State receives no bids on royalty oil contract

Interest in 35,000 barrels a day of Alaska North Slope crude evaporated after BP-ARCO-Phillips deal completed

Kristen Nelson

PNA News Editor

The state Department of Natural Resources Division of Oil and Gas said it received no bids in a competitive sale of the state’s royalty oil for a one-year term.

Bids were due by Sept. 6 and the sale was set for Sept. 7. The state was offering approximately 35,000 barrels of North Slope oil per day from Jan. 1, 2001, through Dec. 31, 2001. Subject to legislative approval, the contract could have been reissued for two years beyond the one-year term.

Kevin Banks, petroleum market analyst for the Division of Oil and Gas, told PNA Sept. 18 that the state began work on the sale after it received a visit from Equiva, the trading arm of the Equilon Refinery in Washington (a joint venture of Shell and Texaco) in late 1999. Equiva was interested in buying royalty oil from the state, and Banks said the state told Equiva it would sell them oil if there was no competition.

Other West Coast refiners responded when the state advertised for competitive bids in January of this year, but because of state rules and regulations, it was August before the September sale was announced.

Banks said that in late 1999 and early 2000 when there was interest in buying the state’s royalty oil, BP’s proposal to acquire ARCO was creating uncertainty about potential suppliers and supply for refineries on the West Coast, particularly refiners who didn’t have any Alaska North Slope production of their own.

But the BP acquisition of ARCO and sale of ARCO’s Alaska assets to Phillips Petroleum Co. was finalized in April, and Banks said West Coast refiners had found new ANS crude sources before the state could hold its sale.

Another problem, he said, is that the state sells its royalty oil at pump station 1, which means purchasers have to negotiate for pipeline transport and, more important, for shipment of their crude from Valdez to the refinery. Crude oil owners with tankers, however, can sell at the refinery gate, which puts the state at a disadvantage.

“It makes our oil somewhat less attractive — no different than other small oil owners who don’t have shipping,” Banks said.

State takes royalty in kind or in value

“It’s not like we’re going to be stuck with the oil,” Banks said. The oil will be shipped down the trans-Alaska pipeline as “royalty in value,” he said, and the state will receive cash payment from the producers.

“The policy of the state, as expressed in statute, is a preference for selling our oil in kind unless it can be shown that it’s in the state’s best interest to keep it in value,” he said. This sale demonstrated that the state was better off taking this crude in value because it couldn’t be sold in kind, Banks said.

The state was able to reexamine procedures and make this sale happen more quickly than sales have in the past, he said. A 1985 sale took about two years because it required legislative approval. This sale, however, was designed so that legislative approval could be sought after oil was delivered by having that approval be to continue the sale beyond the first year.

“We now have procedures in place where the next time we do this it will go an awful lot faster,” Banks said.

Current sales to Williams

From 1969 to the end of 1998 the state sold Cook Inlet and ANS royalty oil to Tesoro Alaska Co. Tesoro’s Nikiski refinery initially took all of the state’s Cook Inlet royalty oil and then for the last 15 years also took ANS crude, Banks said. While the state now takes Cook Inlet oil in value, he said that oil still makes its way into the Nikiski refinery.