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DNR commissioner okays royalty gas contracts with Anadarko, AEC Royalty board, Legislature, must approve contracts; benefits of royalty-in-kind over royalty-in-value gas sales pegged at $252 million over 25 years Kristen Nelson PNA Editor-in-Chief
The Division of Oil and Gas has negotiated contracts with Anadarko Petroleum Corp., AEC Marketing Inc. and AEC Oil & Gas Inc. for the sale North Slope royalty-in-kind natural gas and the commissioner of the Department of Natural Resources has issued a preliminary finding that the contracts are in the state’s best interest. The state solicited offers for royalty-in-kind gas Dec. 26, with offers due Jan. 31. In addition to the joint Anadarko-AEC offer, the state received applications from Chevron, Williams and Alaska Power and Telephone.
The preliminary best interest finding came out March 29; the comment period ends April 29. The Alaska Royalty Oil and Gas Development Advisory Board meets on the proposed sale April 17. If the board approves, the contract goes to the Legislature for its approval. Contract provisions The state said that while AEC and Anadarko submitted a joint proposal, separate contracts will be executed with each company.
In special commitments, above the price paid for gas, the companies jointly agreed to spend $50 million from Jan. 1, 2002, through Dec. 31, 2007, exploring in the Foothills region of the North Slope. Exploration costs included in the $50 million include seismic surveys, roads, drilling pads, exploration wells and well testing.
If Anadarko and AEC make a commercial discovery in the Foothills, they have each committed to spend $12,500 each year for 10 years training local laborers.
The companies also committed to “a preference for in-state use or processing of the royalty gas.”
The contracts allow purchase of royalty gas from both the Prudhoe Bay unit and the Point Thomson unit. Each company will pay the state $1 million for the option to buy gas over a five-year period. “Each buyer can continue to receive gas for subsequent five-year option periods with the payment of another $1 million.”
The maximum amount of gas available will be 70 percent of the state’s royalty share of Prudhoe Bay and Point Thomson production. With a 4 billion cubic feet a day pipeline, the state’s royalty gas would be some 500 million cubic feet, with up to 350 million cubic feet available to the buyers.
The state noted that the gas buyers would have a fixed-volume transportation commitment, but the state’s royalty gas would vary with normal operations at the fields. To help minimize wide swings in volumes of gas delivered to the buyers, they are given the flexibility to change the percentage of royalty gas they take from time to time but are required to give seven months’ notice for such volume changes. Amount can go to zero At the beginning of each five-year option period, the buyers will tell the state the maximum amount of gas they will buy. Once a year during the option period, an annual amount may be specified.
Once the buyers have production from their Foothills leases to put into a gas pipeline, the state said, “they will replace the royalty gas purchased under the agreement with their own gas.”
If buyers have enough production, their purchase of state royalty gas may fall to zero.
Initially, each buyer has selected 35 percent of the state’s royalty gas — for a total of 70 percent, the maximum the state has agreed to sell.
When the buyers are ready to replace royalty gas with their own gas, they must give the state a two-year notice. Commercial terms Anadarko and AEC submitted a bonus bid of $350,000 with their proposal.
The state said the base price of royalty-in-kind gas will be the volume-weighted average of the amount paid by lessees for royalty-in-value. The buyers also pay for any conditioning, processing or field costs incurred by the state on the royalty-in-kind gas which the state wouldn’t have been charged if the gas were taken as royalty-in-value.
The buyers will also pay a price premium of 2 cents per million Btu for the first option period, 4 cents per MMBtu for the second option period, 6 cents per MMBtu for the third option period and so on until the contract terminates. Effective date The royalty-in-kind contracts become effective when signed by the parties and approved by the Legislature.
Several conditions allow either the buyers or the state to terminate the agreements with 30 days notice: if contracts are not approved by May 31, 2003; if an open season for the gas pipeline is not completed by March 31, 2005; or if buyers have not obtained a firm transportation contract by March 31, 2005.
The state said that if Anadarko and AEC explore, but find no commercial gas, the companies could purchase royalty-in-kind gas for the duration of their transportation commitment. The state would then expect, over a 15 year term, to receive $133 million more than if it sold gas royalty-in-value, and $252 million more for 25 years.
If the companies have exploration success they could invest as much as $2.75 billion in a 30-year gas development program and revenues could be $300 million a year. Impacts on producers The state said the North Slope gas producers, BP, ExxonMobil and Phillips, objected to the sale individually and as members of the Alaska Gas Producer’s Pipeline Team.
The companies told the state that royalty-in-kind sales “would adversely impact their economics as gas producers” because if AEC and Anadarko ship royalty gas for a time and then switch to shipping their own gas, the gas producers “will be forced to carry royalty gas in their initial pipeline capacity, leaving some of their own equity gas in the ground.”
DNR said it “carefully considered” the producers concerns and structured the contract to minimize them by requiring Anadarko and AEC to give a minimum of two years advance notice of their intent to produce their own gas, thus providing the producers with time to add compressor stations to increase pipeline capacity.
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