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State looks for interest in royalty oil
Kristen Nelson Petroleum News
The Alaska Department of Natural Resources’ Division of Oil and Gas is asking for expressions of interest from companies interested in bidding on the state’s North Slope royalty-in-kind crude oil.
The non-binding solicitation of interest was published Sept. 18; written responses are due by Nov. 2 to division Director Tom Stokes.
This is for some or all of the state’s North Slope RIK crude which may become available for sale when the current RIK supply contract obligations terminate in the third and fourth quarters of 2021 or any additional royalty volumes the state chooses to take as RIK.
The state takes some royalties in value as a means of calibrating oil pricing and for other purposes, taking the royalty percentage of the wellhead value of oil sold by the producers. When it takes royalties in kind the state makes money by itself selling the oil.
Current contracts The state currently has RIK contracts with Tesoro Refining and Marketing Co., effective in 2016, and with Petro Star Inc. effective in 2017. The five-year Tesoro contract is for 20,000 to 25,000 barrels per day of royalty oil. When that contract was considered by the Legislature in 2016, DNR estimated that the Tesoro contract would result in additional state revenues of $45 million to $56 million over the life of the contract, compared to revenues the state would have received from royalties in value. The in-state refining of the oil was also expected to help the Alaska economy, DNR said at the time.
The state’s Petro Star contract began with a one-year contract, effective Jan. 1, 2017, for 18,800 to 23,500 bpd; a four-year contract went into effect Jan. 1, 2018, and is for up to 23,500 bpd, estimated to decline to some 10,500 bpd over the four years of that contract. The four-year Petro Star contract was estimated to provide an additional $22 million to $27 million over what the state would have received for RIV paid by North Slope producers.
Non-binding solicitation DNR said it received an inquiry from a potential buyer for a multiyear RIK contract. By state statute, sales of the state’s RIK oil must be by competitive bid unless the DNR commissioner determines that the best interest of the state does not require competitive bidding - or that no competition exists.
The current solicitation is to determine if other companies may be interested in RIK oil and if so whether they would be interested in participating in a competitive sealed bid auction.
“This is an informal, non-binding inquiry and your response will not create any kind of commitment by you or your company,” DNR said.
Comments are requested on a number of proposed bidding terms, including:
*Priority bidders - preference for in-state commercial petroleum processors, with conditions.
*Sealed bid auction of RIK oil lots - eight lots of 5,000 bpd each, offered independently for each year from 2022 through 2026.
*Reservation fee - to compensate the state for allowing flexibility for buyers to take less than the maximum volume in a lot.
*Bid process - if DNR holds a bid process, there will be a 30-day period to submit bids and required documentation.
*State’s RIK nomination - state will make commercially reasonable efforts to nominate, with procedures basically unchanged.
*Volumetric limits, proration - quantity may be lower than nominations and DNR reserves right to limit total sale oil quantity.
*Price - calculated as a simple netback price (formula described in notice).
*Contract term - for one year or multiple years not to exceed five years.
*Security arrangements - stand-by letter of credit or parent guarantee, if buyer not parent, and opinion letter by financial analyst.
*Special commitments - may be required (examples provided in notice).
See full notice at: https://dog.dnr.alaska.gov/Newsroom/.
- KRISTEN NELSON
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