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Preliminary B.I. Finding issued on sale of North Slope royalty oil
Kay Cashman Petroleum News
On Oct. 20, a Preliminary Best Interest Finding was issued by the Alaska Department of Natural Resources' Division of Oil and Gas to
Marathon Petroleum Supply and Trading Company for the sale of Alaska North Slope royalty oil.
John Boyle, commissioner of DNR negotiated the contract to sell a portion of the State's North Slope royalty oil to Marathon with the initial term for crude oil deliveries 17 months. Deliveries may be extended on an annual basis for two additional years unless either party withdraws by March 1 before the start of an extension year.
The sale of royalty oil under the proposed contract will help meet the in-state need for crude and help facilitate continued operations of Marathon's Kenai refinery, which has been operating since 1969 to the benefit of Alaskans. These two objectives are paramount in the State's decision to sell royalty in-kind to Marathon through this contract.
A third concern in drafting the contract was to avoid interruptions to the delivery of royalty in-kind oil to the in-state refineries. As such the DNR Commissioner will seek legislative approval and the review of the Royalty Oil and Gas Development Board for this proposed contract.
The negotiations resulting in the proposed contract have been carried out under the procedures for a non-competitive disposition of royalty oil set out in Alaska Administrative Code.Uunder the terms of this contract, the State expects to receive a price for its royalty oil that will be no less than the amount the State would have received, on average, if it elected to keep its royalty in-value.
This Preliminary Best Interest Finding and Determination for the Sale of North Slope Royalty Oil to Marathon provides an analysis to show that the proposed royalty in-kind contract is in the best interest of the State.
After an in-depth consideration of the potential economic, environmental, and social impacts, and the various requirements and criteria for sale of the State's royalty oil the Commissioner finds that a negotiated 17-month contract, with possible annual continuation for two additional years, for the sale of the State's royalty oil to Marathon will maximize the State's revenue from its royalty oil and is in the State's best interest.
RIK background The State of Alaska owns the mineral estate under its lands. To monetize the value of this estate, the State has entered into lease agreements with third parties who explore for, develop, and produce oil and gas from these lands. The State receives a royalty share of ⅛ to as much as ⅓ of the oil and gas produced from these lands on the North Slope. Under the terms of the leases, the State may elect to receive its royalty either "in-kind" or "in-value" (RIV).
When the State takes its royalty as RIV, the lessees market the State's share along with their own production and pay the State the value of its royalty share. When the State takes its royalty share as RIK, it assumes ownership of the oil, and the Commissioner disposes of it through sale procedures, either "competitive" or "non-competitive.".
The chart in this story illustrates the monthly volumes of royalty oil committed to these contracts during this period. It should be noted that since 1986 the State has disposed of its RIK oil through negotiated non-competitive sales. Also note that Marathon acquired the Kenai refinery from Andeavor, formerly known as Tesoro, in 2018.
The volume of royalty oil the State receives depends on the volume of oil produced from State lands. The proposed contract obligates the State to deliver between a minimum of 10,000 barrels per day and a maximum of 15,000 bpd to Marathon between Aug. 1, 2026, and Dec. 31, 2027.
Based on average forecast volumes, the State is expected to have between 41,000 bpd and 82,000 bpd of total North Slope royalty oil available for taking in-kind during the initial 17-month period in the proposed RIK contract.
Thus, based on yearly average forecasts, Marathon's nominations under the proposed contract could represent between 12% and 36% of the State's North Slope royalty oil.
Marathon currently has an effective RIK contract in place with the State which obligates the State to deliver between a minimum of 10,000 bpd and a maximum of 15,000 bpd to Marathon, between Aug. 1, 2025, and July 31, 2026.
-KAY CASHMAN
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