Petro Star royalty oil contracts approved

DNR approval only needed for 1-year contract starting Jan. 1; legislative approval required for 4-year contract starting in 2018

TIM BRADNER

For Petroleum News

The state has approved a sale of state royalty oil to in-state refiner Petro Star Inc. that will supply up to 23,500 barrels per day beginning Jan. 1 for the company’s two Alaska refineries.

Over five years the royalty oil sales to Petro Star will decline to an estimated 10,500 bpd, however, because they are linked to a percentage of declining Slope production.

The state gives priority to in-state refiners for royalty oil to help ensure capacity is available to meet regional needs. As North Slope production declines independent refiners like Petro Star face difficulties in purchasing crude because major Slope producers prefer to supply crude to their own downstream refineries. State royalty oil can provides an additional supply of crude oil.

Diane Hunt, spokeswoman for the state Department of Natural Resources’ Division of Oil and Gas, said the state will net additional revenues of between $29 million to $37 million under the Petro Star royalty sales compared with what it would have been received had the royalties been paid under “royalty in-value” paid by North Slope producers.

In kind or in value

Alaska’s royalty varies between 12.5 percent and 16.75 percent on its oil and gas leases but the state does not sell more than 95 percent of its royalty barrels in kind.

Alex Nouvakhov, chief commercial officer in the DNR, said Petro Star will pay the state a price based on the sales price of Alaska North Slope crude on the U.S. West Coast minus a negotiated $1.95 “differential” which accounts for the oil being delivered within Alaska rather than on the West Coast.

The differential is the same that is paid under another state royalty oil contract agreed to last year with Tesoro Corp. for that company’s refinery at Nikiski, near Kenai, he said.

“The net benefit to the state is the difference between the proceeds that would have been obtained if the volume had been taken in-kind,” Nouvakhov said.

Two contracts

The one-year royalty oil contract can be done without legislative approval but the longer four-year contract will require an okay by lawmakers in the Legislature’s 2017 regular session, DNR said in its statement. Legislative approval for royalty contracts made to in-state refiners is typically routine.

The contracts will supply two Petro Star refineries, one with a processing capacity of 22,500 bpd at North Pole, near Fairbanks in Interior Alaska, and a second at Valdez, in south Alaska at the southern terminus of the trans-Alaska oil pipeline, with a processing capacity of 60,000 bpd.

In a typical year Petro Star produces 56 percent of its products in the form of jet fuel, 33 percent in the form of ultra low-sulfur diesel and 11 percent as home heating oil. The company supplies 50 percent to 60 percent of the home heating oil sold in Interior Alaska as well as naphtha sold to Golden Valley Electric Association of Fairbanks, an electric cooperative serving Interior Alaska.

Petro Star also purchases other crude oil from North Slope producing companies, typically from independent producers like Anadarko Petroleum and Caelus Energy that do not own downstream refineries.

The company has an advantage is that it can take crude oil from the trans-Alaska oil pipeline, which is near both the North Pole and Valdez plants, and return all of the residual oil, the unused portions of the crude, to the line.

In contrast, another Alaska refiner, Tesoro, must ship its North Slope crude by tanker from Valdez to its Cook Inlet refinery, and sell or dispose of its residual oil, sometimes at a loss, Tesoro has said.

Petro Star does pay a fee, however, to other trans-Alaska oil pipeline shippers for the effect of a slight degradation of the crude oil downstream from where residual oil is injected under a “quality bank” formula agreed to by pipeline shippers and the Federal Energy Regulatory Commission.