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State proposes royalty oil sale to Tesoro Refiner to buy up to 15,000 barrels per day of Alaska North Slope crude under one-year contract potentially worth $568 million Wesley Loy For Petroleum News
The state is proposing a one-year contract to sell up to 15,000 barrels per day of Alaska North Slope royalty crude oil to refiner Tesoro.
San Antonio-based Tesoro operates a refinery at Nikiski, on the Kenai Peninsula. The refinery is Alaska’s second-largest in terms of crude throughput capacity, trailing only the Flint Hills Resources refinery at North Pole.
The commissioner of the Alaska Department of Natural Resources has made a preliminary finding that the royalty oil sales to Tesoro would be in the state’s best interest.
A final decision won’t be made, however, until after the public has a chance to comment on the deal. Comments are due by Oct. 23.
The proposed contract is posted at dog.dnr.alaska.gov.
Benefits of sale Royalty oil is the state’s share of the oil produced from leased, state-owned land. On North Slope leases, the royalty ranges from 12.5 percent to more than 33 percent.
Tesoro is looking to become the second refiner this year to ink a deal to buy royalty oil. Legislators in April approved a five-year contract for the sale of 18,000 to 30,000 barrels per day of royalty crude to Flint Hills.
Legislative approval isn’t required for the Tesoro sale, due in part to the short contract term.
Under the proposed contract, Tesoro would buy 5,000 to 15,000 barrels of royalty oil per day between Feb. 1, 2014, and Jan. 31, 2015.
The sale would benefit the state in a number of ways, the commissioner’s preliminary finding says.
First, DNR projects the sale would provide $189 million to $568 million in revenue to the state over the course of the contract.
“The sale may also help facilitate the continued operation of the Nikiski refinery with the economic benefits that accompany such operations,” DNR says. “The Nikiski refinery produces roughly 2 to 3 million gallons per day of refined petroleum products, most of which will be consumed in Alaska. Tesoro’s Nikiski refinery is also the largest taxpayer in the Kenai Peninsula Borough and employs 200 Alaskans in full-time, high-paying positions.”
Alaska has four commercial refineries, including Petro Star’s refineries at Valdez and North Pole.
The Flint Hills and Petro Star refineries are all tied into the trans-Alaska oil pipeline.
The Nikiski refinery is different. Rather than drawing feedstock directly from the pipeline, Tesoro receives its supplies by water, whether from the oil fields on the west side of Cook Inlet, the Valdez oil terminal, or from foreign countries.
Foreign cargos are relatively rare, however, as more than 90 percent of the oil refined in the Nikiski plant is Alaska crude, DNR says.
The Nikiski refinery, like all of Alaska’s commercial refineries, lacks the capability to fully transform a barrel of crude into finished product. Leftover portions of a barrel are called “heavy ends.” The Flint Hills and Petro Star refineries can inject these heavy ends back into the trans-Alaska pipeline, but Tesoro must ship its heavy ends to the West Coast for further processing.
Tesoro’s refinery has a nameplate throughput capacity of 72,000 barrels per day, but actual throughput is lower and varies seasonally. During summer, when demand for refined product peaks, the refinery processes about 65,000 barrels of crude per day.
Overall, DNR says, about 35 percent of the refinery’s output is jet fuel, 24 percent is gasoline and 11 percent is diesel. The remaining 30 percent is heavy ends.
No sweetheart deal Tesoro has operated its Nikiski refinery since 1969.
The state has a long history of selling royalty oil to Tesoro. The state supplied North Slope crude to the Nikiski refinery through most of the 1980s and ’90s. Sales totaled 230 million barrels under seven contracts, DNR says.
In addition, the state supplied Tesoro with about 22 million barrels of Cook Inlet royalty crude from 1979 to 1985.
Under the proposed contract, the state isn’t offering Tesoro a bargain, DNR says. Rather, state law requires that direct sales of royalty oil must generate revenue at least as great as allowing North Slope producers to market the royalty oil along with their own volumes on the West Coast.
Tesoro has a string of retail fuel stations around the state.
The royalty oil purchase does not signal a planned expansion of the Nikiski refinery, DNR says. The royalty oil is merely expected to replace private sources of feedstock.
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