SENATE BILL NO. 239 "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." SENATE BILL NO. 240 "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." 1:33:57 PM JHONNY MEZA, COMMERCIAL ANALYST, DIVISION OF OIL AND GAS, DEPARTMENT OF NATURAL RESOURCES, introduced the PowerPoint presentation: "The Process for the Sale of ANS Royalty Oil In-Kind and the Proposed Contracts with Marathon and Petro Star SB 239 AND SB 240." He indicated the beginning of the presentation would be provided by Mr. John Crowther. 1:34:50 PM JOHN CROWTHER, DEPUTY COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES (via teleconference), emphasized that the royalty oil in-kind sales had been an important element in the state's use and development of natural resources. It had also been an important part in supporting the in-state refining capacity, which benefited consumers through fuel, supply, and security, and also benefited the broader economy. It had also provided additional value over and above the general royalty and value sales. He began with slide 2 of the presentation which stated that it was critical that the proposed contracts be executed by April 22, 2022. The slide showed a summary of the steps needed in order to effectuate the contract and an explanation of why the Department of Natural Resources (DNR) and the administration was seeking an expedited review. 1:36:24 PM Mr. Meza turned to slide 4 of the presentation and shared that he would be reviewing some of the contract terms for the companies Marathon and Petro Star. The slide showed a table reflecting the recent history of the royalty oil in- kind contracts. He explained that the state had received royalty oil from the North Slope both in-kind and in-value. When selling royalty oil in-value, the state received a share of the proceeds from the producers according to its royalty rate in the oil and gas contracts. When the state elected to receive its royalty oil in-kind, the majority of the oil produced would come from in-state refineries. The state had a history of entering into royalty in-kind contracts from the beginning of production of oil in the North Slope. Mr. Meza explained that the contracts with Marathon and Petro Star were highlighted on the slide. The fourth column on the slide showed the way in which the department and the buyers agreed to value the royalty oil, specifically following the netback methodology. He explained that DNR sold its royalty oil at the field; therefore, the price of royalty oil was calculated by "netting back" the price of Alaska North Slope (ANS) oil at the U.S. West Coast to the field. The netback methodology was essentially the same process as in-value pricing, with the exception of royalty in-kind differential. This was a negotiated term between the department and the in-state refineries. The last column showed the values of the negotiated terms and the royalty in-kind differential throughout the history of the contracts. Representative Johnson asked if it was better for the state to receive oil in-kind or in-value. Mr. Meza replied that when the state entered into a royalty in-kind contract, regulations required the price be at least as high as the in-value price. From 2008 to 2021, the department obtained an average premium of $0.93 per barrel in addition to a royalty in-value oil. Representative Johnson asked whether the difference between royalty in-kind and royalty in-value related to the chain of events that happened throughout the selling process. Mr. Meza responded that there was a process for selecting royalty in-kind and that generating a premium over royalty in-value was one of the requirements. Representative Wool asked whether royalty in-kind was another deduction in the price that would be offered to the state. He understood it to represent the normal price of oil plus another deduction. Mr. Meza responded that Representative Wool was correct. The royalty in-kind was another deduction in the price, but even so, a premium was still generated over royalty in- value. 1:41:41 PM Mr. Meza moved to slide 5 and explained that the slide was a visual representation of the differences between the determination of the price of royalty in-value oil and the price of royalty in-kind oil. The processes were similar in that the netback methodology was applied to both. He indicated that when the state elected to receive royalty ANS oil in-value, producers typically sold that oil outside of Alaska. When the state elected to receive royalty ANS oil in-kind, it typically sold the oil inside of Alaska. There were some deductions related to the transportation of royalty in-value oil, such as the marine transportation costs. The royalty in-kind oil did not have transportation cost deductions; therefore, the royalty in-kind differential was employed. The department used the deductions and the royalty in-kind differential to determine the oil premium. Mr. Meza continued to slide 6 which showed some historical information related to the previous graph on slide 5. The graph on slide 6 showed the historical value of the royalty in-kind differential and the marine transportation costs. He explained that the blue line showed the weighted average marine transportation allowance, the green line showed DNR location differential, and the grey line showed the weighted average royalty in-kind differential. He elaborated that the difference between the blue and grey lines was the source of the premium that the department obtained by entering into royalty in-kind contracts. Another consideration was that the department provided supplies to the refineries, but it was not the only supplier. It was important to consider whether the royalty oil was competitive as compared to other suppliers. 1:45:04 PM Representative Edgmon asked Mr. Meza to address the revenue difference for the state. Mr. Meza jumped to slide 9 which showed how much the state had been able to generate in terms of additional revenues. The current Marathon contracts estimated between $3 million and $4 million in revenue, and the Petro Star contracts estimated between $17 million and $19 million in revenue. The revenue estimates were in excess of what would have been received had the state elected to receive 100 percent of the royalty oil in-value. Representative Edgmon suggested that there was a reason for the public process. He was a strong supporter of the legislation. 1:46:49 PM Co-Chair Merrick asked Mr. Meza to review the fiscal note for SB 239 with a control code EPVzv. Mr. Meza explained the fiscal note from DNR aimed to decompose the values he had just given for the Marathon and Petro Star contracts. He relayed that 74.5 percent of the revenues for each fiscal year would be allocated to the general fund, 24 percent would be allocated to the Permanent Fund, and 0.5 percent to the school fund. Co-Chair Merrick noted that there was a typo in the fiscal note that would be corrected before it moved from committee. She asked Mr. Meza to address the fiscal note for SB 240 with control code gjwMS from DNR. Mr. Meza explained that the process was the same as the previous fiscal note. The main differences were the revenue estimates and the proposed amount of royalty oil dedicated to Marathon. 1:48:34 PM Representative Carpenter noticed a discrepancy on the back page of the fiscal note. 1:48:50 PM AT EASE 1:55:46 PM RECONVENED Representative Wool asked about for more information on the difference between the grey line and the green line in the prior graphic on slide 6. Mr. Meza explained that he was comparing the blue line on the top with the grey line on the bottom. This was the important comparison because regulation dictated that the royalty in-kind price had to be at least equal to the royalty in-value price. The royalty in-value price was represented by the blue line. Representative Wool had a question regarding slide 5. He asked how the oil was transported. Mr. Meza relayed that DNR was not in charge of the transportation of oil. The state transferred the royalty title at the field. The purpose of including the deduction in the graph on slide 5 was because the price of ANS oil began at the West Coast of the United States and the royalty oil was sold at the field. 1:58:16 PM Representative Wool understood that the oil went through the pipeline, then into a terminal, then into a boat. He did not think the oil went directly to Marathon or Petro Star and wondered where their oil came from. Mr. Meza responded that Representative Wool was correct. He furthered that Petro Star obtained royalty oil and other types of oil from other producers. Marathon obtained royalty oil from Valdez and it was barged to Nikiski. Representative Wool thought it made sense that Marathon picked the oil up from Valdez and it was then sold at the field. Representative Josephson understood that Marathon was located in Nikiski and asked where Petro Star was located. Mr. Meza responded that Petro Star had a refinery in North Pole and another in Valdez. Co-Chair Merrick asked Mr. Meza to review Fiscal Note 1 by DNR for SB 239. Mr. Meza explained the fiscal note with the control code ezbNE. He indicated that the note showed that the allocation to the general fund and other funds were done uniformly. He reminded members that 74.5 percent would be allocated to the general fund, 24 percent to the Permanent Fund, and 0.5 percent to the school fund. Representative Carpenter requested a brief "At ease." 2:00:41 PM AT EASE 2:01:59 PM RECONVENED Representative Carpenter asked about the oil flowing through the pipeline on slide 5. He wondered if there was an impact on the property taxation on the oil when it had a royalty in-kind status. He wondered if there was any difference in taxation. Mr. Meza thought there was no difference. 2:02:53 PM Co-Chair Merrick OPENED public testimony for SB 239 and SB 240. DOUG CHAPADOS, ASRC, PETRO STAR, ANCHORAGE (via teleconference), spoke in favor of SB 239. He relayed that Petro Star was the state's only Alaskan-owned refinery. In addition to operating a variety of field terminals located around the state, Petro Star also operated two of the state's three commercial refineries. Both refineries drew crude oil from the pipeline. He thought that the legislation was essential to Petro Star's continued operations. Petro Star's oil was used for things like jet fuel, heating oil, and diesel fuel. The royalty in-kind contract would maximize the revenues generated from Alaska's royalties from oil. It would also help maintain the refining industry in the state. Representative LeBon thanked the testifier for calling in. He appreciated the information about Petro Star's important role in the state. 2:06:01 PM Representative Edgmon asked for more information on the Alaskan hire percentages in his district. Mr. Chapados indicated that all but two of Petro Star's 275 employees were Alaska residents. 2:06:48 PM CASEY SULLIVAN, MARATHON PETROLEUM, ANCHORAGE (via teleconference), thanked the committee for hearing the bill. He shared support for SB 240. The flexibility and stability of the contract would help Marathon optimize the ongoing operations of the Kenai refinery. The Kenai refinery was one of Alaska's longest in-state manufacturers of fuel and had been operating since 1969. The refinery could produce up to 68,000 barrels per day. He noted that much of the oil produced at the refinery was used in Alaska, and all of the company's employees were Alaskans. The company was seen as an economic engine for communities, and it offered careers, not just jobs. He added that while much of the contract was a renewal, it was result of dialogue and negotiations between Marathon and the Division of Oil and Gas. In conclusion, Marathon was committed to safely and reliably creating quality fuels for Alaskans. He encouraged support for SB 240. 2:10:32 PM Co-Chair Merrick CLOSED public testimony for SB 239 and SB 240. Co-Chair Merrick noted that SB 239 and SB 240 were companion bills to HB 409 and HB 410. Representative Wool returned to slide 9 which gave information on the additional revenue to the state. He applauded DNR and the administration for looking into all revenue streams, no matter how small. 2:11:57 PM Co-Chair Foster MOVED to report SB 239 out of committee with individual recommendations and the accompanying fiscal note. There being NO OBJECTION, it was so ordered. SB 239 was REPORTED out of committee with nine "do pass" recommendations and with one new fiscal impact note by the Department of Natural Resources. 2:12:24 PM Co-Chair Foster MOVED to report SB 240 out of committee with individual recommendations and the accompanying fiscal note. There being NO OBJECTION, it was so ordered. SB 240 was REPORTED out of committee with nine "do pass" recommendations and with one new fiscal impact note by the Department of Natural Resources. 2:12:40 PM AT EASE 2:13:58 PM RECONVENED Co-Chair Merrick indicated that the committee would stand at-ease to the call of the chair. 2:14:05 PM AT EASE [RECESSED TO A CALL OF THE CHAIR.] 4:12:42 PM RECONVENED Co-Chair Merrick indicated the committee had heard the HB 265 previously on March 29, 2022. There were three proposed amendments.