 18, 1993
5:00 p.m.
MEMBERS PRESENT
Senator Loren Leman, Chairman
Senator Rick Halford
Senator Bert Sharp
Senator Judith Salo
Senator Al Adams
MEMBERS ABSENT
All Present
OTHER MEMBERS PRESENT
Representative Mike Navarre
Senator Suzanne Little
COMMITTEE CALENDAR
SENATE BILL NO. 134
"An Act establishing credits for purchasers of state royalty
oil for expenditures made by those purchasers on qualifying
capital investments to be applied against liquidated
purchase arrearages established in contracts, settlements,
or final judgments; and providing for an effective date."
PREVIOUS ACTION
SB 134 - See Oil & Gas minutes dated 3/17/93.
WITNESS REGISTER
Jim Eason, Director
Division of Oil and Gas
Department of Natural Resources
P.O. Box 107034
Anchorage, Alaska 99510-7005
POSITION STATEMENT: Commented on SB 134.
Randy Pozdena, Managing Director
Eco Northwest
Portland, Oregon
POSITION STATEMENT: Presentation on behalf of Tesoro.
Buki Wright, Vice President
Mapco Alaska Petroleum
Fairbanks, Alaska
POSITION STATEMENT: Commented on SB 134.
Richard Cline
Cline's Texaco
442 Gambel
Anchorage, Alaska 99501
POSITION STATEMENT: Opposed SB 134.
Norm Preston
N & S Texaco
901 E. 15th Ave.
Anchorage, Alaska 99501
POSITION STATEMENT: Opposed SB 134.
Bruce Gabriel
Big G Electric
P.O. Box 4257
Soldotna, Alaska 99669
POSITION STATEMENT: Supported SB 134.
Harold Heinze
Resources Development Advisor to the Governor
1336 Staubach
Anchorage, Alaska 99508
POSITION STATEMENT: Opposed SB 134.
Jim Pazsint
Boniface Texaco
5700 DeBarr Rd.
Anchorage, Alaska 99504
POSITION STATEMENT: Opposed SB 134.
Eddie Burke
Eddie's Chevron
6416 Colgate Dr.
Anchorage, Alaska 99501
POSITION STATEMENT: Opposed SB 134.
ACTION NARRATIVE
TAPE 93-7, SIDE A
Number 001
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.
SENATOR LEMAN adjourned the meeting at 6:47 p.m.
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