Legislature(2017 - 2018)HOUSE FINANCE 519

03/13/2017 01:30 PM House FINANCE

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01:49:57 PM Start
01:50:29 PM SB30
02:28:06 PM HB90 HOUSE BILL NO. 90
03:10:36 PM HB6
03:33:09 PM HB31
03:37:05 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Delayed to 1:45 PM --
Heard & Held
Heard & Held
Heard & Held
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
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."                                                                                          
1:51:09 PM                                                                                                                    
JIM  SHINE, COMMERCIAL  MANAGER,  DIVISION OF  OIL AND  GAS,                                                                    
DEPARTMENT  OF  NATURAL  RESOURCES,  provided  a  PowerPoint                                                                    
presentation titled  "Proposed Sale  of the  State's Royalty                                                                    
Oil  to Petro  Star: Senate  Bill 30"  dated March  13, 2017                                                                    
(copy on  file). He relayed  that the proposed sale  was the                                                                    
result  of  a  lengthy  commercial  negotiation  and  public                                                                    
review process. He began on slide 2:                                                                                            
     Royalty In-Kind Versus Royalty In-Value                                                                                    
          The State has a choice to take its royalty in-                                                                        
          kind (RIK) or in-value (RIV).                                                                                         
          lessees  who  produce  the  oil  also  market  the                                                                    
          State's share along with  their own production and                                                                    
          pay the State the value of its royalty share.                                                                         
          SOA  assumes ownership  of the  oil,  and the  DNR                                                                    
          Commissioner  disposes  of  it  through  the  sale                                                                    
          procedures prescribed by AS 38.05.183.                                                                                
          oil as RIK (starting in 1979).                                                                                        
          million in additional revenue  over what the state                                                                    
          would  receive  if  the  contracted  volumes  were                                                                    
          taken RIV.                                                                                                            
          review and Royalty Board processes.                                                                                   
Mr. Shine related  that the state was  currently selling oil                                                                    
to  Petro Star  under  a one-year  contract,  which had  not                                                                    
required  legislative  approval.  Contracts  over  one  year                                                                    
required legislative ratification.                                                                                              
Mr. Shine addressed slide 3 titled "Non-Competitive RIK                                                                         
Sale Process":                                                                                                                  
     Before taking  RIK, the DNR  Commissioner must  find it                                                                    
     is in the State's best interest.                                                                                           
     DNR  must decide  whether  to sell  RIK  pursuant to  a                                                                    
     competitive  auction or  a non-competitive,  negotiated                                                                    
     Solicitation  of   Interest  issued  January   2015  to                                                                    
     prospective purchasers to gauge market interest.                                                                           
     DNR determined that there  was not competition allowing                                                                    
     for a competitive sale, and  proposed to enter into two                                                                    
     negotiated contracts with Petro Star.                                                                                      
     The first contract, in effect  for the period January -                                                                    
     December 2017, did not  need legislative approval under                                                                    
     AS 38.06.055(a) and  (b)(1), received recommendation of                                                                    
     the Royalty Board and was entered into in August 2016.                                                                     
     The second contract, effective for the period January                                                                      
     2018 -December 2021, received the recommendation of                                                                        
     the Royalty Board, but requires Legislative approval.                                                                      
Mr. Shine detailed that the  Department of Natural Resources                                                                    
(DNR)  sent the  solicitation  of interest  to five  instate                                                                    
refineries:  Petro  Star,  Tesoro,   Flint  Hills,  BP,  and                                                                    
ConocoPhillips. The  state choose  to enter  into negotiated                                                                    
sales with Tesoro  and Petro Star. In  2016, the legislature                                                                    
ratified  a  5-year  contract  with   Tesoro  under  HB  373                                                                    
Approval of  Sale of  Royalty Oil to  Tesoro [Chapter  3 SLA                                                                    
16/ - 04/21/2016]. The department  prepared a  best interest                                                                    
finding and  determined that the 4-year  Petro Star contract                                                                    
was in the state's best  interest. In addition, DNR issued a                                                                    
30-day public  comment review where  no public  comments had                                                                    
been received.  Subsequently, DNR presented the  contract to                                                                    
the Alaska  Oil and  Gas Royalty Development  Advisory Board                                                                    
(Royalty  Board)  on  August  31,  2016,  which  unanimously                                                                    
approved  the contract  and recommended  it for  legislative                                                                    
approval.  He   noted  that  the   "Report  to   the  Alaska                                                                    
Legislature" (copy  on file) and    the  Approval Resolution                                                                    
[Resolution  2016-2 (copy  on file)]  were  included in  the                                                                    
committee member's packets.                                                                                                     
1:55:38 PM                                                                                                                    
Co-Chair Foster  noted Representative Wilson had  joined the                                                                    
Vice-Chair  Gara relayed  that he  had never  had a  problem                                                                    
with the oil  royalty contracts. He spoke to  RIK versus RIV                                                                    
and noted that  the state stood to gain more  taking RIK. He                                                                    
asked  whether  the RIK  "net  positive"  accounted for  the                                                                    
amount of  oil used  to pay the  pipeline tariff.  Mr. Shine                                                                    
answered  that Petro  Star had  already  received its  "feed                                                                    
stock" from  other producers. The  state was  maximizing the                                                                    
value of  it royalty by  selling the  oil to Petro  Star. He                                                                    
elaborated that Petro Star refined  roughly 25 to 30 percent                                                                    
of each barrel of oil  and returned the remaining percentage                                                                    
of the barrel back  into Trans-Alaska Pipeline System (TAPS)                                                                    
in the  comingled stream. He  noted that the same  volume of                                                                    
oil  would  be  shipped  upstream and  downstream  from  the                                                                    
Representative  Guttenberg   referenced  the   Quality  Bank                                                                    
allowance  calculation and  a related  court case.  He asked                                                                    
what the  state would  lose in  the Quality  Bank allowances                                                                    
versus if  there was  no sale. He  thought that  the Quality                                                                    
Bank cost the state and  buyer money. He asked whether there                                                                    
was a  calculation for  the expense.  Mr. Shine  deemed that                                                                    
the  case Representative  Guttenberg  referred to  concerned                                                                    
the valuation  of the  residual portion of  a barrel  of oil                                                                    
and  was  a  Quality Bank  administrative  mandated  federal                                                                    
program.  The  value  was  determined   by  a  Quality  Bank                                                                    
administrator  contracted   through  the  TAPS   owners.  He                                                                    
delineated that the Quality Bank  payment was a deduction on                                                                    
the  netback   formula,  determined  by  the   Quality  Bank                                                                    
administrator.  He noted  the formula  was the  same if  the                                                                    
state chose RIV. Representative  Guttenberg relayed that the                                                                    
court  determined that  the  state had  no  standing in  the                                                                    
Quality  Bank   allowance  situation.   He  was   under  the                                                                    
impression  the state  lost money  because "the  calculation                                                                    
was higher than it should be."  He asked if the state looked                                                                    
at the  Quality Bank costs and  how it impacted the  sale of                                                                    
oil.  Mr. Shine  replied in  the affirmative.  He reiterated                                                                    
that  the number  was the  same whether  the state  took its                                                                    
royalty in-value  or in-kind. He explained  that the Quality                                                                    
Bank  was  an  economic   leveling  mechanism  that  ensured                                                                    
upstream  producers were  in the  same economic  position at                                                                    
the  Valdez main  terminal based  on the  value of  oil they                                                                    
contributed  into  the  comingled  stream.  He  agreed  that                                                                    
larger  Quality   Bank  payments   may  impact   the  bank's                                                                    
deduction that was  part of the state's  netback formula. He                                                                    
surmised that  the real  value to the  state taking  RIK was                                                                    
not  being subject  to  a  marine transportation  deduction.                                                                    
Representative Guttenberg requested  a letter explaining how                                                                    
the in-kind and  in-value worked out to be  the same number.                                                                    
Mr. Shine agreed to follow up.                                                                                                  
2:01:34 PM                                                                                                                    
Representative Grenn  referenced point  number 4 on  slide 4                                                                    
and read:                                                                                                                       
     The  ability  of  the   prospective  buyer  to  provide                                                                    
     refined  products  for  distribution and  sale  in  the                                                                    
     state with price or supply  benefits to the citizens of                                                                    
     the state…                                                                                                                 
Representative Grenn asked whether  there was a breakdown of                                                                    
what  Petro Star  would do  with its  refined products.  Mr.                                                                    
Shine  answered that  the  items were  covered  in the  best                                                                    
interest finding  included in  the member's  packets ["Final                                                                    
Best  Interest Finding  and Determination  for  the Sale  of                                                                    
Alaska North Slope Royalty Oil  to Petro Star Inc." Division                                                                    
of  Oil and  Gas,  Alaska Department  of Natural  Resources,                                                                    
September 15, 2016 (copy on file)].                                                                                             
Co-Chair Seaton  spoke to refineries  tax credits  that were                                                                    
not "transparent."  He asked if  the department  was opposed                                                                    
to the suggestion of  adding transparency language regarding                                                                    
the  credits to  the bill.  Mr.  Shine did  not believe  the                                                                    
department   would   have    a   problem   with   increasing                                                                    
Representative  Wilson  asked  whether   the  bill  was  the                                                                    
appropriate  vehicle to  discuss the  refinery tax  credits.                                                                    
Mr.  Shine replied  that  the contract  was  not subject  to                                                                    
amendment. He  believed that  DNR preferred  the legislature                                                                    
address the issue in standalone legislation.                                                                                    
Mr. Shine  moved to slide 4  titled "Commissioner's Decision                                                                    
     AS 38.05.183(e) states that  the commissioner must sell                                                                    
     the  State's  royalty  oil  to  the  buyer  who  offers                                                                    
     "maximum  benefits to  the citizens  of the  state." In                                                                    
     making  this   determination,  the   commissioner  must                                                                    
     1.   The cash value offered;                                                                                               
     2.   The projected  effects of the sale  on the economy                                                                    
     of the state;                                                                                                              
     3.   The projected  benefits of refining  or processing                                                                    
     the oil in state;                                                                                                          
     4.   The ability  of the  prospective buyer  to provide                                                                    
     refined  products  for  distribution and  sale  in  the                                                                    
     state with price or supply  benefits to the citizens of                                                                    
     the state; and                                                                                                             
     5.   The eight  criteria listed in AS  38.06.070(a), as                                                                    
     reviewed by the Royalty Board.                                                                                             
     In  considering these  criteria, the  commissioner will                                                                    
     state which criteria apply  to the proposed disposition                                                                    
     and  discuss   the  weight  given  to   the  applicable                                                                    
     criteria  in determining  the maximum  benefits to  the                                                                    
Mr. Shine  noted that Petro  Star had two  refineries: North                                                                    
Slope and  Valdez. The refined  products provided  jet fuel,                                                                    
home heating, and ultralow sulfur  diesel fuel for Alaskan's                                                                    
Mr. Shine advanced to slide 5 titled "Approval Process for                                                                      
the RIK sale":                                                                                                                  
     DNR must make a Best Interest Finding (BIF) in support                                                                     
     of the sale.                                                                                                               
          Preliminary BIF issued July 2016.                                                                                     
          Final BIF issued in September 2016.                                                                                   
          DNR  presented the  proposed sale  to the  Royalty                                                                    
          Board on August 31, 2016.                                                                                             
          The  Board reviewed  the Preliminary  BIF and  the                                                                    
          proposed  contracts,  and   unanimously  voted  to                                                                    
          recommend the Legislature approve  the sale of ANS                                                                    
          royalty oil to Petro Star.                                                                                            
          The   Board  issued   a  Report   to  the   Alaska                                                                    
          Legislature  and  Resolution 2016-2  stating  that                                                                    
          the  proposed disposition  of ANS  royalty oil  to                                                                    
          Petro   Star   meets   the  requirements   of   AS                                                                    
          Prior   to  finalizing   the  RIK   contract,  the                                                                    
          Legislature  must   pass  a  bill   ratifying  the                                                                    
         contract with Petro Star (HB 70; SB 30).                                                                               
Mr. Shine turned to slide 6 titled "Royalty Board's                                                                             
Decision Criteria":                                                                                                             
     AS 38.06.070(a) states that the Alaska Royalty Oil and                                                                     
     Gas Development Advisory Board must 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                                                                    
        3. The desirability of localized capital investment,                                                                    
          increased   payroll,  secondary   development  and                                                                    
          other possible effects of the sale;                                                                                   
        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 transactions;                                                                               
        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 or negative environmental                                                                     
         effects related to the transactions; and                                                                               
        8. The projected effects of the proposed transaction                                                                    
          upon existing private commercial enterprise and                                                                       
          patters of investment.                                                                                                
Mr. Shine notified the committee that the Royalty Board                                                                         
addressed the criteria in its report.                                                                                           
2:05:48 PM                                                                                                                    
Mr. Shine addressed slide 7 titled "Petro Star RIK Contract                                                                     
     1-year  contract: from  18,800  bpd to  23,500 bpd  for                                                                    
     Jan. 2017 -Dec. 2017                                                                                                       
     4-year  contract: from  16,400  bpd to  20,500 bpd  for                                                                    
     Jan. 2018 -Dec. 2018                                                                                                       
          from 13,200 bpd to 16,500 bpd for Jan. 2019 -Dec.                                                                     
          from 10,800 bpd to 13,500 bpd for Jan. 2020 -Dec.                                                                     
          from 8,400 bpd to 10,500 bpd for Jan. 2021 -Dec.                                                                      
     Price:  the   contracts  use  a  netback   formula  and                                                                    
     provides higher revenue to State compared to RIV.                                                                          
     Quantity flexibility                                                                                                       
     Petro  Star   may  nominate  zero   barrels  up   to  3                                                                    
     consecutive  months  if  "turnaround clause"  is  used,                                                                    
     otherwise the contract terminates.                                                                                         
     The State  can cap its  delivery amounts to 95%  of the                                                                    
     total ANS royalty  oil if the nominations  from all RIK                                                                    
     buyers is greater than the 95% threshold.                                                                                  
     Provided  that the  supply of  ANS royalty  oil exceeds                                                                    
     demand  from  both  RIK  buyers,  the  State  can  sell                                                                    
     Additional  Sale Oil  as long  as the  total deliveries                                                                    
     are not greater than the 95% threshold.                                                                                    
     Petro Star's  guarantor (ASRC)  shall provide  a letter                                                                    
     of  opinion  from a  financial  analyst  or a  stand-by                                                                    
     letter of  credit or surety  bond equal in value  to 50                                                                    
     days of delivery.                                                                                                          
     If  guarantor's credit  rating  falls below  investment                                                                    
     grade level,  then guarantor  shall provide  a stand-by                                                                    
     letter of credit or surety bond described previously.                                                                      
     In-state  processing: Petro  Star to  use "commercially                                                                    
     reasonable  efforts"  to manufacture  refined  products                                                                    
     in-state from the ANS royalty oil.                                                                                         
     Employment  of  Alaska   residents:  no  discrimination                                                                    
     against AK companies and residents.                                                                                        
Mr.  Shine  reported  that the  decline  in  the  nomination                                                                    
values  was reflective  of the  state's anticipated  royalty                                                                    
barrels.  The numbers  were based  on  2015 Fall  Production                                                                    
Forecast   using  only   currently   producing  assets.   He                                                                    
indicated that the state expected  to receive 50 thousand to                                                                    
55 thousand  barrels of oil  per day  in 2017 and  from 2018                                                                    
through 2021 the state anticipated  receiving 36 thousand to                                                                    
50 thousand barrels of oil  per day. The Tesoro contract (HB
373 from the  previous year) was based on 20  thousand to 25                                                                    
thousand barrels  per day during  the same time  period. The                                                                    
total accounted for approximately  95 percent of the state's                                                                    
royalty oil in the next five years.                                                                                             
Representative Thompson  referenced slide 7  and interpreted                                                                    
that the  state could  sell an  increased amount  of royalty                                                                    
oil up  to the  95 percent threshold  if supply  was greater                                                                    
due to increased production. He  asked whether the statement                                                                    
was correct. He  noted that current oil  production was over                                                                    
550,000  barrels per  day but  the  fall forecast  predicted                                                                    
under 500,000/bbl. Mr. Shine replied  in the affirmative. He                                                                    
pointed  to  the  third  bullet   point  on  slide  7  under                                                                    
"Quantity  Flexibility" and  reported that  if more  royalty                                                                    
oil  was  available during  the  contract  period the  state                                                                    
could provide the excess barrels  based on the contracts. He                                                                    
restated  that  the contract  was  based  on 2015  currently                                                                    
producing assets.                                                                                                               
2:09:08 PM                                                                                                                    
Mr.  Shine spoke  to the  security  provisions. He  reported                                                                    
that  the state  negotiated a  surety bond  with the  Arctic                                                                    
Slope Regional Corporation; Petro  Stars parent company, for                                                                    
$46 million  that would ensure  the state was  reimbursed at                                                                    
the same level in case  of default. He elaborated that there                                                                    
were two default risks: -  if barrels were delivered and the                                                                    
company was unable to meet  its obligation or a denomination                                                                    
risk.  He explained  that the  state  employed a  nomination                                                                    
process to receive  its royalty oil. One  hundred days prior                                                                    
to  the delivery  of  royalty oil,  the  state received  the                                                                    
nomination volumes  information from  Petro Star.  The state                                                                    
then  had 10  days  to notify  upstream  producers how  many                                                                    
barrels it was  taking in-kind. The purpose  of the security                                                                    
provision and  the bond  was to ensure  the state  was "kept                                                                    
whole" if  either default occurred. He  indicated that Petro                                                                    
Star employed over 300 Alaskans.                                                                                                
Mr.  Shine offered  that the  following slide  contained the                                                                    
netback  formula  for the  contract.  He  discussed slide  8                                                                    
titled "RIK Contract Price:"                                                                                                    
          ANS  Spot Price  -  $1.95 -  Tariff Allowance  +/-                                                                    
          Quality Bank Adjustments - Line Loss                                                                                  
          ANS Spot Price  = Average US West  Coast Price for                                                                    
          Alaska  North  Slope  oil  (reported  by  industry                                                                    
          trade publications Platts and Reuters)                                                                                
          $1.95 RIK Differential                                                                                                
          This is  a deduction  used to calculate  the price                                                                    
          of ANS oil sold in Alaska.                                                                                            
          The deduction is  applied to the price  of ANS oil                                                                    
          at its  most common  destination market  (the U.S.                                                                    
          West Coast).                                                                                                          
          It resembles  the deduction used  in sales  of ANS                                                                    
          oil in  Alaska between  North Slope  producers and                                                                    
          between   North  Slope   producers  and   in-state                                                                    
          In contrast, for the ANS  royalty oil that is sold                                                                    
          outside  of Alaska  and  that  is taken  in-value,                                                                    
          producers  use a  deduction that  approximates the                                                                    
          marine transportation cost.                                                                                           
          Since   deduction  that   represents  the   marine                                                                    
          transportation cost  is generally higher  than the                                                                    
          value of  the RIK differential, the  State has the                                                                    
          potential  to obtain  a higher  price for  its ANS                                                                    
          royalty oil  by taking  it in-kind and  selling it                                                                    
          in Alaska.                                                                                                            
          Tariff Allowance = Tariffs  for TAPS and pipelines                                                                    
          upstream of Pump Station 1 (PS-1).                                                                                    
          Quality  Bank Adjustments  = adjustments  reported                                                                    
          by TAPS Quality Bank Administrator.                                                                                   
          Line  Loss  =  loss or  mismeasurement  of  volume                                                                    
          between  PS-1  and   the  Valdez  Marine  Terminal                                                                    
          (VMT).  It is  calculated as  0.09% of  the amount                                                                    
          resulting from the  formula above, excluding "Line                                                                    
Mr. Shine  summarized that the  main difference  between the                                                                    
RIK and  the RIV netback  formula was the difference  in the                                                                    
marine    transportation    deduction   versus    the    RIK                                                                    
differential. He  delineated that  the RIK  differential was                                                                    
$1.95 /bbl. in both  contracts and the marine transportation                                                                    
deduction was expected between  $3.30/bbl. and $3.70bbl. The                                                                    
RIK differential  represented the  value of oil  sold within                                                                    
the  state. He  referenced the  $29 million  to $37  million                                                                    
over 5  years increase in excess  of a RIV contract  was the                                                                    
delta between no marine transportation  deduction and an RIK                                                                    
differential at approximately $1.50bbl.                                                                                         
2:13:09 PM                                                                                                                    
Representative  Guttenberg asked  who  performed the  marine                                                                    
transportation  calculation.  Mr.  Shine  replied  that  the                                                                    
calculation  on   fields  that   were  covered   under  RSAs                                                                    
(Reimbursable Service Agreements)  was an average subtracted                                                                    
from the netback formula for the RIV.                                                                                           
Mr.  Shine instructed  that the  line loss  was an  industry                                                                    
standard   deduction  in   netback  formulas   for  pipeline                                                                    
transportation  that accounted  for the  difference in  flow                                                                    
meters.  He moved to slide 9:                                                                                                   
     CONTRACT IS IN THE STATE'S BEST INTEREST                                                                                   
     The State  will receive between  $29 to $37  million in                                                                    
     additional revenue  over what  the state  would receive                                                                    
     if  the volume  of  ANS royalty  oil  the contracts  is                                                                    
     taken  in-value.  1-year  contract (Jan.  -Dec.  2017):                                                                    
     from $7.6 to $9.5 million  4-year contract (Jan. 2018 -                                                                    
     Dec. 2021): from $22.3 to $27.9 million                                                                                    
     On average,  producers selling ANS royalty  oil outside                                                                    
     Alaska  for  the  5-year period  of  the  proposed  RIK                                                                    
     contracts with  Petro Star are expected  to deduct from                                                                    
     $3.37 to  $3.70 per barrel as  a "marine transportation                                                                    
     cost" in  arriving at  the price for  RIV. This  is the                                                                    
     deduction used to adjust the  price of ANS oil from the                                                                    
     U.S. West Coast to Alaska.                                                                                                 
          The  proposed  contracts   with  Petro  Star  will                                                                    
          deduct  only $1.95  as  a "location  differential"                                                                    
          from the west coast ANS value.                                                                                        
          The proposed  sale provides crude to  Petro Star's                                                                    
          refineries  at  North  Pole and  Valdez  with  the                                                                    
          associated   economic  and   social  benefits   to                                                                    
          Alaska's     economy:    Petro     Star    employs                                                                    
          approximately   44   people    in   its   refining                                                                    
          Maximum throughput  capacity North  Pole refinery:                                                                    
          22,000  barrels per  day  (bpd). Valdez  refinery:                                                                    
          60,000 bpd.                                                                                                           
          Of the  throughput amounts,  approximately 25%-30%                                                                    
          will be refined products.                                                                                             
          Petro Star  refineries' estimated  contribution to                                                                    
          the local economy in 2014 was $25mm                                                                                   
Mr.  Shine  commented that  the  total  of the  two  current                                                                    
contracts  and another  previously approved  Tesoro contract                                                                    
brought the state  $75 million to $95 million  more over the                                                                    
next five years than available under RIV contracts.                                                                             
2:15:40 PM                                                                                                                    
Mr.  Shine  addressed slide  10  titled  "Comparison of  RIK                                                                    
Contracts."  The  slide  contained  charts  summarizing  the                                                                    
breakdown  in  the difference  between  the  volumes in  the                                                                    
Tesoro  and Petro  Star contracts.  He mentioned  that there                                                                    
was a positive fiscal  note accompanying the bill reflecting                                                                    
the  value of  the four-year  contract taken  in RIK  versus                                                                    
Representative Guttenberg  spoke to the tariff  allowance on                                                                    
slide 10.  He read the  following from a box  titled "Tariff                                                                    
     …If royalty comes from fields upstream of PS No 1,                                                                         
     then RIK contracts consider tariffs filed with FERD                                                                        
     for shipment of royalty oil upstream of PS No 1.                                                                           
Representative  Guttenberg  asked  where  the  tariffs  were                                                                    
filed and who set the rates.  He asked whether the state was                                                                    
paying twice  for shipments and  if the upstream  costs were                                                                    
regulated. Mr.  Shine responded that if  the state nominated                                                                    
royalty  barrels from  Prudhoe Bay  the netback  formula was                                                                    
only  subject to  a TAPS  deduction,  which represented  the                                                                    
transportation costs  from Prudhoe  Bay to  Valdez. However,                                                                    
if  the  state was  nominating  royalty  barrels from  other                                                                    
locations like  Pt. Thompson, additional  tariff adjustments                                                                    
were made  for moving the  oil from the point  of production                                                                    
to the  comingled stream  at Pump Station  number 1.  He was                                                                    
not  certain  whether the  costs  were  regulated. He  would                                                                    
follow up.                                                                                                                      
2:18:25 PM                                                                                                                    
Representative  Guttenberg was  concerned that  in the  past                                                                    
some  of  the  tariff   allowances  on  TAPS  were  disputed                                                                    
because, in  his view,  owners were  overcharging themselves                                                                    
and lowering the costs at  the wellhead and getting a better                                                                    
deal from  themselves for shipping  costs. He  wondered what                                                                    
happened   upstream  with   TAPS   owners  and   independent                                                                    
producers and  asked for  a follow up.  Mr. Shine  agreed to                                                                    
follow up.                                                                                                                      
Co-Chair  Seaton asked  whether  there  was any  interaction                                                                    
with the gross  value reduction (GVR) for new oil  or the 10                                                                    
percent  GVR  for  those with  royalty  shares  above  12.25                                                                    
percent. Mr. Shine answered in the negative.                                                                                    
Representative   Wilson    thanked   the    department   for                                                                    
negotiating the  deal, which she believed  was long overdue.                                                                    
She asked  about the difference between  the Tesoro contract                                                                    
and  the Petro  Star contract  in  how much  more the  state                                                                    
received. Mr.  Shine replied that the  prior Tesoro contract                                                                    
was $56  million more over  5 years  and in the  two current                                                                    
contracts between  $29 million  to $37  million more  or the                                                                    
difference  between the  minimum  nomination volumes  versus                                                                    
the  high-end volumes.  Representative Wilson  spoke to  the                                                                    
best  interest of  the state.  She asked  if the  department                                                                    
believed the contract was in  the state's best interest. Mr.                                                                    
Shine replied in the affirmative.                                                                                               
Representative Grenn  asked for clarification of  the fiscal                                                                    
note (FN  2 (DNR). He  noted that according to  the analysis                                                                    
on page  two the proposed  contract is expected  to generate                                                                    
between $22  million and $27  million in revenues.  He asked                                                                    
about the difference.                                                                                                           
2:21:22 PM                                                                                                                    
Mr.  Shine responded  that SB  30 was  based on  a four-year                                                                    
contract. He cited sub-bullets on  slide 9 that reported the                                                                    
range for  a four year  contract similar to the  fiscal note                                                                    
at $22.3  million to  $27.9 million  the minimum  versus the                                                                    
maximum nomination range.                                                                                                       
DOUG CHAPADOS, CHIEF EXECUTIVE  OFFICER AND PRESIDENT, PETRO                                                                    
STAR,  thanked DNR  for its  work on  the contract  and felt                                                                    
that the contract was equitable.                                                                                                
Representative Thompson  asked whether  Mr. Chapados  was in                                                                    
favor  of   the  contract.  Mr.  Chapados   replied  in  the                                                                    
affirmative. He added that crude  oil for his refineries was                                                                    
essential  to remain  in  business and  stated  that it  was                                                                    
becoming harder  to source with  the decline  in throughput.                                                                    
The royalty oil served as the basis of his supply.                                                                              
Co-Chair Seaton agreed the contract  was in the state's best                                                                    
interest.  He asked  if the  company had  any opposition  to                                                                    
transparency  regarding   refinery  credits.   Mr.  Chapados                                                                    
answered that  Petro Star  was happy to  provide a  level of                                                                    
transparency,  but he  believed it  was more  appropriate to                                                                    
have  the issue  attached  to a  tax  bill. Co-Chair  Seaton                                                                    
replied that he was not planning  to add any language to the                                                                    
current bill.                                                                                                                   
2:25:09 PM                                                                                                                    
Representative  Wilson thanked  Mr. Chapados  for taking  up                                                                    
the "gap"  that had been  left in Fairbanks by  Flint Hills.                                                                    
Mr. Chapados answered that Petro  Star was happy to still be                                                                    
in  business and  was  happy to  fill the  gap  left by  the                                                                    
closure of  Flint Hills. The  company utilized  the refinery                                                                    
credits  that  enabled  Petro  Star to  fill  the  void.  He                                                                    
reported  that the  company invested  in an  asphalt project                                                                    
and  produced  a low-cost  fuel  for  use by  Golden  Valley                                                                    
Electric Association due to the credits.                                                                                        
Representative   Thompson  stated   that  the   company  was                                                                    
currently  holding  about $15  million  in  tax credits.  He                                                                    
asked if  the company had  been paid anything.  Mr. Chapados                                                                    
replied that Petro Star submitted  $5 million in tax credits                                                                    
generated in  2015 and  would apply for  $10 million  in tax                                                                    
credits generated in 2016.                                                                                                      
2:27:17 PM                                                                                                                    
Co-Chair  Foster  OPENED  and CLOSED  public  testimony.  He                                                                    
relayed that the bill would be heard on Friday.                                                                                 
SB  30  was   HEARD  and  HELD  in   committee  for  further                                                                    

Document Name Date/Time Subjects
HB 31 Support Documents PKT.pdf HFIN 3/13/2017 1:30:00 PM
HB 31
HB31 - CSHB 31 Workdraft version J.pdf HFIN 3/13/2017 1:30:00 PM
HB 31
HB31 Additional Document ADN Crimes & Reports 2.13.17.PDF HFIN 3/13/2017 1:30:00 PM
HB 31
HB31 Additional Document Tracking Kit Software 2.13.17.PDF HFIN 3/13/2017 1:30:00 PM
HB 31
HB 006 MSB Assembly Jim Sykes Draft Resolution.pdf HFIN 3/13/2017 1:30:00 PM
HB 6
HB 006 Supporing Document MSB Support Resolution.pdf HFIN 3/13/2017 1:30:00 PM
HB 6
HB 6 sponsor statement.pdf HFIN 3/13/2017 1:30:00 PM
HB 6
HB006 Supporting Document-ADN Article.pdf HFIN 3/13/2017 1:30:00 PM
HB 6
HB006 Supporting Document-DNR Petition.pdf HFIN 3/13/2017 1:30:00 PM
HB 6
HB006 Supporting Document-Frontiersman Editorial.pdf HFIN 3/13/2017 1:30:00 PM
HB 6
HB006 Supporting Document-Jonesville Action Plan.pdf HFIN 3/13/2017 1:30:00 PM
HB 6
HB006 Supporting Document-KTUU Article.pdf HFIN 3/13/2017 1:30:00 PM
HB 6
HB006 Supporting Document-Lynne Woods letter.pdf HFIN 3/13/2017 1:30:00 PM
HB 6
HB006 Supporting Document-Map of Area.pdf HFIN 3/13/2017 1:30:00 PM
HB 6
HB006 Supporting Document-MSB Letter.pdf HFIN 3/13/2017 1:30:00 PM
HB 6
HB006 Supporting Document-Sutton Resolution.pdf HFIN 3/13/2017 1:30:00 PM
HB 6
SB 30 Best Interest Finding.pdf HFIN 3/13/2017 1:30:00 PM
SB 30
SB 30 PSI Letter of Support for RIK Bill.pdf HFIN 3/13/2017 1:30:00 PM
SB 30
SB 30 Report from Royalty Board.pdf HFIN 3/13/2017 1:30:00 PM
SB 30
SB 30 Royalty Board Resolution.PDF HFIN 3/13/2017 1:30:00 PM
SB 30
SB 30 Transmittal Letter.pdf HFIN 3/13/2017 1:30:00 PM
SB 30
SB30 PPT to HFIN - 03.13.2017.pdf HFIN 3/13/2017 1:30:00 PM
SB 30
HB090 Sectional Analysis 020817.pdf HFIN 3/13/2017 1:30:00 PM
HB 90
HB090 Sponsor Statement 020817.pdf HFIN 3/13/2017 1:30:00 PM
HB 90
HB090 Supporting Document - Board License Action Options 020817.pdf HFIN 3/13/2017 1:30:00 PM
HB 90
HB090 Supporting Document - CBPL Investigative Process 020817.pdf HFIN 3/13/2017 1:30:00 PM
HB 90
HB090 Supporting Document - CBPL Program Fees and Investigation Cost Comparison 022817.pdf HFIN 3/13/2017 1:30:00 PM
HB 90
HB090 Supporting Document - Licensing Statistics 020817.pdf HFIN 3/13/2017 1:30:00 PM
HB 90
HB090 Supporting Document - Summary of All Professional Licensing 020817.pdf HFIN 3/13/2017 1:30:00 PM
HB 90
HB090 Supporting Documents - Letters of Opposition 022817.pdf HFIN 3/13/2017 1:30:00 PM
HB 90
HB090 Supporting Documents - Letters of Support 022817.pdf HFIN 3/13/2017 1:30:00 PM
HB 90
HB31 Sponsor Statement.pdf HFIN 3/13/2017 1:30:00 PM
HB 31
HB31- Explaination of Changes.pdf HFIN 3/13/2017 1:30:00 PM
HB 31
HB 6 Explanation of Changes.pdf HFIN 3/13/2017 1:30:00 PM
HB 6
HB90 Opposition Document - Letter 3.14.17.pdf HFIN 3/13/2017 1:30:00 PM
HB 90
HB 6 - Administration Letter of Support-signed.pdf HFIN 3/13/2017 1:30:00 PM
HB 6