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Alaska hopes to makes millions more selling extra oil to local refiners

  • Author: Alex DeMarban
  • Updated: July 7, 2016
  • Published February 7, 2016

The Walker administration hopes to generate at least $10 million more annually in revenue and reduce imports into the state of Lower 48 crude oil by sharply boosting the amount of royalty oil it sells to in-state refiners.

As part of the effort, the state Department of Natural Resources released a proposed contract on Thursday that could roughly double the amount of royalty oil sold to Tesoro Alaska, the state's only gasoline refiner.

The state hopes to fashion a similar contract with PetroStar, the state's only other commercial refiner, boosting income by millions more, officials said.

The effort would reduce the amount of Alaska royalty oil shipped out of state, support Alaska refineries and local jobs, and boost income for the state, said Mark Myers, DNR commissioner.

"If you can ever get to a win-win in the oil and gas world, I think we got one, at a time when we really need it," said Myers, of the draft contract with Tesoro.

With low oil prices blasting a multibillion-dollar hole in the state's budget, the department began talking with refiners about a year ago and found strong interest in the idea, officials said.

The state has historically made more money by selling its royalty oil, compared to the other option of letting the large oil producers sell that oil and pay cash to the state, according to a recent preliminary finding, also released Thursday, that says the plan is in the state's best interest.

The state would make more than $1 extra for every barrel of royalty crude oil by selling it to in-state refiners, in part because of marine transportation costs associated with shipping that oil out of state, the finding said.

Royalty oil is the landowner's share of produced oil, and usually amounts to 12.5 percent. In 2015, the state's share of production amounted to 23 million barrels worth $740 million. The state sold about one-fifth of that oil in-state.

The proposed five-year contract with Tesoro, which operates a refinery in Nikiski on the Kenai Peninsula, calls for selling the company about 22,000 barrels of oil daily. That would be an increase from the previous contract that ended in January and set sales at about 10,000 barrels daily.

"Right now they can't get enough oil out of Cook Inlet," said Myers. "This allows us to sell them oil to replace the oil from the Bakken (shale fields in the Lower 48) that they ship up here."

About 80 percent of the crude processed at the Nikiski facility comes from Alaska, the finding said.

That deal would represent a little more than half the state's royalty oil, and would be worth an additional $10 million a year.

Matt Gill, external affairs manager at Tesoro Alaska, said the proposed agreement would provide a reliable source of in-state crude and help ensure long-term success for the company.

The state hopes to sell much of its remaining royalty oil to PetroStar, which operates refineries in Valdez and North Pole that create products such as heating oil and aviation fuel. The state is currently negotiating with that company.

The draft contract and preliminary best interest finding were recently released for public comment by March 7. It will need legislative approval before it can be accepted.

Sen. Cathy Giessel, R-Anchorage and chair of the Senate Resources Committee, said the DNR has done a good job maximizing the value of the state's crude oil and protecting Alaska jobs.

"This in turn provides a stable fuel source for Alaska," she said in a text message that included a smiley-face emoticon.

The deal may not result in cheaper gasoline and other prices, in part because Alaska is affected by national and international markets, said Alex Nouvakhov, DNR's commercial manager.

"We can't make the claim it will reduce retail prices for Alaskans," he said. "It would be nice if we could but we're not convinced it will have that effect."

Officials with PetroStar could not be reached for comment Friday.

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