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February 2014

Vol. 19, No. 6 Week of February 09, 2014

Governor seeks OK for royalty oil sales

Bills submitted to Alaska Legislature would authorize two-year contract to supply up to 15,000 barrels of crude daily to Tesoro

Wesley Loy

For Petroleum News

Alaska Gov. Sean Parnell is offering legislation to extend state royalty oil sales to refiner Tesoro.

Royalty oil is the state’s share of oil that private companies produce from leased state acreage.

Tesoro operates a refinery at Nikiski, on the Kenai Peninsula. The plant is one of the state’s main sources of gasoline, jet fuel and other products. It has operated since 1969.

Parnell said the sale of royalty oil to Tesoro is good for the refinery as well as the economy.

“Across the state, Alaskans and many of our industries are impacted daily by the production of gasoline and other fuels from the Kenai refinery,” the governor said in a Jan. 29 press release. “This extension will help make sure employment in the Kenai Peninsula region stays strong, while also ensuring a robust economy for all Alaskans.”

Extra contract year

The state has a long history of selling its royalty oil to Tesoro and other in-state users. The state also disposes of royalty oil by letting the North Slope producers market it on the West Coast along with their own volumes.

Royalty oil sales constitute a major revenue stream for the state government, along with production and other taxes.

In October, the state Department of Natural Resources signed a new, one-year contract to supply between 5,000 and 15,000 barrels per day of North Slope royalty crude to Tesoro. Subsequently, Tesoro requested an amendment to lengthen the contract for an additional year.

A royalty oil sales contract longer than one year requires legislative approval.

On Jan. 8, DNR issued a finding that the extended contract would be in the state’s best interest.

The contract as amended will run through Jan. 31, 2016.

The state expects to receive at least as much money under the contract as if the oil was marketed on the West Coast. DNR estimates the state will collect between $193 million and $580 million in royalty revenue during the course of the one-year extension.

In December, the Alaska Royalty Oil and Gas Development Advisory Board passed a resolution supporting the contract amendment. The eight-member board, appointed by the governor, is charged with facilitating “wise development” of Alaska’s oil and gas royalty interests.

Twin bills

Parnell transmitted two bills to authorize the Tesoro royalty oil sales: Senate Bill 146 and House Bill 287.

In Jan. 28 introductory letters to Senate President Charlie Huggins and House Speaker Mike Chenault, the governor noted that Tesoro’s Nikiski refinery is the largest taxpayer in the Kenai Peninsula Borough and supplies products to 31 company-owned Alaska retail outlets and 44 “branded” outlets operated by franchise owners.

“This legislation would allow Tesoro to continue supplying these outlets with fuel, which will help strengthen Alaska’s growing economy,” Parnell wrote. “Tesoro is a key economic engine in Alaska and specifically the Kenai Peninsula, employing 200 Alaskans in full-time, high paying positions.”

Royalty oil supplies only part of Tesoro’s needs at the Nikiski plant. The company routinely ships in crude purchased from Cook Inlet or North Slope producers, and on rare occasion imports foreign crude.






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