Providing coverage of Alaska and northern Canada's oil and gas industry
August 2017

Vol. 22, No. 33 Week of August 13, 2017

Governor signs royalty oil sale bill

Bill approves four-year contract for sale to Petro Star; state estimates $22-$27 million in excess revenues over royalties as cash

Alan Bailey

Petroleum News

On Aug. 7 Gov. Bill Walker signed into law Senate Bill 30, a bill authorizing a four-year contract for the sale of state royalty oil to Petro Star Inc., the operator of refineries at North Pole and in Valdez. In September the Alaska Department of Natural Resources issued a best interest finding approving both an immediate one-year royalty oil contract and a subsequent four-year contract with Petro Star. The four-year contract required legislative approval, which, with the governor’s signature, has now been granted.

Petro Star is a subsidiary of Arctic Slope Regional Corp., the Native regional corporation for the North Slope. The state obtains its royalty oil, known as royalty in kind, or RIK, from oil producers in lieu of royalty payments made in cash, with the state subsequently raising revenue through the sale of the oil.

The one-year contract, which went into effect on Jan. 1, committed to the sale of 18,800 to 23,500 barrels of oil per day to the Petro Star refineries. The four-year contract, which goes into effect on Jan. 1, 2018, and continues until Dec. 31, 2021, specified year-on-year declines in the volume of oil sold, declines that reflect the anticipated gradually declining value of state royalties as oil production drops. The contracted volumes consist of 16,400 to 20,500 barrels in year one; 13,200 to 16,500 barrels in year two; 10,800 to 13,500 barrels in year three; and 8,400 to 10,500 barrels per day in year four.

Additional state revenue

The state says that it anticipates that the royalty oil sales from the four year contract, which has now been approved, will generate between $22 million and $27 million in revenues in excess of what would have been generated by taking the royalties as cash payments. This revenue differential results from the formula used to set the price of the royalty oil.

The royalty oil sale agreement also includes a clause in which Petro Star commits to employ Alaska residents and companies as much as possible for work related to the sale.

“With the decline of oil prices and production, it takes creative, out-of-the box thinking and teamwork to generate revenue,” Gov. Walker said when signing SB 30. “Because jobs in Alaska should go to Alaskans, my bill includes a local-hire provision. I thank Petro Star and Arctic Slope Regional Corp. for teaming up with the state so that our resources can put the maximum number of Alaskans to work. I also thank Senator Cathy Giessel and Representatives Geran Tarr and Andy Josephson for their support of this bill.”

“This legislation is the result of the joint efforts by Petro Star Inc., ASRC and the State of Alaska, ensuring an RIK crude supply even during declining TAPS throughput,” said Doug Chapados, Petro Star president and CEO. “Not only does this ensure a diverse and stable crude supply for the future, it also has the potential to generate tens of millions of additional dollars for the state over the next five years. I would like to thank state lawmakers as well as the governor for moving SB 30 forward.”

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