|
State strikes deal with Marathon for RIK
One-year contract covers 10,000-15,000 barrels per day of royalty oil to Kenai refinery; will bring more revenue than oil in value Kristen Nelson Petroleum News
The Alaska Department of Natural Resources has published a final best interest finding and determination for the sale of Alaska North Slope royalty oil to Marathon Petroleum Supply and Trading Co.
The FBIF, dated April 22, says DNR Commissioner Corri Feige has negotiated a one-year contract with Marathon for the sale of a portion of the state’s North Slope royalty oil.
The commissioner found the sale of the royalty in-kind oil will maximize revenue to the state, help meet the need for in-state crude and facilitate continued operation of Marathon’s Nikiski refinery, which has been operating since 1969.
Multiyear sale agreements for RIK oil require a review by the Royalty Oil and Gas Development Board and legislative approval. “This approval process takes time, and here, could mean months without royalty oil being delivered to the Nikiski refinery,” the finding says.
However, contracts designed to relieve market conditions are not required to go through that process if they are for one year or less.
Negotiations for the proposed contract were carried out under regulatory procedures for a non-competitive disposition of royalty oil and the state will receive a price that will be no less, on average, than it would have received from taking oil as royalty in value.
From November 1979 through December 2020 the state disposed of 965 million barrels of oil through in-kind sales, approximately 45% of its North Slope royalty oil, which totaled 2,138.5 million barrels during that period.
The finding also noted that since 1986 the state has disposed of RIK oil through negotiated non-competitive sales.
Volume available The finding said the proposed contract covers between 10,000 and 15,000 barrels per day between Aug. 1, 2021, and July 31, 2022.
That is out of a forecast volume of some 60,000-80,000 bpd of royalty oil during that year, so the contract proposes disposition of between 19% and 25% of the state’s North Slope royalty oil.
The finding said the state wants to keep a small percentage of its royalty in value because of higher royalty values for some leases and “to obtain pricing and other information from in-value disposition for comparison purposes.”
Volumes available for RIK disposition are limited to 95% of total royalty oil available.
Another constraint is that the volume of royalty oil expected is based on a forecast.
Also, royalty forecasts vary seasonally as North Slope oil production varies - peaking in the winter and declining in the summer.
In-state refining There are five active in-state refineries, the finding said, three of which produce refined petroleum products - Marathon’s Kenai refinery, Petro Star’s North Pole refinery and Petro Star’s Valdez refinery. “Hilcorp and ConocoPhillips operate small topping plants on the North Slope that primarily support oil industry operations and are mostly geographically limited to the North Slope,” the finding said.
Marathon’s Kenai refinery, unlike those in North Pole and Valdez, is not tied into the trans-Alaska pipeline system. Since it does not draw feedstock directly from TAPS, some feedstock arrives over water allowing the Kenai refinery to source feedstock from the world market, the Valdez Marine Terminal or Cook Inlet. “While importation of non-Alaskan crude is possible at the Kenai refinery, it is a relatively infrequent event,” the finding said, with some 90% of the refinery’s crude coming from Alaska in recent years.
Because the Kenai refinery is not on TAPS, it cannot re-inject unprocessed crude back into the line, and most load the unrefined portion onto a ship for transport to another Marathon facility on the U.S. West Coast or sold to a third party.
And, while the North Pole and Valdez refineries are fueled with North Slope crude, Marathon fuels its refinery with Cook Inlet natural gas.
The finding said the Kenai refinery has a capacity of some 68,000 barrels of crude per day and produces some 59,000 barrels of refined product per day, the majority of which will be consumed in the Alaska market.
“The State of Alaska’s RIK has played a critical role in the development and continued operation of the Alaskan refining sector,” the finding said.
The state has a long history selling North Slope RIK to the Marathon refinery, having supplied ANS crude to that facility between July 1980 and January 1982, between January 1983 and December 1998 and since February 2014.
RIK oil sale procedure The finding said DNR sought to determine in-state interest for RIK oil with an informal solicitation of interest in August 2020, a solicitation which generated responses from Hilcorp, ConocoPhillips, ExxonMobil, Petro Star and Marathon, with ExxonMobil, Petro Star and Marathon initially expressing interest in purchasing RIK.
“Ultimately, only Petro Star and Marathon continued RIK discussions with DNR in 2021,” the finding said.
The finding said DNR negotiated an RIK contract with Marathon which is expected to generate higher revenues than with RIV.
| 