Legislature(2015 - 2016)BUTROVICH 205

03/30/2016 03:30 PM Senate RESOURCES

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03:30:09 PM Start
03:31:02 PM Confirmation Hearing
04:07:52 PM SB205
05:02:21 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Please Note Hearing May Go Until 5:30 p.m. --
Moved SB 205 Out of Committee
-- Public Testimony --
+ Consideration of Governor's Appointee: TELECONFERENCED
Board of Directors, Alaska Gasline Development
Corporation: Dave Cruz
-- Public Testimony on Appointee --
+ Bills Previously Heard/Scheduled TELECONFERENCED
        SB 205-APPROVAL OF SALE OF ROYALTY OIL TO TESORO                                                                    
4:07:52 PM                                                                                                                    
CHAIR  GIESSEL announced  consideration  of SB  205 [version  29-                                                               
GS2225\A was before the committee].                                                                                             
4:08:09 PM                                                                                                                    
JIM  SHINE, Special  Projects  Assistant,  Department of  Natural                                                               
Resources (DNR), Anchorage, Alaska, presented  SB 205. He said it                                                               
ratifies a  contract for sale  of royalty  oil from the  state to                                                               
Tesoro.  He  explained  that essentially,  the  state  can  elect                                                               
either  royalty in  kind  (RIK) versus  royalty  in value  (RIV).                                                               
Taking it  in value means  the producer produces,  transports and                                                               
markets the  oil on the state's  behalf. In an RIK  situation the                                                               
state takes possession of the oil and sells it itself.                                                                          
When  electing  either  a  best interest  finding  must  be  made                                                               
according to AS 38.05.182 that also  says RIK is the default. But                                                               
that still  requires a  best interest  finding. This  process was                                                               
commenced through  a solicitation  of interest  that went  out in                                                               
January  2015 to  all  the in-state  refineries  to gauge  market                                                               
interest in purchasing royalty oil.                                                                                             
MR. SHINE said that the state  receives all royalties as RIV now.                                                               
That is  kind of an anomaly  as the state has  historically, back                                                               
to 1979,  sold RIK  to in-state  producers, starting  with Mapco,                                                               
Williams, Petro  Star, Flint Hills,  and Tesoro.   Today, because                                                               
the  contract with  Tesoro terminated  on January  31, 2016,  the                                                               
state is taking all of its North Slope royalties in value.                                                                      
He explained that  a best interest finding needs to  be made that                                                               
taking RIK is  in the state's best interest, and  as part of that                                                               
it is directed  per statute to sell it by  competitive bid unless                                                               
there  is  no  adequate   competition.  The  department  received                                                               
responses  from BP  and ConocoPhillips,  which  have North  Slope                                                               
topping plants  for in-field  use. Their  response was  that they                                                               
would  take volumes,  but they  weren't interested  in processing                                                               
them  in-state. Flint  Hills responded  that they  weren't taking                                                               
volumes,  because  they had  closed  their  doors in  June  2014.                                                               
Tesoro  and  Petro Star  both  responded  with a  willingness  to                                                               
purchase RIK  barrels. Tesoro agreed  to the state's  price terms                                                               
in  the solicitation  and Petro  Star responded  that they  would                                                               
like to  purchase barrels, but  at a different  pricing mechanism                                                               
that was  not as advantageous to  the state and not  in line with                                                               
the solicitation.                                                                                                               
At that  time the  commissioner made  a determination  that there                                                               
was not adequate  competition based on the  pricing responses and                                                               
proceeded  with   a  non-competitive  negotiated   contract  with                                                               
4:11:34 PM                                                                                                                    
MR. SHINE said  the decision criteria in AS  38.05.183 direct the                                                               
commissioner  in  selling  royalty  oil to  provide  the  maximum                                                               
benefit  to the  citizens  of  the state.  Some  of the  criteria                                                               
include the cash  value offered (price terms), the  effect on the                                                               
economy, the  benefits of refining  and providing  those products                                                               
in-state, and eight other criteria  listed in AS 38.06.070, which                                                               
are reviewed by the Royalty Board.                                                                                              
He  explained  that they  issued  the  preliminary best  interest                                                               
finding on February  3, 2016; attached to that as  an exhibit was                                                               
the  proposed contract  with Tesoro  that  was out  for a  30-day                                                               
public  comment period.  During  that time  they received  public                                                               
comments from  Petro Star and  its parent corporation,  ASRC, and                                                               
those  were addressed  in  the proposed  final  contract that  is                                                               
before the legislature today. That  contract was submitted to the                                                               
Royalty   Board  and   it  was   unanimously   approved  with   a                                                               
recommendation of ratification by the legislature.                                                                              
4:12:47 PM                                                                                                                    
The Royalty Oil and Gas  Development Advisory Board, known as the                                                               
Royalty Board, under AS 38.06.070(a),  also reviewed the contract                                                               
under the following decision criteria:                                                                                          
-revenue needs of the state                                                                                                     
-projected local regional needs for the products                                                                                
-desirability   of   capital   investment  in   local   secondary                                                               
-social impacts                                                                                                                 
-projected  additional  costs  and responsibilities  put  on  the                                                               
-additional  criteria   include  the   existence  of   labor  and                                                               
consumption   markets,  potential   environmental  positive   and                                                               
negative  impacts,   and  projected  proposed   transaction  upon                                                               
commercial enterprises.                                                                                                         
The Royalty  Board after  considering the  contract in  line with                                                               
these criteria did unanimously approve the contract, he said.                                                                   
4:13:40 PM                                                                                                                    
MR.  SHINE   explained  that  the  actual   contract  before  the                                                               
legislature  is  a  five  year contract  for  sale  of  20-25,000                                                               
barrels of royalty oil per  day. Tesoro takes possession of those                                                               
at the  Valdez Marine Terminal and  then barges them over  to the                                                               
Tesoro Nikiski refinery.                                                                                                        
He discussed  the formula  used to determine  the RIK  versus RIV                                                               
valuation methodology:  in the RIV  world the  producers' netback                                                               
when they transport  from the Valdez Marine Terminal  to the West                                                               
Coast a  marine transportation  deduction is  netted back  off of                                                               
the  final (ANS)  sales prices.  In  an RIK  situation the  state                                                               
doesn't have  that marine transportation  because it's  not being                                                               
sent  from Valdez  down to  the West  Coast. So,  you essentially                                                               
start with the U.S. West Coast  average and then deduct the $1.95                                                               
RIK differential,  which is meant  to represent the value  of the                                                               
price of oil sold in-state.                                                                                                     
Another  provision  is  if  they don't  nominate  oil  for  three                                                               
consecutive months, the contract will terminate.                                                                                
SENATOR WIELECHOWSKI asked him to explain the $1.95 figure.                                                                     
MR. SHINE said  basically the Commercial Section  of the Division                                                               
of  Oil and  GAs  uses the  $1.95 RIK  differential  in the  last                                                               
Tesoro  contract to  reflect the  in-state price  of a  barrel of                                                               
4:15:51 PM                                                                                                                    
ALEX  NOUVAKHOV, Commercial  Manager*  Division of  Oil and  Gas*                                                               
Department  of  Natural  Resources   (DNR)*  explained  that  the                                                               
pricing formula assumes  West Coast price for ANS as  a basis and                                                               
then there are deductions from that  to arrive at the price which                                                               
the state  receives. The deductions  include things  like tariffs                                                               
for   the  TAPS   and   relevant   upstream  pipelines,   quality                                                               
adjustments based  on the quality of  the crude, and in  cases of                                                               
RIV pricing a marine transportation cost deduction.                                                                             
In  RIK pricing,  an RIK  differential  is used  instead of  that                                                               
marine   transportation  cost   deduction.  It   is  a   location                                                               
differential which  mimics and reflects the  private transactions                                                               
which  occur  for ANS  within  Alaska  (without transporting  the                                                               
crude to the U.S. West Coast).                                                                                                  
MR. SHINE said the equation for RIK was on slide 9 as follows:                                                                  
     ANS Spot Price - $1.95 - Tariff Allowance +/- Quality                                                                      
     Bank Adjustments - Line Loss 9                                                                                             
      •ANS Spot Price = Average U.S. West Coast Price for                                                                       
       Alaska North Slope oil (reported by industry trade                                                                       
     publications Platts and Reuters)                                                                                           
     •$1.95 RIK Differential                                                                                                    
     •Destination value minus marine costs so RIK > RIV.                                                                        
     •Tariff Allowance = TAPS and Pipelines upstream of PS-                                                                     
        •Quality Bank Adjustments = as reported by TAPS                                                                         
     Quality Bank Administrator.                                                                                                
     •Line Loss (loss of volume between PS1 and the VMT).                                                                       
SENATOR  WIELECHOWSKI said  he  was still  trying  to figure  out                                                               
$1.95  and  asked if  the  $3.70  is  the current  deduction  for                                                               
shipping from Valdez to the  West Coast. Does the $1.95 represent                                                               
the in-state transportation cost?                                                                                               
MR.  SHINE  responded that  the  $3.30-$3.70  per barrel  is  the                                                               
average  of   marine  transportation  deductions  right   now  as                                                               
reported by Department  of Revenue (DOR). It is the  cost to ship                                                               
a barrel of  oil from Valdez to the destination  (mostly the U.S.                                                               
West  Coast). He  didn't know  how to  further clarify  the $1.95                                                               
other than  it is  the deduction  to represent  the value  of the                                                               
price  of a  barrel of  oil sold  within the  state in  a private                                                               
4:20:38 PM                                                                                                                    
SENATOR WIELECHOWSKI said he  still wanted further clarification.                                                               
He asked,  "Because they don't  have to  ship it down  there, why                                                               
are we allowing a $1.95?"                                                                                                       
4:21:06 PM                                                                                                                    
MR. NOUVAKHOV answered that the  $1.95 is a location differential                                                               
that reflects  the market  dynamics. Even  though the  crude does                                                               
not  leave the  state,  transactions between  private buyers  and                                                               
sellers still have a location  differential that is determined by                                                               
supply and  demand. It is  not a transportation deduction  of any                                                               
sort. The best  interest finding had a table  from the Department                                                               
of Revenue that showed the  location differential between private                                                               
transactions at various locations within the state.                                                                             
CHAIR GIESSEL  asked what  page the  best interest  finding table                                                               
that he was referring to was on.                                                                                                
MR. NOUVAKHOV  answered that table  1 on  page 11 shows  the past                                                               
location  differentials.  That   table  shows  historic  location                                                               
differentials between  private sales of crude  ranged from $1.34-                                                               
4:24:57 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked how  much the  state loses  for every                                                               
penny of differential.                                                                                                          
MR. NOUVAKHOV answered that he  didn't have that number here, but                                                               
he could  calculate the impacts  penny by  penny on a  barrel and                                                               
get it to him.                                                                                                                  
SENATOR WIELECHOWSKI asked the rationale  behind going from $1.65                                                               
to $1.95. "Has the market adjusted that much?"                                                                                  
MR. NOUVAKHOV answered the last  two contracts they had were with                                                               
Flint Hills  and Tesoro. The  Flint Hills contract had  $2.15 and                                                               
Tesoro  (which  expired   in  January  2016)  had   $1.95  for  a                                                               
differential. So,  the $1.95 in  the current proposal is  in line                                                               
with the past  contract with Tesoro and a little  better than the                                                               
contract which  was in place with  Flint Hills, and it  is within                                                               
the range of location differentials  for private contracts in the                                                               
SENATOR  STOLTZE remarked  that this  is a  take it  or leave  it                                                               
provision and it is not amendable.                                                                                              
4:27:41 PM                                                                                                                    
SENATOR MICCICHE  asked if  he understood that  this $1.95  is an                                                               
assumption  that   if  BP  purchased   the  same   quantity  from                                                               
ExxonMobil that the location differential would be very similar.                                                                
MR. NOUVAKHOV  answered that  it is not  an assumption.  This DOR                                                               
figure is  based on  actual contracts which  they have  access to                                                               
between private parties,  but the information it  forecasts for a                                                               
future year is an assumption.                                                                                                   
SENATOR MICCICHE said  that illustrates his point  that Tesoro is                                                               
not getting a special deal. In  fact, in their 2014 contract they                                                               
had less  of a deduction  than Flint  Hills. He assumed  when the                                                               
Flint Hills  contract was  written that  the current  going price                                                               
for location  differential between private parties  was somewhere                                                               
around $2.15.                                                                                                                   
MR. NOUVAKHOV said that was correct; in 2013 it was $2.12.                                                                      
SENATOR COGHILL said it's important  to understand how you arrive                                                               
at this, but it looks like  the state was about to switch between                                                               
RIK and RIV much more rapidly  than under this contract. "Is that                                                               
the reason for this number being so critical at this point?"                                                                    
MR.  SHINE  responded that  the  $1.95  is not  a  transportation                                                               
deduction. Market  factors determine that  location differential.                                                               
The  $1.95 is  a  fixed  price over  the  life  of the  five-year                                                               
contract. The  delta between the $1.95  location differential and                                                               
the marine transportation deduction  that they would otherwise be                                                               
incurring in  an RIV situation  is approximately  $1.50-$1.75 per                                                               
barrel. Over  the life of  this contract that  difference equates                                                               
to $45-56  million more to the  state over RIV. "If  we elect RIK                                                               
we have to at least be equal to or greater than RIV."                                                                           
4:31:00 PM                                                                                                                    
SENATOR STOLTZE asked him to  comment about the supply of asphalt                                                               
that  is such  a  critical part  of  Alaska's building  industry-                                                               
which plant can provide it and where they are located.                                                                          
MR.  SHINE   said  he  wasn't   an  expert  on  asphalt   or  the                                                               
construction  industry,  but  representatives from  Tesoro  could                                                               
better answer that.                                                                                                             
SENATOR  STOLTZE  said  he  was  interested  in  other  suppliers                                                               
besides  Tesoro and  in having  a  more economical  distribution.                                                               
"Was that  discussed by the  Governor's team, and did  that enter                                                               
into the best findings?"                                                                                                        
MR. SHINE  replied selling royalty  oil to in-state  refineries -                                                               
Tesoro, Petro  Star, and Flint  Hills, - historically  provides a                                                               
certain  security of  supply as  their feed  stock for  producing                                                               
those products that are used within the state.                                                                                  
4:32:44 PM                                                                                                                    
CORRI FEIGE,  Director, Division  of Oil  and Gas,  Department of                                                               
Natural Resources  (DNR), Anchorage,  Alaska, added  that asphalt                                                               
and the  sale of asphalt was  not necessarily a part  of the best                                                               
interest  finding  discussion  or  the  negotiation  of  the  RIK                                                               
contract, because the contract itself  deals with the sale of the                                                               
ANS crude.  What the refiner  chooses to  use that crude  for and                                                               
what derivative products  comes off of that is not  a function of                                                               
the  best  interest finding.  Tesoro  can  speak to  the  refined                                                               
products that they put out. It  was part of the discussion at one                                                               
point  with Petro  Star  that  they, too,  were  also looking  at                                                               
developing  an asphalt  plant.  But the  division  does not  have                                                               
access to that information.                                                                                                     
SENATOR  STOLTZE   said  a  decision   like  this   that  affects                                                               
availability  should have  more departments  involved; maybe  the                                                               
commissioner of DOTPF should have been  consulted. It is a gap in                                                               
the process  that can  exponentially increase  the cost  of state                                                               
projects and locally-funded projects.                                                                                           
CHAIR GIESSEL said that the  committee has a contract before them                                                               
versus micromanaging a project.                                                                                                 
SENATOR MICCICHE  said he  was interested  in RIK  contract terms                                                               
for employment of Alaska residents  and no discrimination against                                                               
Alaska   companies  and   residents.   Does   Tesoro  meet   that                                                               
4:36:09 PM                                                                                                                    
MR. SHINE replied  that the most recent RIK  contracts use pretty                                                               
standard  terms. The  "commercially reasonable  efforts" means  a                                                               
reasonableness standard  of diligence, because requiring  the in-                                                               
state use of products has  constitutional issues. A Supreme Court                                                               
case dealing with  limiting the processing of  forest products to                                                               
those  used  in-state was  found  unconstitutional  based on  the                                                               
Dorman  Commerce Clause.  As with  any contract,  they absolutely                                                               
encourage  employment   of  Alaskans   and  local   hire.  Tesoro                                                               
currently  employs 210  local Alaskans  bringing $127  million to                                                               
the economy  annually. They  meet that mandate  and there  are no                                                               
indications that will ever change.                                                                                              
SENATOR MICCICHE said that works for him.                                                                                       
MR. SHINE said  should Tesoro fall below a  certain credit rating                                                               
(BBB-), then they would be required  to supply a letter of credit                                                               
equal  to the  value of  90 days  of oil  delivery (slide  8). It                                                               
protects the state in the event  that credit ratings fall below a                                                               
certain level,  which has  not been  the case  over the  last two                                                               
4:38:21 PM                                                                                                                    
SENATOR  MICCICHE asked  the similarities  between this  contract                                                               
and the previous two contracts.                                                                                                 
MR. SHINE  replied that  the only major  difference really  is in                                                               
the RIK differential.  It was $2.15 for Flint Hills  in 2014, but                                                               
the  valuation  has been  identical  in  the  last two  years  of                                                               
contracts with Tesoro for purchase  of royalty barrels. The other                                                               
difference  would  be  in  volume   of  barrels  that  are  under                                                               
contract. The 2014  Flint Hills contract had  a nomination window                                                               
of 18,000-30,000  barrels per day.  When they closed  their doors                                                               
in 2014, that contract terminated.                                                                                              
SENATOR MICCICHE  said that  says to him  that the  department is                                                               
largely  allowed to  do their  jobs on  contractual arrangements,                                                               
and the Parnell  contract is essentially identical  to the Walker                                                               
contract, although  there may be  tougher questions  depending on                                                               
which  administration you  support  the  most. Realistically  the                                                               
contract is independent and very similar to others in nature.                                                                   
MR. SHINE said that was correct.  He said slide 10 highlights the                                                               
point he made earlier that the  value this contract brings to the                                                               
state  of an  estimated $45-56  million more  over the  next five                                                               
years than it would otherwise receive for royalty in value.                                                                     
4:40:38 PM                                                                                                                    
SENATOR MICCICHE  asked if he  is saying there is  more potential                                                               
profit for purchasing  the state's oil in RIV rather  than an RIK                                                               
sale such as this.                                                                                                              
MR.  SHINE answered  the RIV  purchaser would  be someone  on the                                                               
West Coast, although he didn't follow the question.                                                                             
SENATOR MICCICHE  restated if you  add $45 million more  value to                                                               
the state  in RIK, then one  would think this is  more profitable                                                               
to  the state  and  RIV would  be more  profitable  to the  other                                                               
purchasers (because the state would lose $45-56 million).                                                                       
MR.  SHINE said  that was  correct. The  delta between  the $1.95                                                               
location   differential   and   the  approximate   $3.50   marine                                                               
transportation deduction in  an RIV situation is  where the state                                                               
realizes the  most economic  benefit in  this contract  over RIV,                                                               
and that number equates to $45-$56 million.                                                                                     
He said  slide 11 talks  about additional royalty oil  sales. The                                                               
state will  nominate up  to 95 percent  of its  available royalty                                                               
barrels for sale  and is in current negotiations  with Petro Star                                                               
to provide  royalty oil to them  over the next five  years. Those                                                               
contracts  will terminate  about  the same  time  as this  Tesoro                                                               
contract.  The state  has contracts  with Tesoro  and Petro  Star                                                               
right  now and  95 percent  of  its volumes  are nominated.  They                                                               
actually  have more  additional  barrels than  was predicted  and                                                               
those  will  be offered  for  sale  on  an  equal basis  to  both                                                               
contracting parties.                                                                                                            
4:42:56 PM                                                                                                                    
MR. SHINE said Petro Star had  raised a couple of issues in their                                                               
public comments  to the  proposed contract.  Those fall  into two                                                               
buckets: the first being the  length of the contract with Tesoro.                                                               
The  initial contract  was  for  five years  with  the option  to                                                               
extend  for  five years.  That  would  have  to be  among  mutual                                                               
consent of the parties and it  would come back to the legislature                                                               
for  ratification.  That provision  has  since  been struck.  The                                                               
contract  before them  for ratification  is a  stand-alone, five-                                                               
year contract.                                                                                                                  
Another concern  that was  addressed was with  respect to  a pro-                                                               
ration preference to  Tesoro in exchange for  nominating a little                                                               
less volume, so  more could be provided to Petro  Star. But after                                                               
consideration   and  receiving   that  comment,   the  pro-ration                                                               
preference was also struck. So, it's  status quo if the state has                                                               
its  royalty  barrels  under  contract.   If  there  is  a  field                                                               
maintenance or  a downturn in  production and that  state doesn't                                                               
have  enough barrels  to meet  contractual obligations,  then all                                                               
the  royalty  purchasers  are pro-rated  proportionate  to  their                                                               
4:44:14 PM                                                                                                                    
SENATOR  WIELECHOWSKI  ^Confirmation  Hearingasked  him  to  talk                                                               
about the other bids they received.                                                                                             
MR. SHINE  answered that  the department  sent a  solicitation of                                                               
interest  to five  refineries  within the  state  - Flint  Hills,                                                               
Petro Star,  Tesoro, BP, and  ConocoPhillips - and  got responses                                                               
from  BP  and  ConocoPhillips,  which have  North  Slope  topping                                                               
plants  for  in-field  use, indicating  willingness  to  purchase                                                               
barrels, but they  were not planning on refining  them within the                                                               
state.  They were  going to  be  added to  export shipments.  The                                                               
response from  Flint Hills was  that they were not  interested in                                                               
purchasing, because  they were no longer  operating. The response                                                               
from Petro Star indicated that they  were willing to enter into a                                                               
non-competitive, negotiated process for  a pricing mechanism that                                                               
was not  the same  as provided in  the solicitation  of interest,                                                               
whereas Tesoro responded  affirmatively, indicating a willingness                                                               
to participate  in a  competitive bid  or an  informal negotiated                                                               
process and met the price term solicitation.                                                                                    
SENATOR   WIELECHOWSKI   asked   if   the  bids   from   BP   and                                                               
ConocoPhillips would have resulted in more profit to the state.                                                                 
MR.  SHINE   answered  that  the   price  is  just  one   of  the                                                               
considerations the  commissioner has to  review in making  a best                                                               
interest finding.  They probably  agreed with  the price  term of                                                               
$1.95, but  they were not  going to  refine within the  state and                                                               
export  it.  When  all  of   the  criteria  in  AS  38.05.183  is                                                               
considered, the  state would  receive more  value in  selling its                                                               
RIK to an  in-state refiner that would provide  those products to                                                               
local markets.                                                                                                                  
MR. NOUVAKHOV added their discussions  with BP and ConocoPhillips                                                               
did not go  into the pricing as much. They  made indications that                                                               
they would  be potentially interested  in bidding for  the crude,                                                               
but they wouldn't  be able to meet  in-state refining conditions.                                                               
Given  the  statute which  requires  the  state  to make  a  best                                                               
interest  finding for  any export  of crude  - crude  that is  in                                                               
excess  to  the  in-state  demand  -  they  couldn't  reach  that                                                               
threshold,  because indications  Petro Star  and Tesoro  combined                                                               
came to  a different that RIK  that was available. So,  the state                                                               
couldn't  very well  make a  best  interest finding  that it  had                                                               
excess crude to sell for export.                                                                                                
SENATOR WIELECHOWSKI  asked if they  did a financial  analysis on                                                               
providing the oil to BP and  ConocoPhillips would the state get a                                                               
production tax on that and was that added value factored in.                                                                    
MR.  NOUVAKHOV answered  that this  is royalty  oil and  it would                                                               
make no  difference for production  tax to whom they  are selling                                                               
it  (Tesoro,  petro Star  or  back  to  a producer).  The  fiscal                                                               
aspects of  the sale would  not be different.  So, in terms  of a                                                               
marginal economic  impact there  is no  difference who  the buyer                                                               
CHAIR GIESSEL noted that Tesoro was in the room for questions.                                                                  
4:49:17 PM                                                                                                                    
SENATOR STOLTZE asked Mr. Shine  when he looked at royalty prices                                                               
if he  looked at  any issues  of motor  fuel price  collusion and                                                               
MR.  SHINE replied  that  is  not a  criteria  that is  expressly                                                               
provided  in the  statute that  the  commissioner consider.  They                                                               
look  at what  refined products  will  be delivered  and used  in                                                               
state, but the actual price of  fuel is very far removed from the                                                               
actual sale of feedstock to the refineries.                                                                                     
A number of factors influence the  sale of gasoline in the state.                                                               
The Seattle  oil price  information service  (OPIS) price  plus a                                                               
small percentage  differential is typically what  sets the market                                                               
rate for gasoline prices within  the state. So, between the state                                                               
selling RIK  to Petro Star  or Tesoro  and what somebody  pays at                                                               
the pump  there are  a number  of transaction  and transportation                                                               
costs  that  get  added  to  that,  as  well  as  capital  costs,                                                               
employment and overhead. The price  of gasoline is not considered                                                               
in selling the state's RIK. They  look to maximize the benefit of                                                               
the resources to the citizens of the state.                                                                                     
MR. SHINE said that asphalt  is not an express consideration, but                                                               
this  went out  to  public comment  for 30  days  and before  the                                                               
Royalty  Board in  a  very transparent  process  and they  didn't                                                               
receive any  comments suggesting  that they consider  the asphalt                                                               
industry in the determination.                                                                                                  
SENATOR STOLTZE  asked if the  asphalt production issue  was ever                                                               
brought up other than the comment period.                                                                                       
MR.  SHINE answered  no,  to his  knowledge,  but Director  Feige                                                               
mentioned that  the issue  has come  up in  the context  of Petro                                                               
Star maybe making improvements at  their refinery to make asphalt                                                               
more available within the state.                                                                                                
4:51:45 PM                                                                                                                    
SENATOR STOLTZE  said that has  come up  in the process,  but not                                                               
formally in the comment period.                                                                                                 
MR. SHINE responded yes.                                                                                                        
CHAIR  GIESSEL  asked Ms.  Feige  who  took that  over  producing                                                               
asphalt when Flint Hills stopped.                                                                                               
MS. FEIGE  responded that she did  not know if it  was assumed by                                                               
another operator, but she thought not.                                                                                          
MR. NOUVAKHOV answered that he  didn't know that anyone took that                                                               
over,  but  they had  discussion  with  Petro Star  about  future                                                               
CHAIR GIESSEL invited Tesoro to the table.                                                                                      
4:53:41 PM                                                                                                                    
MATT  GILL,  Senior  Manager, External  Affairs,  Tesoro  Alaska,                                                               
supported  SB 205.  He  said Tesoro  Corporation  is currently  a                                                               
Fortune 100  company; it is  an independent refiner  and marketer                                                               
of  petroleum products.  Tesoro's refining  operation started  in                                                               
Alaska with  purchase of  its Kenai Refinery  in 1969.  The Kenai                                                               
Refinery has an operational capacity  of up to 72,000 barrels per                                                               
day.  It's  primarily  focused   on  jet  and  diesel  production                                                               
followed  by gasoline  and gasoline  blend  stocks, heating  oil,                                                               
heavy oils,  propane and asphalt.  They operate a  68-mile common                                                               
carrier  products pipeline  that transports  jet fuel,  gasoline,                                                               
diesel  fuel  to   the  Port  of  Anchorage   and  the  Anchorage                                                               
International Airport.  The wholesale delivery of  their products                                                               
occurs through  their terminals in Kenai,  Anchorage, the Nikiski                                                               
Dock, and the Port of Anchorage.                                                                                                
In addition to  being the largest taxpayer in  the Kenai Borough,                                                               
Tesoro  provides  over  225 in-state,  family-wage  jobs  at  the                                                               
refinery and  terminals along with about  30 fulltime contractors                                                               
that are working in and  around the refinery year-round. They are                                                               
a major  supporter of the  Cook Inlet Regional  Citizens Advisory                                                               
Council  (CIRCAC) as  well as  the largest  member of  Cook Inlet                                                               
Spill Prevention and Response Team (CISPRT).                                                                                    
They actively support a wide  range of events and programs across                                                               
the state.  In 2015 they  gave over  $300,000 in grants  from the                                                               
Tesoro Foundation and  their intention is to beat  that number in                                                               
2016. Each  year they sponsor all  the 5th and 6th  grade classes                                                               
on  the  Kenai  Peninsula  to  conduct a  mission  at  the  Kenai                                                               
Challenger  Learning Center.  They are  the signature  sponsor of                                                               
the Caring for the Kenai Program  as well as the founding sponsor                                                               
of the  Alaska Business Week,  a statewide business  program that                                                               
gets put on each summer.                                                                                                        
MR. GILL  said this legislation is  the result of over  a year of                                                               
dialogue  and  productive   negotiations  between  Department  of                                                               
Natural  Resources  (DNR)  and  Tesoro  Corporation  and  by  all                                                               
accounts, they  are very  impressed with  the state's  ability to                                                               
understand  their issues  and with  their  ability to  come to  a                                                               
mutually beneficial agreement  that is win/win for  the state and                                                               
Tesoro as well as accommodating to the other in-state refiners.                                                                 
Their estimates indicate that the  state will continue to receive                                                               
a price  for its royalty  in kind oil  that exceeds the  price it                                                               
would receive  if it elected  to keep  its royalty oil  in value.                                                               
The estimated additional revenues is  $45-56 million for the span                                                               
of  the  contract.  For  Tesoro,  this  five-year  contract  will                                                               
provide a stable  supply of ANS crude while also  giving them the                                                               
volumetric flexibility to  help accommodate seasonal fluctuations                                                               
in demand for their refined products.                                                                                           
MR. GILL  said the availability, flexibility,  and stability that                                                               
this contract  offers has a  positive impact on their  ability to                                                               
maintain  their  ongoing operations  at  the  Kenai Refinery.  In                                                               
order to  accommodate the needs  of the other  in-state refiners,                                                               
Tesoro  and  the  state  modified this  contract  to  reduce  the                                                               
volumes as  well as eliminate  a pro-ration clause and  the five-                                                               
year extension option. Tesoro believes  in Alaska's future and is                                                               
committed to being an active  corporate citizen and looks forward                                                               
to continuing  to provide Alaskans  with clean burning  fuels and                                                               
successfully  running  their  refinery  for  perhaps  another  47                                                               
CHAIR GIESSEL asked who should be asked the asphalt question.                                                                   
MR. GILL answered that would best be directed to Cameron Hunt.                                                                  
4:58:19 PM                                                                                                                    
CAMERON HUNT, Vice President and  Manager, Kenai Refinery, Tesoro                                                               
Alaska, said that Tesoro has picked  up all of the asphalt volume                                                               
for Southcentral and  the Fairbanks area demand  with the closing                                                               
of Flint  Hills. This last  summer they produced  430,000 barrels                                                               
and are investing in improvements  to their loading rack to speed                                                               
up  asphalt  loading  at  the  Nikiski  Refinery.  Through  press                                                               
releases  they  have  found  that Petro  Star  is  also  building                                                               
capacity to supply asphalt from their North Pole refinery.                                                                      
SENATOR  MICCICHE asked  the  percentage of  Alaska  hire at  the                                                               
Kenai Refinery.                                                                                                                 
MR.  HUNT answered  that he  didn't  have a  percent for  Alaskan                                                               
hire. They  are unable  to find  in-market for  certain specialty                                                               
educational backgrounds  such as  chemical engineers. He  can say                                                               
that  100 percent  of their  refinery  employees do  live in  the                                                               
state, which  the North Slope companies  can't necessarily claim.                                                               
Whenever it's possible to hire  locally, they do so especially in                                                               
their  operations  workforce, especially  mechanics,  carpenters,                                                               
and electricians, and  they were even able to  hire several Flint                                                               
Hills employees  after it  closed and relocate  them down  to the                                                               
CHAIR GIESSEL  opened public testimony, and  finding no comments,                                                               
closed it.                                                                                                                      
SENATOR  COSTELLO moved  to report  SB 205,  version 29-GS2225\A,                                                               
from  committee  with  individual  recommendations  and  attached                                                               
fiscal note(s). There were no objections and it was so ordered.                                                                 

Document Name Date/Time Subjects
SB 205-Version A.PDF SRES 3/30/2016 3:30:00 PM
SB 205
SB 205 Transmittal Letter.pdf SRES 3/30/2016 3:30:00 PM
SB 205
SB 205 Fiscal Note.PDF SRES 3/30/2016 3:30:00 PM
SB 205
SB2015-Presentation to SRES-DNR-3-30-2016.pdf SRES 3/30/2016 3:30:00 PM
SB 205 Supporting Document Report to Alaska Legislature.pdf SRES 3/30/2016 3:30:00 PM
SB 205
SB 205 Supporting Document Resolutions for Tesoro RIK Contract 2016.pdf SRES 3/30/2016 3:30:00 PM
SB 205
SB 205 Supporting Document TesoroRIKContractBIF.pdf SRES 3/30/2016 3:30:00 PM
SB 205
AGDC Board Factsheet.pdf SRES 3/30/2016 3:30:00 PM
AGDC Board-Fact Sheet
AGDC-Resume-Dave Cruz.pdf SRES 3/30/2016 3:30:00 PM
AGDC Board-Dave Cruz
SB 205-Presentation to SRES-DNR-3-30-2016.pdf SRES 3/30/2016 3:30:00 PM
SB 205