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State considering royalty-in-kind sale of inlet gas Royalty has been taken in-value in past, but there is now some interest in purchasing royalty gas; price would have to equal that received for in-value Kristen Nelson Petroleum News Editor-in-Chief
The Alaska Department of Natural Resources is considering a royalty-in-kind sale of its 15 billion cubic feet per year of Cook Inlet royalty natural gas, and is asking for expressions of interest in such a sale.
The department said March 15 that before deciding to move forward with a preliminary best interest finding for a Cook Inlet royalty gas sale, it wants to know what the level of interest would be.
And, because of the “fairly complicated … changing demand-supply situation in Cook Inlet,” it also wants feedback from interested parties who might be affected by such a sale, Will Nebesky, commercial analyst with the Division of Oil and Gas, told Petroleum News March 16.
Nebesky said the state looked at selling royalty-in-kind Cook Inlet gas in the late 1970s — Enstar was interested at that time — but a transaction was never completed. There were also conversations in the late 1990s, he said, but this is the furthest the state has gone with a possible sale since the 1970s. The state currently does not sell its royalty share of Cook Inlet gas directly, but takes it as royalty-in-value. Holders of the state leases sell the royalty gas, one-eighth on most Cook Inlet leases, to industrial and commercial users and to local power and gas utilities. The leaseholders then pay the state the value of the gas.
So what prompted the state to look at royalty-in-kind sales now?
Nebesky said “multiple parties” have expressed an interest in purchasing state royalty gas. He declined to name those who had expressed an interest, but said the state believes candidates for purchasing royalty gas would include “any of the parties that are presently selling gas and any of the parties in Cook Inlet that are purchasing gas.” Comments close April 2 A royalty sale would not lower the price, but could provide some surety of supply.
Nebesky said state statute dictates that the value the state receives for royalty-in-kind must be at least equal to what it receives for royalty-in-value.
The royalty gas from Cook Inlet leases is approximately 15 billion cubic feet per year, but the state said production rates vary “significantly” between summer and winter months. Nebesky said production “swings quite significantly from winter to summer,” and a royalty-in-kind “disposition will have to somehow address seasonality.”
“The percentage is the same but the production volume varies,” and that could be a problem for a purchaser, he said, and one of the things the state wants to know is if this is really an issue for potential purchasers.
Natural gas comes from multiple fields in and on both sides of Cook Inlet, and Nebesky said there are also issues of how a state royalty-in-kind gas sale would affect commercial relationships now in place between buyers and sellers.
The state is asking for comments on a number of topics, both from those who might be interested in buying the state’s royalty gas, and from those who might be affected by such a sale: whether a party is interested in purchasing royalty gas; length of the contract; volume of gas that should be sold; price provisions or other parameters that should be considered; what individual fields and leases should be considered; transportation considerations; institutional and commercial factors; and potential public advantages and disadvantages.
Comments are due by the close of business April 2 and should be addressed to: Commissioner, Alaska Department of Natural Resources, 550 West 7th Ave., Suite 1400, Anchorage AK 99501. Broad feedback requested Nebesky said that as the state began to explore what might be involved in a Cook Inlet royalty-in-kind gas sale, it was clear that “the question is sufficiently complex that it might be helpful to get some feedback from interested parties — parties who have an interest or would be affected by a decision” to sell some gas as royalty-in-kind.
The situation is “fairly complicated,” and there is a “changing demand-supply situation in Cook Inlet,” he said.
Cook Inlet no longer has an excess supply of natural gas.
“We’re looking at a new balance between demand and production of gas,” and the state wants to know “what would a royalty sale imply for that balance,” Nebesky said.
He said the state “wants to make sure that there aren’t unintended effects” if it decides to sell its Cook Inlet royalty gas, and thinks the best way to make sure of that is to ask for comments from all interested parties.
There “might be displacement factors we want to make sure we’re aware of … If the state steps in, it will alter the mix and that could have implications we want to be fully aware of,” Nebesky said.
Once comments are received, the commissioner will evaluate them and decide whether to proceed with the next step, the preliminary best interest finding. Nebesky said the decision might be not to proceed with the sale, but if the state goes forward, the preliminary best interest finding would be the next step. The preliminary finding would probably be available by May, he said, and then there would be another opportunity for comments.
The preliminary finding will look much more closely at the schedule and will list the steps going forward, Nebesky said.
If the state goes ahead with the sale, it would ask for proposals from prospective purchasers and then negotiate terms and conditions with those purchasers.
As for an effective date for a sale, the state is required to give six months notice to leaseholders that it plans to take its royalty gas in-kind, rather than in-value, so that notification period also has to be included in the process. And a sale contract in excess of one year requires approval by the Legislature.
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