SB 30-APPROVAL: ROYALTY OIL SALE TO PETRO STAR  1:39:02 PM CO-CHAIR JOSEPHSON announced that the next order of business would be SENATE BILL NO. 30, "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." 1:39:45 PM JIM SHINE, Commercial Manager, Division of Oil and Gas, Department of Natural Resources, provided a PowerPoint presentation entitled, "Proposed Sale of the State's Royalty Oil to Petro Star: Senate Bill 30," and informed the committee SB 30 is similar to last year's legislation enabling a contract with Tesoro for a royalty-in-kind (RIK) sale. He said royalty- in-value (RIV) occurs when a producer ships, transports, and sells the state's royalty share, along with its own, and remits the royalty value to the state; RIK occurs when the state assumes ownership of its royalty barrels of oil and disposes of them through statutory sales procedures. The bill is the culmination of a long process including commercial negotiations, a best interest finding, a public review, and other procedures. Mr. Shine said the state has participated in RIK sales procedures since 1979, and directed attention to a chart provided in the committee packet that illustrated the history of RIK sales [chart not provided]. The contract with Petro Star Inc. (Petro Star) in SB 30 will yield the state from $22 million to $28 million more over RIV revenue. Currently, the state has a one-year contract with Petro Star that would be followed by the four-year contract within SB 30, commencing 1/1/18. Together, the two contracts will yield the state from $29 million to $37 million more over RIV revenue [slide 2]. The best interest finding has determined SB 30 is in the state's best interest, and the Alaska Royalty Oil and Gas Development Advisory Board, Department of Natural Resources, recommends the legislature approve the sale by its Resolution 2016-2, a copy of which was provided in the committee packet [slide 3]. In addition, the commissioner of DNR considered the following decision criteria [slide 4]: • cash value offered • projected effects of the sale on the economy of the state • the ability to provide refined products for distribution and sale within the state 1:44:04 PM MR. SHINE restated the approval process for the RIK sale began with the preliminary best interest finding issued in 2016, followed by public review, review and recommendation by the royalty advisory board, the contract, and SB 30 [slide 5]. He provided slide 6 which listed the statutory criteria that must be considered by the royalty advisory board. Mr. Shine provided details of the contract enabled by SB 30 such as projections of royalty volume over a five-year period of 50,000 to 55,000 barrels per day of royalty oil in 2017, and 36,000 to 50,000 barrels available from 2018 through 2021. He recalled last year a Tesoro RIK contract was approved that is providing 20,000 to 25,000 barrels of royalty oil over a five-year period and was used as a guide in the state's projections [slide 7]. REPRESENTATIVE PARISH questioned whether the state will have the ability to pick up additional capacity in the event of an increase in throughput [in the Trans-Alaska Pipeline System (TAPS)]. MR. SHINE said the contract has built-in quantity flexibility that allows the state to offer additional oil on equal terms. He returned to contract terms and pointed out in the event of default the state is exposed in two scenarios: a complete default - in which the state does not receive payment for barrels produced and sold, and a denomination risk - in which the buyer defaults after a certain volume of oil has been nominated. In order to protect the state against either of the aforementioned events, the contract has a security provision clause for a $46 million surety bond. In addition, the contract urges Petro Star to use commercially reasonable efforts to manufacture refined products in the state and employ local residents [slide 7]. In regard to RIK contract price, he explained the contract begins with the monthly/daily average U.S. West Coast price for Alaska North Slope (ANS) oil. The RIK differential of $1.95 is a reduction of the price to determine the value of an in-state barrel of oil, thus in an RIV context the state is subject to marine transportation costs of between $3.30 and $3.50 per barrel; however, in an RIK contract, the state uses a $1.95 RIK location differential that represents the value of a barrel of oil sold within the state. The location differential is determined by the Department of Revenue and DNR to ensure the oil remains competitive, and to maximize the value of the resource to the state. CO-CHAIR JOSEPHSON asked how the differential compares to that of last year's royalty oil sale. MR. SHINE said the differential is the same. In 2014, a previous contract with Flint Hills carried a differential of $2.15 per barrel. He advised the other deductions are the same as found in an RIV formula as follows [slide 8]: • TAPS tariff allowance and tariffs for oil transported upstream of Pump Station 1 • quality bank adjustments required by regulation by the Federal Energy Regulatory Commission • line loss calculated at an industry standard amount for metering in and metering out MR. SHINE summarized as follows [slide 9]: • the contract is in the state's best interest • the contract will yield $29 million to $37 million in additional revenue over what the state would receive if the volume of royalty oil is taken RIV • location differential is a static number and marine transportation costs are expected to exceed the differential • Petro Star employs 44 Alaskans in refining operations and others statewide MR. SHINE presented slide 10 which was a short comparison of the contract within SB 30 and last year's contract with Tesoro. REPRESENTATIVE BIRCH expressed his support. REPRESENTATIVE DRUMMOND questioned why DNR needs the legislature's permission to sell royalty oil. MR. SHINE explained for royalty oil sold in excess of a one-year contract, there is a statutory requirement for DNR to obtain legislative approval. 1:54:56 PM DOUG CHAPADOS, President/CEO, Petro Star Inc., acknowledged the efforts of the commissioners of DNR to support the contract. He said after long negotiations, the contract is a fair agreement. 1:56:06 PM BRYCE WARD, Mayor, City of North Pole, opined the ability to sell RIK is beneficial to the state and Petro Star provides benefits to the City of North Pole. He expressed his concern related to the differential in the RIK contract and pointed out the product is state oil provided to state residents by a state producer, but at a differential price that is higher than the spot market price. He acknowledged the contract is bringing in an additional $30 million to the state, however, he questioned whether this is a benefit for all residents of the state since Interior residents will be paying the differential cost. Mayor Ward encouraged the committee to look at the intent of the differential as the oil is not being exported, but is provided solely to state residents. 1:58:12 PM CO-CHAIR JOSEPHSON opened the hearing for public testimony, and after ascertaining no one wished to testify, closed public testimony. 1:59:18 PM CO-CHAIR TARR moved to report SB 30 out of committee with individual recommendations and the accompanying fiscal note. There being no objection, SB 30 was reported out of the House Resources Standing Committee.