State gauging interest in royal-in-kind oil

Natural Resources solicits parties for a competitive sale.

Petroleum NewsAugust 19, 2012 

The state is looking for someone to buy its oil.

The Alaska Department of Natural Resources wants to know if any commercial petroleum processors with good credit are interested in bidding for some or all of its North Slope royalty in-kind oil supply when the current contract expires in early 2014.

After receiving an inquiry from a potential buyer, the state is now soliciting oil refineries in Alaska and the West Coast, and from the major North Slope producers. State statute requires the natural resources commissioner to either hold a competitive sale for royalty in-kind oil or determine that the best interest of the state can be met without such a sale.

The informal solicitation could lead to a competitive sale sometime soon.

If the state holds an auction, it would be the first for North Slope oil since 1984, according to Kevin Banks, a petroleum market analyst with the Division of Oil and Gas.

Through its lease terms, Alaska gets a cut of all oil produced in the state but it can choose to take its share either in dollars (royalty in value) or in actual barrels (royalty in kind). State statute places a preference on claiming royalty in kind whenever possible because the state can potentially earn more by selling oil directly on the open market.

Although one potential benefit of buying royalty in kind is the possibility of beating the market price, Banks said the state is aiming to sell the oil at a price equivalent to its royalty in value, plus bonus bids and special commitments. The stability of supply provides an incentive for buying from the state over other potential suppliers, he said.

The state asked companies to respond by the end of the month.

The state is currently selling its North Slope royalty in-kind oil to Flint Hills Resources LLC for its North Pole refinery, under a 10-year contract set to expire March 31, 2014.

The current effort would use that contract as a model.

After a failed effort to sell its royalty in-kind oil to nontraditional investors in the early 1980s, the state began focusing its sales pitch on commercial petroleum processors.

Throughout the 1980s and 1990s, the state also required a letter of credit from potential buyers. It relaxed the provision some for Flint Hills, requiring instead a financial guarantee from its parent company, Koch Industries Inc., and regular financial analyses.

While the royalty in-kind contract historically includes provisions to process a certain amount of oil in Alaska and to hire locally, to the extent the state can legally compel a company to do so, the Flint Hills contract started the process of "special commitments" to ease consumer fuel prices in Alaska and to increase the supply of crude oil for local use.

Ideas originate from the bidder. The 2004 Flint Hills contract included commitments to use the Alaska Railroad, to promote the Fairbanks International Airport and to maintain parity for gasoline prices between Fairbanks and Anchorage, among other commitments.

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