HOUSE BILL NO. 469 "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." KEVIN BANKS, DIVISION OF OIL AND GAS, DEPARTMENT OF NATURAL RESOURCES explained that HB 469 would ratify a five-year contract that would begin on December 1, 1998 with MAPCO. The expiration date would coincide with a long-term contract that MAPCO has with the state of Alaska. The contract also has a security clause. MAPCO has agreed to put a letter of credit equal to 75 days worth of oil. This would cover the state of Alaska in the case that MAPCO defaults in the contract. MAPCO is required to process at least 80 percent of the oil in the state of Alaska. MAPCO has indicated that they would process most of the oil. There is also a local hire provision in the contract. Residents are defined in the same manner as in the North Star lease agreement. Mr. Banks explained that the price is based on the value calculated by the producers. The producers base their price on the market value of Alaska North Slope (ANS) oil, transportation chargers for tankers, tariffs for the pipeline, and adjustments for quality. MAPCO would pay this price plus .15 cents. Co-Chair Therriault noted that the State established this pricing structure in the Amerada Hess settlement. In response to a question by Representative Davies, Mr. Banks explained that the additional .15 cents was added to assure that the value to the state of Alaska is considered first. He observed that the state of Alaska is taking a portion of its oil and selling it in the same market. There is concern that the State could reduce the value of royalty oil through the sale of oil. He explained how the sale of oil by the state of Alaska could shift the balance of oil distribution between the West Coast and the Far East or mid United States. Representative Davies noted that MAPCO can increase or decrease the monthly nomination. MAPCO would have to stay below the maximum quantity authorized per year. Mr. Banks noted that there is a reservation fee if MAPCO fails to take the maximum quantity in any given month. The state of Alaska is committed to a certain amount per month. He clarified that MAPCO would not be allowed to exceed 33 percent in any month. The nomination occurs 3 months before production begins. In response to a question by Representative Martin, Mr. Banks pointed out that the State is confined in its ability to offer competitive bids. He observed that a substantial amount of oil is going to MAPCO under a contract that was awarded in the late 70's. At the end of the contract the State hopes to be free to begin competitive bidding without any potential customers having a significant advantage over another. Both contracts would end in the year 2003. Representative Martin questioned the criteria that would be used to ensure local hire. Mr. Banks observed that MAPCO's state contract provided them with the stability of supply needed to start a refinery. Representative Martin asked why the contract would only add .15 cent a barrel. He maintained that the price is too low. He suggested that in-state refineries have the advantage of not paying shipping costs. Mr. Banks maintained that the price at pump station one represents an amount close to market value. The additional .15 cents provides a cushion. Co-Chair Therriault pointed out that no monetary value is applied to local hire. Mr. Banks noted that the commercial terms of the contract were kept separate from other potential benefits. Representative Kelly referred to the definition of "royalty value" on page 2, line 17. He observed that MAPCO is paying what the State could get for the oil plus .15 cents. JEFF COOK, VICE PRESIDENT EXTERNAL AFFAIRS, MAPCO, FAIRBANKS spoke in support of the legislation. He noted that the oil will be refined into jet fuel and diesel. He stressed that MAPCO has hired locally. He noted that the Alaska Royalty Oil and Gas Advisory Board took testimony on the MAPCO contract. The Board approved the contract unanimously. He emphasized that they pay the fair market value and the tariff cost to Fairbanks. Representative Kelly asked if MAPCO has any other sources of oil. Mr. Cook observed that MAPCO purchases oil from the state of Alaska and Phillips Oil. He noted that MAPCO pays less to the Phillips Oil company than it pays to the state of Alaska. Representative Martin maintained that cost factors are not the same. Mr. Cook observed that MAPCO did not receive any tax breaks to offset their $70 million dollar expansion. He pointed out that the same expansion would cost approximately $45 million dollars if it were built in Tennessee. Co-Chair Therriault noted that there is a zero fiscal note. Representative Kohring stated that he is concerned with the issue of competition. Representative Kelly MOVED to report HB 469 out of Committee with the accompanying fiscal note. There being NO OBJECTION, it was so ordered. HB 469 was REPORTED out of Committee with "no recommendation" and with a fiscal impact note by the Department of Natural Resources.