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State defends royalty-in-kind sale
at House Oil and Gas Committee
Kristen Nelson PNA Editor-in-Chief
Producers and explorers — companies with and without current gas reserves — argued their respective sides of whether or not the state should be holding a royalty-in-kind sale for its North Slope natural gas before the House Special Committee on Oil and Gas Feb.5. (See Feb. 10 issue of PNA)
The state’s Division of Oil and Gas defended the sale Feb. 5 and Feb. 7.
Division of Oil and Gas Director Mark Myers said access to facilities was crucial for the future well being of the state’s oil and gas industry and a royalty-in-kind sale would give a shipper guaranteed gas so it could contract for space in an open season. Myers said the division disagrees with the producers’ contention that access is not an issue and noted that bidders Chevron and Williams both had access concerns — Chevron for its Point Thomson gas and Williams for gas in its foothills prospects. Some expansion From the design specs the producers have proposed, they have 0.8 billion cubic feet to 1 bcf of expansion capacity that could be brought on with additional compression, Myers said: that expansion capacity could be used to ship the state’s royalty gas.
Bonnie Robson, deputy director of the division, told the committee that while the producers only objected to royalty-in-kind sales where the gas could be returned to the state and revert to royalty in value (gas which the producers must then ship and sell for the state), in fact the state is allowed by lease terms to switch on six months notice. If the producers want to end the state’s ability to switch from in-kind to in-value, she said, they are asking for royalty relief from the state, and should be required to demonstrate that they have an economic need for such relief. Open season uncertain Robson said the producers have said the royalty-in-kind sale was not needed because they did not plan to hold an open season in 2002. But that statement, she said, came within two weeks of one of the producers — she would not say which one — telling the state there could be an open season in the second quarter of 2002. And the pipeline consortium, she said, has indicated that they might hold an open season in 2002, so the state has no guarantee there won’t be an open season in 2002.
Once the open season closes, she said, the decision between royalty-in-kind and royalty-in-value will have been made. If the state doesn’t treat this as a now or never decision, Robson said, it may be unable to sell royalty gas in-kind until 2020 or 2025, when space might be available in the line.
The producers have suggested the state could get capacity in an expansion open season, but, Robson said, an expansion could be limited to companies already shipping, and if new companies were allowed to contract for space, the state could be limited to its royalty share of the expansion, perhaps one-eighth of 1 bcf.
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