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September 2018

Vol. 23, No.37 Week of September 16, 2018

State looks for RIK gas interest; includes Prudhoe, Point Thomson

Kristen Nelson

Petroleum News

The Alaska Department of Natural Resources, Division of Oil and Gas, is soliciting interest in potential royalty in-kind natural gas from the Prudhoe Bay and Point Thomson units.

The solicitation, dated Aug. 31, asks for expressions of interest by letter within 30 days.

DNR said it is considering whether to take the state’s royalty on future natural gas production from Prudhoe Bay and Point Thomson in value or in kind.

“If DNR takes the royalty in kind, it is currently considering a noncompetitive contract,” solicitation says. The department said that to consider a noncompetitive contract it “first considers whether there is a lack of competition and whether a noncompetitive process is in the State’s best interest.”

DNR said the current solicitation for interest in future gas sales will allow the state “to better understand competition for its gas,” adding that it is not committing to take its royalty gas in kind or to sell any volume of gas to any party.

“A public process, including legislative approval, is necessary before DNR can enter into an agreement to sell royalty in kind gas,” the department said.

DNR working issues

The DNR commissioner has statutory authority to negotiate commercial agreements, market the state’s royalty in kind and tax as gas volumes, and modify certain oil and gas lease terms.

Under Senate Bill 138, enacted in 2014, DNR would elect to receive Alaska LNG royalty gas in kind, unless the DNR commissioner finds that taking gas in value would be in the best interest of the state. Other than crude oil sold to in-state refineries, the state takes its royalties on crude oil production in value, with the crude oil sold by producers and the state taking payment for its royalty share.

DNR Commissioner Andy Mack told legislators in a March update on the Alaska LNG project that before entering a contract to take gas as royalty in kind, the department would issue a preliminary best interest finding, take comments from the public and the Royalty Oil and Gas Development Advisory Board, and then obtain legislature approval.

A final best interest finding would then be issued.

Mack said any royalty in kind finding has to come to the Legislature to be ratified.

In a July update to legislators, DNR Deputy Commissioner Mark Wiggin said the department is working on royalty in kind vs. royalty in value issues, including eliminating switching between RIK and RIV, a right the state now enjoys. He said if RIK is selected, with the state taking royalties (and probably also taxes) in gas molecules, DNR would need a gas sale agreement with the Alaska Gasline Development Corp.

JDA

The joint development agreement for Alaska LNG, signed in Beijing in early November by the state, AGDC, China Petrochemical Corp. (Sinopec), CIC Capital Corp. and the Bank of China, envisions that 75 percent of LNG from the Alaska project will go to China, leaving the state 25 percent to market to other buyers and for in-state use. Those volumes would include the state’s royalty share.

The JDA says the parties will work together on a scope of work defined in the agreement, including the opportunity for delivering 75 percent of the LNG produced from Alaska to China “at a cost-based and stable price utilizing the benefits of strategic financing and investment,” strategic financing opportunities and a transparent investment model.

The JDA expires Dec. 31, 2018, unless extended by mutual written agreement of the parties.

- KRISTEN NELSON






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