Consulting firm Black & Veatch, in a new study done for the state of Alaska, examines an important question regarding how the state should handle its royalty natural gas.
The royalty is the state’s share of gas that companies produce from leased state land.
Should the state ever see construction of a megaproject to develop its vast North Slope gas reserves, a major decision for the state will be how to sell its gas.
The state would have two choices: It could take the gas physically, or in kind, and market the molecules itself. Or it could take the gas in value — that is, allow the major producer companies including BP, ConocoPhillips and ExxonMobil to sell the state’s gas along with their own volumes.
The Black & Veatch study suggests that taking the gas in value would be smarter than taking it in kind.
And why is that?
For one thing, to sell gas on its own, the state would need to set up a marketing organization at great cost, Black & Veatch says.
Such an organization would require 30 to 40 employees at salaries of $150,000 to $200,000 per year, the study says.
The state would lack experience in gas trading, and would face challenges in competing with the North Slope producers who have well-established liquefied natural gas, or LNG, marketing expertise and global portfolios, the Black & Veatch study says.
The state would need to make firm capacity commitments along the LNG supply chain, which could total up to $1 billion a year, the study says.
Conceivably, the state could realize “negative royalties” if the LNG price drops too low.
Bottom line, taking the royalty gas in kind could lead the state to lose up to 60 percent of its royalty value relative to the royalty-in-value approach, the Black & Veatch study says.
In any event, deciding how to monetize its royalty gas is a problem Alaska would love to have. The North Slope reserves have been stranded for decades as the state’s politicians have tried without success to compel the oil companies to lay a costly pipeline to develop the gas.
—Wesley Loy
