HB 469 - APPROVE SALE ROYALTY OIL TO MAPCO Number 0016 CHAIRMAN HODGINS announced the committee would hear HB 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." Number 0032 JOHN SHIVELY, Commissioner, Department of Natural Resources stated that the basic terms of the contract with Mapco is that it is a five year contract starting on December 1 of this year and ending on December 31, 2003. They have chosen that date because there is an existing contract that ends in 2003 and therefore both contracts will end together. He stated that quantity is based on a percentage of Prudhoe Bay production, as they are selling out of Prudhoe Bay. He stated that the percentage varies from 27 percent to 33 percent which was designed to have an annual volume of 2,800 barrels. He stated that there is a weighted average price based on royalty value and they are required to get at least what they would get if they took royalty in-value instead of in-kind. He stated that 15 percent extra has been added on that, as they always try to get a little bit extra per barrel in order to meet the policy set by the legislature. He stated that there is no price reopener, if the price changes they either have to accept the new price or terminate the contract. He pointed out that there is a security set up for a letter of credit for 75 days that would protect the state if Mapco were to decide to stop taking the oil. There is a provision that states they can reduce the letter of credit if they find a back-up buyer for the oil. He stated that there is a requirement that at least 80 percent of it is refined in state and there is a local hire provision that contains the same language as in the North Star deal. He stated that they have made a best interest finding that deals with the socio-economic and environmental effects, as required. He stated that the royalty board unanimously endorsed it and received public comment as well. Number 0345 REPRESENTATIVE JOE RYAN asked why is it only 80 percent in-state refining. Number 0355 KEVIN BANKS, Petroleum Market Analyst, Division of Oil and Gas, Department of Natural Resources, stated that in the past there has only been one existing contract where all of oil is required to be processed in state. He pointed out that since the mid-80's, contracts that have been negotiated with in-state refineries have set 80 percent as the number because there is a certain amount of commercial flexibility allowed under that. He stated that in the winter time production in the North Slope is at its highest and lower in the summer, but the demand is the exact opposite. He stated this would give the flexibility to replace those volumes in the summertime when they are short. Number 0432 REPRESENTATIVE RYAN asked when the residual oil is put back in the pipeline does that oil no longer belong to Mapco and is given back to state. Number 0500 MR. BANKS replied that the oil that goes throughout the refinery is borrowed or rented and they have the arrangements with several North Slope Producers to take the oil that they extract and use for products, which is the oil that we are selling them. The oil that is returned, Mapco pays the quality bank plus (Indisc. -- paper ripping) to those who provide the rental service for the use of that oil. He stated that 210,000 barrels pass throughout the refinery every day but about 67,000 barrels will actually be made into product. Number 0650 REPRESENTATIVE RYAN asked who owns this residual oil that leaves Mapco but goes back in with other oil that is not residual, gets mixed and increases in value. Number 0669 COMMISSIONER SHIVELY responded the producers own that oil. Number 0689 JEFF COOK, Vice President, External Affairs, Mapco Alaska Petroleum, stated that the contract will enable and expand the partnership between Mapco and the state of Alaska. He stated that it is a value-added effort that will take additional Alaska crude oil and refine it into 14,000 barrels a day into additional jet fuel, which is what the state is currently importing. It will also provide an additional 3,000 barrels of diesel and the crude will be refined in a new $70 million expansion. He stated that they are moving forward for 100 percent Alaskan hire for the product. The new unit is a stand alone unit and it can only make jet and diesel fuel. Number 0880 REPRESENTATIVE RYAN asked if the quality bank contribution that Mapco makes reflects the spread between what North Slope Crude is verses what Number 6 Bunker fuel would be, or the equivalent of residual oil. MR. COOK replied that what is put back in is not the equivalent to bunker oil but there is a complex formula for the quality bank. The Federal Energy Regulatory Commission concluded a hearing to adjust and make sure that was a fair quality bank penalty mechanism. He stated that the conclusion was the quality bank does equalize the quality of the crude oil through the payment. Last year, Mapco paid $30 million which equaled to 5 cents a gallon for refined products. Number 1035 REPRESENTATIVE TOM BRICE made a motion to move HB 469, with individual recommendations and attached fiscal note. Number 1055 CHAIRMAN HODGINS asked if there was an objection. Hearing None, HB 469 moved out of the House Special Committee of Oil and Gas.