SB 239-APPROVE PETRO STAR INC. ROYALTY OIL SALE  [The hearing on SB 240 begins at 5:04:21 pm, after the DNR presentation that describes the requirements for royalty oil sales.] 4:17:58 PM VICE CHAIR MICCICHE announced the consideration of 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." He recognized John Crowther and Jhonny Meza and advised the committee that the presentation applied to both SB 239 and SB 240. SB 239 addresses legislative approval of the Petro Star royalty oil sale and SB 240 addresses legislative approval of the marathon Petro royalty oil sale. 4:18:53 PM JOHN CROWTHER, Deputy Commissioner, Department of Natural Resources (DNR), Anchorage, Alaska* introduced Jhonny Meza. 4:18:53 PM JHONNY MEZA, Commercial Analyst, Commercial Section, Division of Oil and Gas, Department of Natural Resources (DNR), Anchorage, Alaska, introduced SB 239 with the presentation titled The Process for the Sale of ANS Royalty Oil In-kind and the Proposed Contracts with Marathon and Petro Star. MR. MEZA explained that the forthcoming presentation describes two proposed contracts for the sale of royalty oil in-kind, both of which need legislative approval before the contracts can be executed. MR. MEZA reviewed the agenda on slide 2: AGENDA 1. What is Royalty In-Kind? 2. History of Royalty In-Kind Sales 3. Statutory and regulatory mandate for Royalty In- Kind 4. The process that DNR has followed for this sale of Royalty In-Kind oil 5. Contract terms for Marathon and Petro Star 4:19:41 PM MR. MEZA advanced to slide 4, What is Royalty In-Kind? Statutory Reference. He reviewed the statutory authority under AS 38.05.182: Sec. 38.05.182. Royalty on natural resources.  (a) Any royalty provided for in AS 38.05.135 38.05.181 may be taken in kind rather than in money if the commissioner determines that the taking in kind would be in the best interest of the state. However, royalties on oil and gas shall be taken in kind unless the commissioner determines that the taking in money would be in the best interest of the state. (b) The commissioner shall submit a determination to take royalty in money to the legislature at the first opportunity during a current session or, if the legislature is not in session, at the next regular session. The legislature, within 60 days or by the adjournment of the session, whichever comes sooner, may revoke the determination by concurrent resolution. MR. MEZA pointed to the letter from the DNR commissioner informing the legislature of the determination to take the state's oil and gas royalty in-value (RIV). He reviewed what royalty in-value (RIV) means as opposed to royalty in-kind (RIK): The State has the option to take its royalty oil and gas in-value (RIV) or in-kind (RIK). • RIV: Lessees market the royalty oil or gas alongside their own equity production. Then the State receives a portion of the proceeds subject to fair market value. • RIK: Lessees provide royalty oil or gas (of sales quality) to the State. Then the State becomes responsible for the marketing of its royalty oil or gas. 4:21:27 PM MR. MEZA advanced to slide 5, What is Royalty In-Kind? Contractual Reference. He stated that given the statutory language, DNR enters into a contract with the lessees for the oil and gas lease, which provides a definition of the percentage of the royalty rate, and the ability of the commissioner to take the oil and gas royalty either in-value or in-kind. He pointed out that from the inception of the lease, the language in statute and the contract allows DNR to participate in the market as a resource owner by selling its royalty owner in-kind. He directed attention to the example of an oil and gas unit agreement that reflects such language when there's a unitized collection of oil and gas leases: Within ninety days of receipt of that notice, the Commissioner will give the Working Interest Owners written notice of its elections to take in kind all, none, a specified percentage, or a specified quantity of its royalties in any Unitized Substances produced from the Participating Area. 4:22:17 PM MR. MEZA advanced to slide 6, What is ROYALTY IN-KIND? STATE OWNERSHIP IN THE NORTH SLOPE (AS OF JANUARY 2022). He pointed to the map of the North Slope that details the oil and gas units where the state has a resource ownership interest. In this context, royalty oil in-kind refers to the sale of royalty oil from the fields that the state is the resource owner. Prudhoe Bay and Kuparuk are examples. The state doesn't have any resource ownership on the Greater Moose's Tooth and thus would not be able to take royalty in kind from that field. 4:23:02 PM MR. MEZA advanced to slide 7, History of Royalty In-Kind and slide 8, History of Royalty In-Kind Alaska North Slope Oil. He directed attention to the graph on slide 8 that shows the history of the royalty oil from the North Slope colored light blue and the black line that represents the share of the royalty oil that the state took in-kind. The state started taking royalty in-kind in November 1979 and consistently continued to do so until recently. He highlighted the following: 1) The State has historically selected to receive its royalty oil both in-kind and in-value. 2) About 97% of the royalty oil in-kind selections by the State has been for oil from the North Slope. • The State has never nominated Cook Inlet royalty gas in-kind. • Cook Inlet royalty oil in-kind has gone to the Nikiski refinery (in the 1970s-1980s) and to Chinese Petroleum (1987-1991). 3) The amount of RIK oil that the State sells varies, and depends on? • ANS oil production from State-owned mineral resources. • The royalty rates for State oil and gas leases. • The State's selection of the fields from which to choose RIK oil (as not all fields may be selected). • The quantity of crude oil demanded by the in- state refineries or other potential buyers. • The competitiveness of ANS royalty oil versus other sources of crude oil for the in-state refineries or other potential buyers. 4:24:41 PM MR. MEZA advanced to slide 9, History of Royalty In-Kind Types of Contracts and Buyers. He reviewed the following: a) Of all RIK oil sold to date - over 900 million barrels (mmbbls) the majority has been sold via non-competitive sales. b) b) Less than 5% of RIK oil (46 mmbbls) has been sold via competitive sales. The effective terms of these contracts were short in duration. c) c) The large majority of RIK oil sold to date has been to in-state entities, but there are a few historical cases where RIK oil was sold for export outside of Alaska. In-state buyers for negotiated sales: • Alpetco: export refinery (oil-based petrochemical plant) • Chevron: Nikiski refinery (built in 1963, dismantled in 1991) • Mapco/Williams/Flint Hills Resources: North Pole refinery (1977) • Petro Star: North Pole (1985) and Valdez (1992) refineries • Tesoro/Marathon: Nikiski refinery (1969) MR. MEZA stated that the table shows the duration of the royalty in-kind contracts. It shows that the state has participated in these sales since nearly the beginning of production on the North Slope. 4:26:35 PM MR. MEZA advanced to slide 10, Statutory and Regulatory Mandate for Royalty In-Kind and slide 11, Statutory and Regulatory Mandate for Royalty In-Kind Legislative Approval. He highlighted AS 38.06.055 that states that legislative approval is required before the DNR commissioner can execute these contracts. He reviewed the following: • Per statute, the sale of royalty by the DNR commissioner requires: • The written recommendation of the Alaska Royalty Oil and Gas Development and Advisory Board, and • The approval of the Legislature via the enactment of legislation. • There are also statutory exceptions to when legislative review is required: • If the sale of royalty is to "relieve storage or market conditions" (which can only be used for a contract of up to 1 year) • If the sale of royalty oil is at most 400 bpd 4:27:23 PM MR. MEZA advanced to slide 12, Statutory and Regulatory Mandate for Royalty In-Kind Recent History of Approval. He explained that the chart reflects the most recent contracts for the sale of royalty oil in-kind. Tesoro (2016) was a five year contract, Petro Star (2016) was also multi-year. The last two columns reflect that these multi-year contracts were reviewed by both the royalty board and the legislature. By contrast, the one-year contracts in 2021 with Marathon and Petro Star only required one review and in these cases it was by the legislature. Currently multi-year contracts with Marathon and Petro Star have been reviewed by the board and DNR is submitting that written recommendation as part of the packets seeking legislative approval for both sales. 4:28:46 PM MR. MEZA advanced to slide 13, to review the Statutory and Regulatory Mandate for Royalty In-Kind Royalty Board Review. Royalty Board Review Statutory Criteria  (a) In the exercise of its powers under AS 38.06.040(a) and 38.06.050 the board shall consider (1) the revenue needs and projected fiscal condition of the state; (2) the existence and extent of present and projected local and regional needs for oil and gas products and by-products, the effect of state or federal commodity allocation requirements which might be applicable to those products and by-products, and the priorities among competing needs; (3) the desirability of localized capital investment, increased payroll, secondary development and other possible effects of the sale, exchange, or other disposition of oil and gas or both; (4) the projected social impacts of the transaction; (5) the projected additional costs and responsibilities which could be imposed upon the state and affected political subdivisions by development related to the transaction; (6) the existence of specific local or regional labor or consumption markets or both which should be met by the transaction; (7) the projected positive and negative environmental effects related to the transaction; and (8) the projected effects of the proposed transaction upon existing private commercial enterprise and patterns of investments. DNR criteria used for finding that a contract is in  the best interest of the State  (e) When a sale, exchange, or other disposal of oil or gas taken in kind by the state as its royalty share, or a sale, exchange, or other disposal in whole or in part of a right to receive future royalty oil or gas, under a state lease under this chapter is made other  than by competitive bid, or when a sale, exchange, or other disposal of gas delivered to the state under AS 44.55.014(b) is made other than by competitive bid, the sale, exchange, or other disposal shall be awarded by the commissioner to the prospective buyer whose proposal offers the maximum benefits to citizens of the state. The commissioner shall consider (1) the cash value offered; (2) the projected effects of the sale, exchange, or other disposal on the economy of the state; (3) the projected benefits of refining or processing the oil or gas in the state; (4) the ability of the prospective buyer to provide refined products or by-products for distribution and sale in the state with price or supply benefits to the citizens of the state; and (5) the criteria listed in AS 38.06.070(a) • The Preliminary and Final Best Interest Findings, published by DNR, provides an analysis for how these criteria are met. 4:29:42 PM MR. MEZA advanced to slide 14 and stated that this slide provides samples of the reports that the Royalty Review Board wrote and submitted to the legislature on March 15, 2022. MR. MEZA advanced to slide 15, Statutory and Regulatory Mandate for Royalty In-Kind Competitive vs. Non-Competitive Sale. He reviewed the following: 1) By statute, the default is a competitive sale. • Competitive sales of RIK oil occurred in 1981, 1985, and 1986. • Less than 5% of the RIK oil (46 mmbbls) sold to date has been via competitive sales. 2) A non-competitive sale requires a written finding by DNR. 3) How does DNR decide between a competitive and non- competitive sale? • DNR publishes a "Solicitation of Interest" letter with the goal of gauging the interest of the market. • In this letter, DNR establishes its preferred method of sale (i.e., competitive disposition) with non-binding parameters for such sale. • Interested parties are invited to comment on their willingness to buy RIK oil and their preferred terms. • DNR analyzes those responses and makes a written determination of the method of sale that is in the best interest of the State. MR. MEZA highlighted the statutory requirements for the sale of royalty: Sec. 38.05.183. Sale of royalty. (a) The sale, exchange, or other disposal of a mineral obtained by the state as a royalty under AS 38.05.182, the sale, exchange, or other disposal in whole or in part of a right to receive future mineral production under a state lease under this chapter, or the sale, exchange, or other disposal of gas delivered to the state under AS 43.55.014(b) shall be by competitive bid and the  sale, exchange, or other disposal made to the highest responsible bidder, except that competitive bidding is  not required when the commissioner, after prior written notice to the Alaska Royalty Oil and Gas Development Advisory Board under AS 38.06.050, determines that the best interest of the state does  not require it or that no competition exists. (c) If the commissioner determines that a sale, exchange, or other disposal of a mineral obtained by the state as a royalty under AS 38.05.182, of a right to receive future mineral production under a state lease under this chapter, or of gas delivered to the state under AS 43.55.014(b) shall be made otherwise  than by competitive bid, and the Alaska Royalty Oil and Gas Development Advisory Board has been notified in writing of that determination, the commissioner  shall make public in writing the specific findings and conclusions on which that determination is based. 4:30:59 PM MR. MEZA advanced to slide 16, Statutory and Regulatory Mandate for Royalty In-Kind Sale Within the State or for Export? He related that the state map identifies the locations of the different refineries. In the Interior and Southcentral regions are the Petro Star refineries in North Pole and Valdez and the Nikiski refinery operated currently by Marathon and formerly by Tesoro. He highlighted the presumption in 38.05.183(d in that the sale of royalty oil and gas must meet local demand before a decision can be made to sell the royalty oil for export. (d) Oil or gas taken in kind by the state as its royalty share or gas delivered to the state under AS 43.55.014(b) may not be sold or otherwise disposed of for export from the state until the commissioner  determines that the oil or gas is surplus to the  present and projected intrastate domestic and  industrial needs. MR. MEZA advanced to slide 17, Statutory and Regulatory Mandate for Royalty In-Kind Information on In-State Refineries. He directed attention to the chart that provides information about Petro Star's North Pole and Valdez refineries and Marathon's Nikiski refinery, addressed respectively in SB 239 and SB 240. The Nikiski refinery operated by Marathon currently produces 55,000 barrels per day (bpd), including a mix of jet fuel, gasoline and other refined products. Most are consumed in Alaska, although some heavy oils are shipped to other Marathon refineries outside of Alaska. The Petro Star refinery at North Pole produces a maximum of 22,000 bpd and its refinery at Valdez produces a maximum of 60,000 bpd. Production is a mix of jet fuel; ultra-low sulfur diesel, asphalt, and heating oil; but no gasoline. The refined products are primarily sold in Alaska, although refined products are occasionally sold in Canada and the Pacific Northwest. For Marathon, the typical sources of crude oil come from the North Slope and Cook Inlet for the Nikiski refinery, with 20 percent coming from other refineries in the US and foreign countries. The source of crude oil for the Petro Star refineries is entirely from the Alaska North Slope. Employment numbers are also considered in the best interest findings for these contracts. The chart shows that the Marathon and Petro Star refineries each employ between 200 and 300 people. 4:33:30 PM MR. MEZA advanced to slide 18, Statutory and Regulatory Mandate for Royalty In-Kind Pricing Requirement for RIK. He related that the graph on the left shows yet another element for why these proposed contracts meet the regulatory requirement regarding revenue to the state. In particular, it shows that the value the state receives from selling royalty oil in-kind yields more for the state than if the state had chosen to take the royalty in- value. The gray on the graph shows the volumes of oil sold since 2008. The blue dots represent the instances where the price of royalty oil in-kind generated a premium over what the state received when it took a portion of the royalty in-value from the producers. The red squares reflect the 21 cases in 168 months when the royalty value in-kind was lower than the royalty in- value. MR. MEZA highlighted the following: • For the 2008 2021 period, the price of RIK oil was, on average, greater than the price of RIV oil by $0.93/bbl. • The State sold 148 million barrels of royalty oil during this period. • Total proceeds from these RIK sales amount to $10.99 billion. • This translates into $137 million of revenue in addition to what DNR would have obtained had it decided to receive these royalty barrels in- value. 4:35:12 PM MR. MEZA advanced to the next slides to describe the process DNR followed for the sale of royalty oil in-kind. He restated that the process is transparent as mandated by both statute and regulations. He directed attention to the 11 step process starting with the approach of expiration of existing royalty in- kind contracts and ending with legislative approval and execution of the royalty in-kind contract. He described the steps in more detail, the basics of which are: Step 1. Decide whether or not to offer RIK ANS oil for sale and inform the royalty board. Considerations are whether the sale will be competitive or non-competitive; whether the royalty oil should be dedicated to in-state or for export; and the duration of the contracts. Step 2. DNR publishes a Solicitation of Interest letter, continuing to inform the royalty board. This leads to Step 3. DNR evaluates the responses from the marketplace. Step 4. In this example, the decision was to have non- competitive sales. The royalty board was informed. Step 5. DNR conducted bilateral negotiations with the RIK buyers and agreed on tentative terms. Step 6. DNR published the preliminary best interest finding (BIF) for the proposed RIK contracts. Step 7. The preliminary BIF was subject to royalty board review and it underwent a 30-day public comment period. He noted that there were no comments from the public for the proposed Marathon and Petro Star contracts. Step 8. The royalty board recommended the legislature approve the contracts for both Marathon and Petro Star. Step 9. DNR published the final best interest finding. Step 10. SB 239 and SB 240 were submitted to the legislature. These are the bills the committee is considering today. Step 11. The DNR commissioner may not execute these RIK contracts without the approval of the legislature. 4:37:12 PM VICE CHAIR MICCICHE returned attention to the chart on slide 18 and related that he calculated that on average from 2008 to 2021, the royalty in-value proceeds were about 1.5 percent more than the royalty in-value valuation. He asked Mr. Meza if he agreed. MR. MEZA answered that he believed that was correct. VICE CHAIR MICCICHE asked if an appropriate way to view the difference was that the RIK was closer to 14 percent compared to 12.5 percent for RIV. MR. MEZA answered that could be one interpretation, but in this case the extra percentage comes from the refiners, not the producers. VICE CHAIR MICCICHE responded that he was looking at the bottom line, not the source of the premium. 4:38:32 PM MR. MEZA advanced to slide 21 and described the chart of the timeline for the proposed sale of RIK oil for Marathon and Petro Star, all of which was described previously. The legislature is doing its review, which is required prior to execution of the contracts. MR. MEZA moved on to discuss the contract terms for Marathon and Petro Star. He directed attention to the chart on slide 23 that provides information about recent contracts for the sale of royalty oil in-kind. It's the same chart depicted on slide 12, but the last two columns provide information about Netback pricing and the RIK differential. He pointed out that since 2016 the royalty barrels for sale has dropped and now the production of refined products is 10-20 percent less. MR. MEZA stated that what these contracts have in common is that the value of royalty oil in-kind is calculated using the netback methodology for pricing. Because DNR sells the royalty oil at the field, they netback all the costs associated with transportation and the adjustments for quality of the different sources of oil. The calculation also includes an RIK differential that is tied to the royalty price at the field. The last column shows how the RIK differential has gone up since 2016 when it was $1.95/bbl. The proposed contracts under review have an RIK differential value of $2.23/barrel for Marathon and $2.25/barrel for Petro Star. 4:41:39 PM MR. MEZA advanced to slide 24, Contract Terms for Marathon and Petro Star RIK Differential is the Source of the Premium of RIK over RIV. It provides a graphical representation of the netback methodology to calculate the price of royalty in-kind at the field. The graphic on the left is a representation of what the royalty oil price would be if the state were to select its royalty in-value. When the state selects RIV, the producers typically sell the oil into the Lower 48 and the state receives a share of the proceeds from the lessees. To calculate the price of RIV oil at the field, transportation costs, including the allowance for marine transportation, are calculated. He clarified that the costs shown were for illustrative purposes and to show how the RIK compares to RIV. The graphic on the right illustrates the royalty in-kind oil sale. The primary difference is that the oil is sold inside the state. There is no marine transportation allowance but there is the RIK differential. This shows where the premium comes from that Senator Micciche referenced. It's the difference between the per barrel cost of the marine transportation allowance and the RIK differential. In this illustration the difference is $1.25 per barrel. 4:43:46 PM MR. MEZA advanced to slide 25 Contract Terms for Marathon and Petro Star RIK Differential is the Source of the Premium of RIK over RIV. The graph provides historical information of the difference between the marine transportation allowance and the value of the RIK differential. The gray line reflects the weighted-average RIK differential; the blue line the weighted- average marine transportation allowance, and the green dashes reflect the DOR location differential. The distance between the blue line and the gray line gives evidence of the source of the premium that DNR has gotten through its sales of RIK oil. The green dashes shows the increase in the location differential for the proposed contracts. [Further explanation from slide 25 is provided below:] • There is a consistent difference between the marine transportation allowance and the negotiated values of the RIK differential. • Why, for the proposed RIK contracts, is the RIK differential higher? • When the in-state refineries buy ANS oil from North Slope producers, they use a similar netback methodology for arriving at the price of ANS oil at the field. • In doing so, they use a "location differential." • DOR publishes the weighted average of these location differentials for all contracts for the sale of ANS oil within Alaska. • From the perspective of the RIK buyer, the royalty oil in-kind needs to be as competitive as other sources of crude oil from the North Slope. 4:44:35 PM MR. MEZA advanced to slide 26 Contract Terms for Marathon and Petro Star Flexibility for Buyer and Seller. He said this chart provides a description of all the provisions in the contracts. It highlights that both the refineries as buyer and the state as seller have flexibility. He reviewed the following: Flexibility for the RIK buyer (refineries)  RIK buyer may? 1. nominate 0 barrels for up to 2 consecutive months or for 3 months under "turnaround" clause. 2. request, subject to DNR approval, a permanent  reduction of nominations below what was agreed. 3. temporarily reduce royalty oil purchase under force majeure event. 4. request, subject to DNR approval, additional royalty oil for purchase. • RIK buyer may temporarily nominate below the agreed range but must meet a minimum annual amount. Flexibility for the RIK seller (DNR)  1. Proration: If nominations by all RIK buyers is greater than 95% of ANS royalty oil, then DNR will prorate nominations of RIK buyers consistent with the 95% threshold. 2. No guarantee in the quantity, quality, or source of royalty oil 3. Excess royalty: DNR can sell additional ANS royalty oil if all nominations are below the 95% threshold and RIK buyers wish to buy more royalty oil. 4:45:46 PM MR. MEZA advanced to slide 27 Contract Terms for Marathon and Petro Star Other Provisions. It shows the details in the contract such as financial assurance in the event the buyer is unable to pay the invoices for the sale of the royalty oil. The grantor of the RIK buyer has the option of providing the state: 1. Letter of credit 2. Surety bond or 3. Opinion letter by an independent financial analyst that the current and projected credit rating of guarantor is at investment grade MR. MEZA stated that the value of the assurance is valued at 90 days' worth of royalty oil in the Marathon contract and 50 days worth of royalty oil in the Petro Star contract. The contracts also have the following retroactivity provisions: • There could be grounds for changing the amount for an invoice already paid (in terms of the price or quantity) • There is an 8-year period allowed for adjustment of invoices (even after termination of the agreement). MR. MEZA reviewed the provisions in the contracts to encourage the buyers to process the royalty oil in the state and to hire Alaska residents: • Instate processing: RIK buyer agrees to use commercially reasonable efforts to manufacture refined products from the royalty oil in Alaska. • Employment of Alaska residents: RIK buyer agrees to employ Alaska residents and Alaska companies to the extent they are available, willing, and at least as qualified as other candidates 4:47:14 PM MR. MEZA advanced slide 28 Contract Terms for Marathon and Petro Star Contracts are in the Best Interest of the State. He said this slide highlights the cash benefits of the proposed sales. It is the revenue in addition to what the state would have received had it elected to take 100 percent of its royalty oil in-value. He described the following: Additional revenue to the State Tesoro 2016 $31 million Petro Star 2016 multiyear contract $23 million Marathon (2021) $3 million Petro Star 2021 $0.7 million Marathon (2022) estimate $3-14 million Petro Star (2022) estimate $17-19 million 4:48:15 PM SENATOR BISHOP asked if the provision on slide 27 about employment of Alaska residents was in statute or regulation. MR. MEZA answered that it it's a provision in the contract. JOHN CROWTHER, Deputy Commissioner, Department of Natural Resources (DNR), Anchorage, Alaska, added that the department's statutory basis for that provision is the general authority to negotiate terms in a contract. Because he's "an Alaska hire guy." 4:49:40 PM SENATOR KIEHL noted that a lot more royalty barrels than were being sold in-kind. He asked what factors go into the decision to sell oil from a particular field. MR. MEZA answered that there are two considerations: 1. When the department expects the royalty in-value to be the lowest value it substitutes the lowest value of royalty oil with the comparatively higher value of royalty oil in-kind. 2. DNR also selects royalty oil in-kind from fields that generate the largest amount of royalty oil, such as Prudhoe Bay and Kuparuk. 4:50:50 PM SENATOR KIEHL asked about the chart on slide 25 that compared the marine transportation allowance to the royalty in-kind differential. The chart looks like $2/barrel but it has to be $0.80-0.90/barrel to get ahead. He asked Mr. Meza to describe the difference. MR. MEZA answered that the main source of the premium for the royalty in-kind contracts does come from the difference between the marine transportation costs and the RIK differential, but other elements in the netback methodology could create differences in the initial premium. The graph that shows the $0.93/barrel premium is the combined effect of the differences between these elements of the netback methodology. 4:52:27 PM SENATOR KIEHL asked if he would provide a few examples of the factors that ultimately reduce the premium. MR. MEZA referred to slide 24. The only difference in the values on the right of the two graphics comes from the difference between the marine transportation allowance and the RIK differential. The other transportation costs and adjustments in Step 3 of both graphics reflect -$6/bbl, but there are slight variations. For the purposes of valuing RIV, this valuation is determined by a set of agreements that the state entered with producers in the early '90s. These settlement agreements have unique ways of determining things such as how the price of ANS oil should be calculated on the US West Coast. That alone creates a difference between RIV and RIK. By design it's impossible for the valuations to be identical because the settlement agreements differed between producers on the North Slope where the state receives its royalty in-value. 4:54:20 PM SENATOR KIEHL asked for help squaring what he read in the discussion in the best interest finding about not being able to retroactively adjust transportation charges unless they were required by FERC with the retroactivity provision on slide 27 that provides eight years to adjust invoices. MR. MEZA said he'd like to follow up after the presentation because the contracts are sometimes changed by FERC or RCA directives regarding tariffs in some pipelines and he didn't precisely recall the cases DNR did not retroactively adjust. SENATOR KIEHL said that was acceptable. 4:56:19 PM VICE CHAIR MICCICHE referred to the chart on slide 28 to highlight the reason the state sells it oil RIK. He said the first four boxes on the far right are actuals although the Petro Star 2021 contract probably isn't up to date, but the $56 million in actuals are based on the contract price. He said the question he has is the estimate between $3 and $14 million for Marathon 2022 and the $17-19 million in Petro Star is the likely potential differential of marine transportation costs in relation to oil price. He asked if that was correct. MR. MEZA answered yes but other elements in the pricing methodology could expand or reduce that estimate. How much the buyer/refiner decides to buy from the state also affects the estimate, and both refiners have a range. As the table shows, the royalty barrels Marathon has ranges from 10,000 15,000 barrels per day and for Petro Star the range is 10,000 12,500 barrels per day. Additionally, the contract allows the buyer to nominate zero barrels. VICE CHAIR MICCICHE asked whether there was a possibility that the state could go into deficit in an RIK contract. MR. MEZA answered it's theoretically possible if oil prices dropped into the negative range like happened for a day or so in 2020, but the price of RIK oil is determined as an average for the month. VICE CHAIR MICCICHE asked if he agreed that the probability was essentially nonexistent. MR. MEZA answered yes. 5:00:03 PM VICE CHAIR MICCICHE opened public testimony on SB 239. 5:00:27 PM DOUG CHAPADOS, President/CEO, Petro Star, Anchorage, Alaska, stated support for SB 239 to approve Petro Star's five-year royalty oil contract. He related that Petro Star is a wholly owned subsidiary of Arctic Slope Regional Corporation. It is the state's only Alaska-owned refiner with fuel terminals in Anchorage, Valdez, Kodiak, Unalaska Island, and the Interior. Petro Star owns commercial refineries in North Pole and Valdez, and the Trans Alaska Pipeline System (TAPS) is its only source of crude oil. Thus the proposed contract is essential for the company to continue operation. MR. CHAPADOS recounted the variety of products that Petro Star produces. These include jet fuel for commercial airlines and over 90 percent of the jet fuel consumed at the Department of Defense and U.S. Coast Guard installations in the state. The refiner also produces heating oil for residential and commercial customers, ultra-low-sulfur diesel, fuel for on and off road uses, asphalt, and specialty low sulfur turbine fuel exclusively for the Golden Valley and Copper Valley electric associations. MR. CHAPADOS highlighted that the best interest finding explained that this contract is good for the state in terms of maximizing revenues generated from Alaska's royalty oil share and by helping maintain the in-state petroleum refining industry, which preserves competition within the state's fuel market. He encouraged the committee to pass SB 239 and approve the RIK contract. 5:03:08 PM VICE CHAIR MICCICHE closed public testimony on SB 239. Finding no questions or comments, he solicited a motion. 5:03:20 PM SENATOR STEVENS moved to report SB 239, work order 32-GS 2121\A, from committee with individual recommendations and attached [fiscal note(s)]. VICE CHAIR MICCICHE found no objection and SB 239 was reported from committee. SB 240-APPROVE MARATHON PETRO ROYALTY OIL SALE  5:04:20 PM VICE CHAIR MICCICHE reconvened the meeting and announced the consideration of 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." VICE CHAIR MICCICHE noted that SB 239 and SB 240 were moving in tandem and that the committee understood the concept that was described in the presentation that was delivered during the hearing on SB 239. He asked the DNR representatives Mr. Meza and Mr. Crowther if they had any comments. JOHN CROWTHER, Deputy Commissioner, Department of Natural Resources (DNR), conveyed that they did not have any additional comments of statements. VICE CHAIR MICCICHE clarified for the public that the concept for SB 240 and SB 239 was the same but the royalty contracts were for different refiners. 5:04:54 PM VICE CHAIR MICCICHE opened public testimony on SB 240. 5:05:17 PM CASEY SULLIVAN, Government and Public Affairs Manager, Marathon Petroleum, Anchorage, Alaska, noted that he submitted a letter as part of the record. He stated that it was Marathon's pleasure to share its support for Senate Bill 240. He stressed that the flexibility, and stability that the contract offers will have a positive impact on Marathon's ability to optimize the ongoing operations at the Kenai refinery. MR. SULLIVAN reminded the committee that the Kenai refinery was the first refinery in the state and had been operating for more than 50 years. It provides the state with core supplies of jet fuel, diesel, gasoline, propane, and asphalt from Nikiski to North Pole. He described the legislation as the result of constructive dialog and productive negotiations between DNR and Marathon. He expressed appreciation for the professional work by the division and confidence that the contract provides positive shared value for all Alaskans. MR. SULLIVAN concluded his testimony stating that Marathon believes in Alaska's future and is committed to continue its legacy of safely and reliably producing quality fuel produces day in and day out for Alaskans. He thanked the committee for considering SB 240 and urged its passage. 5:07:20 PM VICE CHAIR MICCICHE closed public testimony on SB 240. 5:07:28 PM SENATOR STEVENS moved SB 240, 32-GS 2122\A, from committee with individual recommendations and attached [fiscal notes]. VICE CHAIR MICCICHE found no objection and SB 240 was reported from the Senate Resources Standing Committee.