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Bill introduced to allow modifying NPSL
Net profit share leases could be modified by commissioner if necessary to prolong production, economic life of fields or pools Kristen Nelson Petroleum News
The Alaska Senate Resources Committee began consideration on Feb. 10 of a bill from the governor which would allow the Department of Natural Resources to modify the terms of net profit share leases when necessary to increase production from otherwise uneconomic sources.
A net profit share lease requires the lessee to pay the state a share of net profits - in addition to a traditional royalty percentage, DNR’s Division of Oil and Gas said in its presentation to the committee.
Royalty payments begin with commercial production and are assessed on gross revenue, while net profit share revenue payments begin when the NPSL reaches payout stage - after exploration and development costs, with interest, are recouped. Net profit is revenues, net of operating costs, which exceed the cost of exploration and development of the lease.
DNR has authority to modify royalties to allow for continued or incremental production; the bill would extend that ability to NPSLs, potentially extending the life of a field, and resulting in additional royalties, net profit share, taxes, etc. that the state would not receive without the NPSL modification.
In its presentation on Senate Bill 61, the division noted that while DNR has the authority to modify royalties, in some cases it may be in the state’s best interest to modify net profit share instead of royalty.
Royalties are paid sooner than NPSL payments and are more predictable over the life of an investment. And rather than looking at a reduction in royalties or net profit share, smaller reductions in both may be beneficial.
What would change In addition to allowing DNR flexibility to target reductions, the modifications would also allow DNR the ability to increase net profit shares in the event of higher prices or production levels, allowing DNR to recapture foregone royalties or net profit share if oil prices rise, or to participate in upside price movements if the department provides downside relief.
Net profit share leases were issued between the late 1970s and the early 1980s and there are 26 active NPSLs on the North Slope.
Net profit share rates range from 30% to 79.59%, DNR said; to date the state has received $1.175 billion in net profit share payments.
Currently, DNR negotiates a modification package for NPSLs and submits the proposal to the Legislature, with legislation required for the modification to take effect. The division said four NPSLs in the NorthStar unit were modified in 1996 to a sliding scale royalty, a modification which was ratified in HB 548 and upheld by the Alaska Supreme Court in Baxley v. State in 1998.
Allowing for NPSL modifications in statute would streamline the process, the division said, while allowing the Legislature to set conditions and limits.
As with royalty modifications, NPSL modification decisions under SB 61 would be reported to the Legislature, and the Legislature may require hearings.
Under SB 61, the DNR commissioner would have authority to modify net profit share rates in the same manner as royalty rates, with the objective to encourage production of otherwise uneconomic state resources, the division said.
Additional qualifying scenario SB 61 also creates an additional qualifying scenario for modification of NPSL or royalties to allow for incremental production in existing pools which would require incremental capital which would be uneconomic in the absence of modification. It also clarifies that test production during exploration does not disqualify a field or pool from royalty or NPSL modification based on new production, codifying DNR’s existing interpretation.
Royalty modification is capped at minimum royalty rates; the proposed NPSL modification establishes a minimum of 10%.
The change under SB 61 would be based on a sliding scale mechanism, which could vary with the price of oil, volume of production, per-barrel costs, etc.
The decision-making process for the modification process does not change under SB 61.
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