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State moves royalty oil sale to Tesoro
KRISTEN NELSON Petroleum News
The Department of Natural Resources has issued a final best interest finding and determination for a sale of Alaska North Slope royalty crude oil to Tesoro Refining and Marketing Co.
In the finding the DNR commissioner proposes to sell 20,000 to 25,000 barrels per day of the state’s royalty oil in-kind to Tesoro for processing at its Nikiski refinery under a five-year contract.
DNR said in a statement that deliveries are estimated to start Aug. 1 and continue until July 31, 2021.
In the finding the department said the sale of royalty oil in-kind will maximize revenue to the state, help meet in-state need for crude and facilitate continued operation of the Nikiski refinery.
Under the terms of the contract the state will receive no less than the amount it would receive, on average, from keeping its royalty in-value.
Almost a billion barrels DNR said in the best interest finding that between November 1979 and October 2015 the state disposed of 918.8 million barrels of royalty oil through in-kind sales, approximately 45 percent of its North Slope royalty oil. The state has sold its royalty oil to in-state refineries through competitive and non-competitive sales and has occasionally auctioned royalty oil to customers in the Lower 48.
The state’s royalty oil has declined as North Slope production has declined, with the volumes of royalty oil available for sale in the five-year contract period estimated to be between 37,000 and 54,000 bpd. The amount in the Tesoro contract is some 45 percent to 68 percent of those volumes.
The best interest finding says there are three considerations in taking royalty oil in-kind.
The state wants to keep a small percentage as royalty in-value, where the lessees market the state’s share with their own production and pay the state the value of its royalty share, because there are higher royalty values for some leases and to obtain pricing and other information from RIV dispositions for comparison purposes.
The second consideration is that royalty oil is based on a production forecast that has at times been “quite optimistic,” the finding said. The third consideration is that royalty forecasts provide expected daily volumes, while production varies over the year, highest in winter and lowest in summer.
The value to the state is that it receives more revenue from RIK sales than from RIV sales.
The finding says the state received more revenue from each barrel of RIK oil than RIV oil in 83 months of the 94 months from January 2008 to October 2015. Since March 2011 the difference has been some $1.94 per barrel. In that period the state sold some 95.14 million barrels of RIK oil under three different contracts, with $106.11 million of additional revenue over what would have been realized under RIV.
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