Legislature(1997 - 1998)
05/01/1998 03:55 PM RES
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SENATE RESOURCES COMMITTEE May 1, 1998 3:55 P.M. MEMBERS PRESENT Senator Rick Halford, Chairman Senator Lyda Green, Vice Chairman Senator Loren Leman Senator Bert Sharp Senator John Torgerson Senator Georgianna Lincoln MEMBERS ABSENT Senator Robin Taylor COMMITTEE CALENDAR SENATE BILL NO. 342 "An Act approving the sale of Prudhoe Bay Unit royalty oil by the State of Alaska to Mapco Alaska Petroleum, Inc.; and providing for an effective date." - MOVED SB 342 OUT OF COMMITTEE PREVIOUS SENATE COMMITTEE ACTION SB 342 - See Resource Committee minutes dated 4/29/98. WITNESS REGISTER Mr. Kevin Banks Division of Oil and Gas Department of Natural Resources 3601 C St. Anchorage, AK 99503-5948 POSITION STATEMENT: Supported SB 342. Mr. Jeff Cook, Vice President External Affairs Mapco 1150 H & H Lane North Pole, AK 99705 POSITION STATEMENT: Supported SB 342. Representative Jerry Sanders State Capitol Juneau, AK 99801-1182 POSITION STATEMENT: Offered comments on SB 342 ACTION NARRATIVE TAPE 98-38, SIDE A Number 001 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 pass. 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 contract. 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 supply. 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 less. 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 ordered. There being no further business to come before the committee, the meeting adjourned at 4:48 p.m.