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Northstar renegotiation changes from “wash” to good deal Outgoing Division of Oil and Gas Director Ken Boyd reviews politically charged events of his tenure, including Northstar, BP buy-out of ARCO Kristen Nelson PNA News Editor
The state of Alaska has faced some big, contentious issues during Ken Boyd's 10 years as deputy director and director of the Division of Oil and Gas.
The most notable were probably Northstar and BP's acquisition of ARCO, Boyd told PNA.
He talked to PNA in August after he announced that he would be leaving the division. Part 1 of this interview appeared in the September issue of PNA.
Northstar became an issue after BP acquired leases from other companies at the undeveloped field and asked the state to renegotiate the lease terms.
When the leases were originally put out to bid — and acquired by companies other than BP — the bid terms were different than the state's usual terms for leases — based on competitive bids per acre, paid up front. The state also collects rental fees and royalties on any oil and gas produced.
Bidding for the Northstar leases, at a time when oil prices were very high, was net profit share with companies bidding what percentage of profit they would pay the state once the field was in production.
BP told the state Northstar would not be economic under the lease terms as they existed, and asked the state to renegotiate the leases, which the state did, raising the royalties for the tracts and adding a sliding scale royalty to increase the state's share if oil prices rose. Deal improved over time At the time the deal to change the lease terms was negotiated, and argued before the Legislature, BP believed it could develop the field for $380 million, Boyd said.
It was an OK deal for the state at the time, Boyd said, because “the change that we made to the way that they paid royalty on those leases was a dead wash” when compared to the revenue the state would have received from a combination of royalties and the old net profit share if the field cost $380 million to develop.
“And you didn't know what was going to happen in the future, whether it would get better or worse,” Boyd said.
“I can tell you today without any fear of equivocation that it is a good deal for the state, because BP's costs have doubled.”
The company's development investment had to be paid off before the state saw any of its share under net profit share.
At $380 million, he said, “you could see some pay out coming out as net profit share down the line. But now that the cost has doubled, that has to be all paid down before the net profit share gets paid… The deal is better for the state the way it is now with the sliding scale royalty. It just is.” Tectonic changes in merger deal The other big political event that took place was BP's proposed acquisition of ARCO, “something that dropped in the middle of everything that we were doing,” Boyd said, recalling how he heard the news in March 1999. The division spent a lot of time figuring out what the potential impact would be for the state.
“Of course there were some just tectonic changes,” Boyd said, the governor's charter, the Federal Trade Commission ruling, BP's sale of ARCO's Alaska assets to Phillips Petroleum and Exxon's lawsuit.
Exxon, Boyd said, “triggered the entire alignment (of Prudhoe Bay oil and gas ownership). Which I think is a good thing.” Boyd said he didn't think the Prudhoe Bay alignment could have taken place without the BP-ARCO deal.
“I don't think that alignment could ever have taken place without some big event like this. I think if you just tried to do it from scratch, and you just didn't have an event like that, it would take forever.
“We do much smaller deals in units and they take months or years sometimes. Alpine unit took three years to put together, and a lot of people.
“I don't know how they did it. I just can't imagine what the discussions were like. Because at some point you have to have a value for gas — or how do you make the deal?” Shallow gas leasing initiated The state also began shallow gas leasing during Boyd's tenure. That program, unlike competitive oil and gas leasing, is a first-come first-served leasing program which makes state land available for shallow gas exploration and development.
Boyd said he is still a little worried about that program.
“When used properly, it's a good program.” The idea is to get natural gas to villages to use as fuel, or for projects such as remote mines.
“All good things. Or you might be able to use it as just a commodity. You may discover you can put it in a pipeline and sell it — that's terrific, too,” he said.
But Boyd said he is concerned that the shallow gas leasing program may have a down side if the shallow gas leases are not developed.
“The idea that you have this land, for really pretty cheap prices, and the state not getting much money. If people don't do anything with it, if it just turns into a speculator's paradise, then I hope somebody will change the law to stop that.”
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