Legislature(2017 - 2018)SENATE FINANCE 532

02/06/2017 09:00 AM Senate FINANCE

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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."                                                                                          
9:03:38 AM                                                                                                                    
JIM  SHINE, COMMERCIAL  MANAGER,  DIVISION OF  OIL AND  GAS,                                                                    
DEPARTMENT    OF    NATURAL   RESOURCES,    discussed    the                                                                    
presentation, "Proposed  Sale of the State's  Royalty Oil to                                                                    
Petro Star: Senate Bill 30;  Senate Finance Committee" (copy                                                                    
on file).                                                                                                                       
Co-Chair MacKinnon stated that Mr. Chapadose was online for                                                                     
Mr. Shine looked at 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).                                                                                                   
     When the  State takes its  royalty as RIV,  the 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.                                                                                                
     When  SOA  takes its  royalty  share  as RIK,  the  SOA                                                                    
     assumes ownership of the oil,  and the DNR Commissioner                                                                    
     disposes of  it through the sale  procedures prescribed                                                                    
     by AS 38.05.183.                                                                                                           
     The SOA  has regularly  taken royalties  of ANS  oil as                                                                    
     RIK (starting in 1979).                                                                                                    
     The State  will receive between  $29 to $37  million in                                                                    
     additional revenue  over what  the state  would receive                                                                    
     if the contracted volumes were taken RIV.                                                                                  
     Petro Star contract has been  through public review and                                                                    
     Royalty Board processes.                                                                                                   
Mr.  Shine  addressed  slide 3,  "Non-competitive  RIK  Sale                                                                    
     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.                                                                      
Co-Chair MacKinnon acknowledged Senator Micciche.                                                                               
9:08:44 AM                                                                                                                    
Senator Olson looked at slide  2. He queried the period that                                                                    
the increase of  $29 million to $37 million  took place. Mr.                                                                    
Shine  replied   that  it  included  the   current  one-year                                                                    
contract  and  the  four-year   contract  contained  in  the                                                                    
legislation. The one-year contract  did not need legislative                                                                    
approval. The $29  million to $37 million  included the one-                                                                    
year and four-year contracts through calendar year 2021.                                                                        
Senator Dunleavy  stressed that the proceeds  were deposited                                                                    
into the Permanent Fund. Mr. Shine agreed.                                                                                      
Co-Chair  MacKinnon noted  that  50 percent  of revenue  was                                                                    
deposited into  the Permanent Fund;  45 percent went  to the                                                                    
general fund; and 5 percent  went to the Public School Trust                                                                    
Fund. Mr. Shine agreed.                                                                                                         
Mr. Shine looked at slide 4, "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 highlighted slide 5, "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  addressed  slide 6,  "Royalty  Board's  Decision                                                                    
     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 products;                                                                          
     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                                                                    
     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.                                                                                                     
Senator  Dunleavy  looked  at number  7,  and  wondered  who                                                                    
oversaw that  criteria. Mr. Shine replied  that the Division                                                                    
of Oil  and Gas oversaw that  criteria, but he did  not know                                                                    
how much  consultation was done  with other  state agencies.                                                                    
He stated that  the report indicated that there  would be no                                                                    
negative  environmental  impacts.  He  stated  that  it  was                                                                    
existing status quo operations for Petro Star.                                                                                  
9:13:46 AM                                                                                                                    
Mr. Shine discussed slide 7, "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. 2019  from 10,800                                                                    
          bpd to  13,500 bpd for  Jan. 2020 -Dec.  2020 from                                                                    
          8,400 bpd to 10,500 bpd for Jan. 2021 -Dec. 2021                                                                      
     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                                                                    
          percent  of  the  total ANS  royalty  oil  if  the                                                                    
          nominations from  all RIK  buyers is  greater than                                                                    
          the 95 percent 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  percent                                                                    
          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.                                                                                        
9:19:01 AM                                                                                                                    
Mr. Shine addressed slide 8, "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 Plattsand 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.                                                                                                            
Senator Micciche  queried the range  of ANS spot  prices for                                                                    
the  calculation. Mr.  Shine replied  that  the actual  spot                                                                    
price was not included. He  remarked that the local in-state                                                                    
differential gave  the approximate $1.50 per  barrel benefit                                                                    
over RIV.  He stated  that the starting  point was  the same                                                                    
regardless of the price of oil.                                                                                                 
Co-Chair MacKinnon wondered  if it was fair  to consider the                                                                    
revenue from  the one-year contract. Mr.  Shine replied that                                                                    
the one-year contract did  not require legislative approval,                                                                    
so it was  not included in the fiscal note.  The $29 million                                                                    
to $37 million did include  the benefit that the state would                                                                    
receive with the four-year contract and one-year contract.                                                                      
Senator Olson noted the volatility  of the oil price market,                                                                    
and queried the  advantage of a four-year  contract versus a                                                                    
year-to-year contract.  Mr. Shine  replied that  the benefit                                                                    
the state  received was that it  was not subject to  a $3.50                                                                    
per  barrel deduction  for  marine  transportation from  the                                                                    
Valdez Marine Terminal to its west coast destination.                                                                           
Senator Olson announced  that the price did  not matter. Mr.                                                                    
Shine agreed.                                                                                                                   
Mr. Shine continued to discuss slide 8:                                                                                         
     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  percent  of  the amount  resulting                                                                    
     from the formula above, excluding "Line Loss."                                                                             
Senator  Micciche noted  that the  differential between  $29                                                                    
million and  $37 million  was the  transportation difference                                                                    
between  the take-or-pay  quantity and  the max-quantity  of                                                                    
the  contract. Mr.  Shine  agreed. He  stated  that the  $29                                                                    
million  would represent  the benefit  to the  state if  the                                                                    
minimum  volumes  were  nominated in  each  contract  month,                                                                    
versus  the  $37 million  the  state  would receive  if  the                                                                    
maximum volume was nominated each month.                                                                                        
9:24:37 AM                                                                                                                    
Mr. Shine looked at 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                                                                    
          Petro Star employs approximately 44 people in its                                                                     
          refining operations.                                                                                                  
          Maximum throughput capacity                                                                                           
               North Pole refinery: 22,000 barrels per day                                                                      
               (bpd). Valdez refinery: 60,000 bpd.                                                                              
          Of the throughput amounts, approximately 25                                                                           
          percent-30 percent will be refined products.                                                                          
          Petro Star refineries' estimated contribution to                                                                      
          the local economy in 2014 was $25mm                                                                                   
Vice-Chair  Bishop felt  that the  four-year contract  was a                                                                    
national security issue. He wanted comments on his concern.                                                                     
9:25:54 AM                                                                                                                    
DOUG  CHAPADOSE, PRESIDENT  AND CEO,  PETRO STAR,  ANCHORAGE                                                                    
(via  teleconference),  stated  that   Petro  Star  was  the                                                                    
largest supplier  of fuel to  the Defense  Logistics Agency,                                                                    
which  was  the  federal agency  responsible  for  supplying                                                                    
energy in all  forms to the Department of  Defense (DOD). He                                                                    
stated that  the fuel supplied  by Petro Star  was essential                                                                    
to  the  war-fighting  capabilities of  the  Pacific  forces                                                                    
located in  Alaska. He stressed  that it was a  large factor                                                                    
in determination  to base the  F-35 fighters at  Eielson Air                                                                    
Force Base.                                                                                                                     
Senator  von  Imhof  noted  that  Golden  Valley  Electrical                                                                    
Association  felt  that  the contract  would  provide  a  10                                                                    
percent  or  more  reduction  for  the  cost  of  power  for                                                                    
approximately 35,000  Interior Alaska residence,  because of                                                                    
the new  fuel blend. Mr.  Shine agreed. He  acknowledged the                                                                    
letter of support in the bill packet.                                                                                           
Senator  von Imhof  queried plans  to  expand beyond  35,000                                                                    
customers. Mr. Shine deferred to Mr. Chapadose.                                                                                 
Co-Chair MacKinnon shared that  the public testimony portion                                                                    
of the meeting might address that concern.                                                                                      
Co-Chair MacKinnon  stressed it  a contract which  the state                                                                    
had made with Petro Star.  She noted that the bill mentioned                                                                    
the  Arctic  Slope  Regional Corporation,  and  queried  the                                                                    
relationship and  its inclusion  in the statutory  bill. Mr.                                                                    
Shine  replied that  Arctic Slope  Regional Corporation  was                                                                    
the parent wholly-owned subsidiary was Petro Star Refining.                                                                     
Mr. Chapadose thanked the efforts  in drafting the contract.                                                                    
He  stated  that  it  was  a   long  period  to  come  to  a                                                                    
resolution, and felt that it  was a rewarding period. He was                                                                    
pleased with the contracts.                                                                                                     
9:30:33 AM                                                                                                                    
Senator  von  Imhof  noted  that  Golden  Valley  Electrical                                                                    
Association  (GVA) had  entered into  a contract  with Petro                                                                    
Star to  provide NAPTHA fuel  costs, which resulted in  a 10                                                                    
percent decrease  in costs. She  remarked that  GVA provided                                                                    
power to  approximately 35,000 Interior Alaska  members. She                                                                    
wondered  if there  were  further plans  for  Petro Star  to                                                                    
expand  their  footprint  to provide  natural  gas  to  more                                                                    
residents.   Mr.  Chapadose   responded   that  the   35,000                                                                    
referenced the  number of account  holders of  Golden Valley                                                                    
Electrical Association. Those  individuals would receive the                                                                    
benefit of the new contract;  therefore, the lower cost fuel                                                                    
was  passed  onto  the  consumers. He  could  not  speak  to                                                                    
expanding the GVA membership.                                                                                                   
Senator Micciche  wondered why  the availability  of royalty                                                                    
oil to the refineries was  not only beneficial to the parent                                                                    
company of  the refinery. He  queried its importance  to the                                                                    
overall economy in Alaska. Mr.  Chapadose replied that Petro                                                                    
Star operated the  only refinery in the  interior. The Flint                                                                    
Hills refinery  was currently being demolished.  He stressed                                                                    
that  Petro Star  was the  only source  of refined  products                                                                    
within the  interior region, including Valdez.  The oil from                                                                    
the  Trans-Alaska Pipeline  System (TAPS)  was the  only oil                                                                    
available to refine. He stressed  that the ability to source                                                                    
crude was critical to the  Petro Star operation. He remarked                                                                    
that  acquiring  crude  from  producers  was  becoming  more                                                                    
difficult, as  production had decreased on  the North Slope.                                                                    
He  stated that  the  source  of crude  from  the state  was                                                                    
essential to remain in business.                                                                                                
9:35:09 AM                                                                                                                    
Co-Chair MacKinnon CLOSED public testimony.                                                                                     
9:35:09 AM                                                                                                                    
AT EASE                                                                                                                         
9:36:38 AM                                                                                                                    
9:36:40 AM                                                                                                                    
Vice-Chair Bishop detailed the fiscal note.                                                                                     
9:37:05 AM                                                                                                                    
AT EASE                                                                                                                         
9:37:16 AM                                                                                                                    
Vice-Chair Bishop readdressed the fiscal note.                                                                                  
SB 30 was HEARD and HELD in committee for further                                                                               
9:38:25 AM                                                                                                                    
AT EASE                                                                                                                         
9:40:00 AM                                                                                                                    

Document Name Date/Time Subjects
SB 30 PPT to SFIN 02.06.17.pdf SFIN 2/6/2017 9:00:00 AM
SB 30
SB 39 C-PACE Senate Finance 02.06.17.pdf SFIN 2/6/2017 9:00:00 AM
SB 39
SB 39 Sectional for CRA CS.pdf SFIN 2/6/2017 9:00:00 AM
SB 39