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Flint Hills seeks help from Legislature Company wants tariff change retroactivity removed from its royalty oil contract; DNR says this was part of a larger bargain Kristen Nelson Petroleum News
Flint Hills Resources Alaska has been working with the Department of Natural Resources to get changes in its royalty oil contract and has now turned to the Legislature. With the end of the regular session May 9, the company probably isn’t going to get help this year.
The issue is retroactive adjustments to the sale price of state royalty oil from possible trans-Alaska pipeline tariff changes by the Federal Energy Regulatory Commission.
Senate Resources heard and held a bill May 1 that would limit retroactive adjustments in the sale price of state royalty oil. The House version of the bill was referred to House Resources and had not been heard May 3.
The legislation, Senate Bill 314 and House Bill 503, came out of the Senate Judiciary Committee and Judiciary Chair Ralph Seekins, R-Fairbanks, said in a sponsor statement that the intent was to correct an unintended consequence from the State of Alaska’s participation in protests before FERC against trans-Alaska pipeline interstate tariff rates.
Seekins said Flint Hills could owe retroactive payments of as much as $50 million a year, forcing the company to reserve monies for this potential liability which the company has said could reach $200 million or more.
As a result, Seekins said, the company cancelled a $175 million clean fuels project and a $91 million naphtha stabilizer project, has discontinued naphtha production because that is a low-margin product and is purchasing 10,000 barrels fewer per day of the state’s royalty oil, for which it pays a premium.
The Alaska Railroad has lost some $7 million in shipping revenue and the Port of Anchorage some $1 million in fuel flowage fees.
Seekins also said Flint Hills is not able to provide long-term contracts to fuel customers such as Golden Valley Electric Association.
Flint Hills has worked with DNR Jeff Cook, director of external affairs for Flint Hills Resources Alaska, told Senate Resources the company has worked with the Department of Natural Resources on the issue. DNR negotiates contracts for the state’s royalty oil and gas.
Cook said the tariff retroactivity is in the royalty contract Flint Hills signed, and he said the company considered that issue when it signed the contract. What it did not expect, he said, was that the state would protest the TAPS Settlement Methodology prior to the end of that agreement in 2009. Because the state signed the settlement, Cook said, Flint Hills expected the state to defend it.
The protests the state filed in January of 2005 and January of 2006 will not be resolved until August of 2009 at the earliest, he said.
The potential liability to Flint Hills is $50 million per year starting in January 2005, and the company has to reserve monies for this potential charge, and has cancelled more than $260 million in capital projects as a result.
Tariff deducted in price calculation Tony Sementelli, executive vice president and chief financial officer for Flint Hills Resources, told the committee the way its price for royalty is figured is based on the delivered West Coast price for ANS crude oil with deductions for marine transportation and for the pipeline tariff, taking the crude oil back to a Prudhoe Bay value. The lower the tariff, the higher the amount the company pays for crude at Prudhoe Bay, he said.
Flint Hills will live by its deal, Sementelli said, but at the time the royalty contract was signed the Department of Natural Resources said it expected the TAPS Settlement Methodology to go to term. It is the Regulatory Commission of Alaska that has reduced tariffs, not FERC, he said, and the RCA decision on intra-state tariffs is still on appeal, with a final decision possible this year or next.
If it takes years to reach a FERC decision, Sementelli said, the retroactive payment could end up being larger than the price Flint Hills paid for the refinery.
The North Pole refinery is competitive today because Flint Hills buys crude oil at a discount to the West Coast price, he said.
DNR: RIK has to bring more than RIV Kevin Banks, petroleum market analyst for DNR’s Division of Oil and Gas, told the committee that its regulations specify that royalty in kind cannot be sold for less than the state receives for royalty in value. The state has always had retroactivity provisions in its royalty contracts, he said, and some potential purchasers have said that because of the retroactive issue they aren’t interested in buying from the state.
Banks said in remarks prepared for the committee that the retroactive provision in the Flint Hills contract was agreed to at the expense of other considerations for the state and is “just one part of a larger deal.”
Based on the difference between proposed interstate tariffs for 2005 and 2006 ($3.71 and $3.96 per barrel) and the RCA-ordered intra-state rate of $1.96 per barrel, based on an average purchase of about 55,000 bpd, Flint Hills could owe the state some $100 million for the 2005-07 period.
Banks also said the Department of Law has identified some potential constitutional problems with the bill. The state’s constitution specifies that natural resources be developed “for the maximum benefit of the people.” In the ANS Royalty Litigation, Alaska Superior Court Judge Compton ruled that this prohibited DNR from collecting royalties in kind if that amount would be less than collected for royalties in value.
Under the bill, if FERC ruled to lower the interstate tariff as RCA did the intra-state tariff, RIK would be less than RIV, Banks said.
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