Phillips Alaska pays state $6 million in royalty settlement

Petroleum News Alaska Staff

The Department of Natural Resources said Aug. 15 that it successfully concluded negotiations to amend the royalty settlement agreement between the state and Phillips Alaska Inc. Aug. 9.

Th state said that as part of this amendment the state and Phillips agreed to revise the methodology used to calculate the value of ANS royalty oil. This revision is retroactive and so the state will receive approximately $6 million from Phillips in additional royalties for January 2000 through February 2002.

DNR said most of the oil produced from state lands on the North Slope is subject to several royalty settlement agreements between the producers and the state. These agreements may be routinely “reopened” by either the state or the producers to change the method that royalty value is calculated in the event of a change in circumstances that affects the value of royalty oil.

DNR said the reopener process requires that the state and the producer negotiate a new method or, if negotiations fail, have the matter resolved through arbitration.

The state and Phillips provided each other with notices to reopen. The state determined that the existing settlement methodology no longer appropriately valued the state’s royalty sold by Phillips in the West Coast market, DNR said, while Phillips recognized that the cost of transporting royalty oil to market would be affected by the new Endeavour class tankers that are just now coming into the trade.

Agreement was reached on a new method to value royalty oil and the royalty settlement agreement was amended. DNR said the net affect of the amendment increases the destination value of the state’s royalty oil while increasing the deduction allowed for Phillips’ marine transportation costs.

Gov. Tony Knowles said of the agreement, “This is a fair settlement that fully protects state interests. It also demonstrates our ability to quickly recognize changing circumstances and deal positively with the oil industry to resolve issues despite the complex and sometimes difficult nature of such negotiations.” He praised the staff at the Division of Oil and Gas and those at the Department of Law who contributed to the successful outcome of the reopener process.

The Phillips agreement follows a similarly negotiated amendment of the royalty settlement agreement between the state and BP Exploration signed in June. BP and the state agreed to a new destination value for royalty oil, and BP has already refiled royalty payments for North Slope oil retroactive to January 2001 for approximately $5 million.