Providing coverage of Alaska and northern Canada's oil and gas industry
January 2019

Vol. 24, No 3 Week of January 20, 2019

A royalty question

BP has taken the state to court to force arbitration over royalty dispute

Alan Bailey

Petroleum News

BP Exploration (Alaska) has taken the state of Alaska to court, claiming that arbitration procedures must be invoked to settle a dispute over the royalty value of oil produced on the North Slope. Royalties due to the state are calculated using the wellhead value of the oil. That value, essentially, consists of the sale price of the oil less the cost of transporting the oil to market. The dispute revolves around some components of the transportation costs.

Contentious calculations

With many millions of dollars at stake, the numbers that go into the wellhead value calculations, and hence the royalty determinations, can be contentious. According to BP’s complaint, filed in Alaska Superior Court in October, in 1991 the state and BP, after many years of litigation over royalty calculations, entered into an agreement that established a methodology for calculating the royalty value of oil “at the well.” The agreement included procedures intended to enable the resolution of future disputes without the necessity of resorting to litigation. Those procedures included the use of negotiation and arbitration. In particular, the procedures are to be invoked in cases where there is a dispute over the correctness of the royalty calculations, and what expenses BP can subtract from the oil sale price when calculating the wellhead value, BP’s complaint says.

The current dispute revolves around some of the costs involved in the marine transportation of oil from the Valdez Marine Terminal to market destinations on the U.S. West Coast. The costs in question relate to administrative expenses, depreciation expenses associated with tankers, and vessel expenses incurred while in service for the Alaska oil trade but paid after the vessels no longer served BP.

Costs disallowed in 2013

According to the BP complaint, in 2013, following a review of BP’s records, the state retrospectively disallowed these costs in the royalty calculations for the years 2007 to 2010. BP appealed to the state over the decision. Apparently, Alaska’s Division of Oil and Gas has yet to resolve the dispute and in 2016 made a similar decision for costs BP had claimed for 2011 and 2012. In August 2018, with the issue still not resolved, BP informed the state that it was invoking the dispute resolution process that is specified in the 1991 agreement. The state subsequently told BP that the dispute at issue was not subject to the dispute resolution provisions of the agreement. In October BP filed suit in Superior Court, asking the court to mandate arbitration.

The state, in responding to BP’s complaint, told the court that BP has not made a claim upon which relief can be granted, and that the court does not have jurisdiction over the dispute until the state makes a final administrative decision in the matter at question. Moreover, BP’s appeal to the court is not valid because it was launched more than three years after the original complaint, the state told the court.

State says costs not subject to arbitration

As expressed in a December court filing from the state, the core of the state’s argument is that the disputed transportation costs do not fall within categories that are subject to arbitration, under the terms of the 1991 agreement. For example, while the administrative costs in question were incurred by Alaska Tanker Co., a BP affiliate, the 1991 agreement provides a 12 percent allowance for administrative costs. And BP should have accounted for federal tax benefits associated with the depreciation costs it has claimed, the state said.

BP personnel discussed the issues with division staff in March 2017 but did not try to trigger the arbitration procedures until August 2018, the state claimed. By originally appealing the Department of Natural Resources decisions to DNR, rather than initiating an arbitration procedure, BP had acted in a manner that recognized the appeal process as the appropriate course of action, the state said. Moreover, that appeal process forms part of the state’s formal decision-making procedures, the state argued.

BP: arbitration is required

BP, for its part, has claimed that the three cost elements under dispute do fall under the arbitration provisions of the 1991 agreement. Besides, state and federal laws both encourage the use of arbitration in the settlement of contract disputes. Moreover, these laws give courts or an arbitrator the right to decide what can be arbitrated - DNR lacks jurisdiction over what can be arbitrated, BP told the court.

The court has now extended the time allowed for cross motions in the case.

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