HOME PAGE SUBSCRIPTIONS, Print Editions, Newsletter PRODUCTS READ THE PETROLEUM NEWS ARCHIVE! ADVERTISING INFORMATION EVENTS PETROLEUM NEWS BAKKEN MINING NEWS

Providing coverage of Alaska and northern Canada's oil and gas industry
February 2013

Vol. 18, No. 7 Week of February 17, 2013

Flint Hills oil supply contract offered

Alaska proposes to sell up to 30,000 barrels a day of North Slope royalty crude to North Pole refinery operator in five-year deal

Wesley Loy

For Petroleum News

Alaska officials are proposing a new contract to sell state royalty oil to Flint Hills Resources, which operates one of the state’s largest refineries near Fairbanks.

The state natural resources commissioner already has made a preliminary “best interest finding” in support of the contract.

However, a number of steps remain before the deal is sealed. The Alaska Royalty Oil and Gas Development Advisory Board must endorse the sale, and lawmakers in Juneau will need to pass legislation approving the contract.

The Royalty Board is to meet on Feb. 26 in Fairbanks.

Flint Hills, a subsidiary of Koch Industries Inc. of Wichita, Kan., operates the refinery at North Pole and produces large volumes of jet fuel, plus gasoline, heating oil and other products.

The refinery draws crude oil from the nearby trans-Alaska pipeline.

Existing contract expires in 2014

The DNR’s Division of Oil and Gas on Feb. 8 published a newspaper notice of the commissioner’s preliminary best interest finding. The finding and the draft sales contract were to be posted on the division’s website, but the documents were not immediately available.

Flint Hills currently has a 10-year contract for state royalty oil that expires on March 31, 2014.

The proposed new contract would be for a five-year term, and would provide for the sale of 18,000 to 30,000 barrels per day of North Slope crude.

“Deliveries of royalty oil under this proposed contract will commence on April 1, 2014 and continue until March 31, 2019,” the notice said. “The price provision in the proposed contract is based on a formula that relies on accepted industry price reporting services and is similar to the formulas applied to the calculation of the royalty value paid to the State by the North Slope producers.”

The state’s share

Royalty oil is that share of crude the state receives from companies producing on state leases. In general, the state gets 12.5 percent of the oil produced from Prudhoe Bay and other North Slope oil fields.

The state has two options for selling its royalty oil. It can take its oil “in kind” and sell it in Alaska, or it can take the oil “in value” by letting producers such as ConocoPhillips, BP and ExxonMobil market it along with their own volumes.

In recent months, DNR approached potential buyers, sending letters in August to refiners inquiring about their interest in acquiring some or all of the state’s North Slope royalty oil once the Flint Hills contract expires.

The letters held out the possibility of DNR auctioning the oil.

In an Aug. 20 letter back to DNR, Bradley Razook, Flint Hills chief executive, wrote that his company was interested in negotiating the purchase of royalty oil, and if necessary would be “interested in participating in a competitive sealed bid auction for the oil in 2014.”

No bargain oil

The proposed five-year contract appears to be for less royalty oil per day than the current contract, which was announced in 2004 at up to 77,000 barrels a day.

A Flint Hills website says the North Pole refinery has a crude oil processing capacity of about 220,000 barrels per day. The site says about 60 percent of the refinery’s production is destined for the aviation market.

While the refinery is regarded as a vital energy asset for Alaska, especially the Interior, state law doesn’t allow royalty oil to be sold at a bargain or discount, said Kevin Banks, a former state oil and gas director now working in the Division of Oil and Gas as a petroleum market analyst.






Petroleum News - Phone: 1-907 522-9469 - Fax: 1-907 522-9583
[email protected] --- http://www.petroleumnews.com ---
S U B S C R I B E

Copyright Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA)©2013 All rights reserved. The content of this article and web site may not be copied, replaced, distributed, published, displayed or transferred in any form or by any means except with the prior written permission of Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA). Copyright infringement is a violation of federal law subject to criminal and civil penalties.