Sunday, October 6, 2013

State makes deal to sell royalty oil to Tesoro

Tim Bradner
Alaska Journal of Commerce

The Tesoro refinery near Kenai will purchase 5,000 to 15,000 barrels per day of Alaska royalty oil in an agreement reached with the Division of Oil and Gas. Deliveries will begin Feb. 1, 2014, and the contract runs through Jan. 31, 2015.
The state of Alaska has reached agreement with Tesoro Petroleum Corp. to sell 5,000 barrels per day to 15,000 barrels per day of state royalty crude oil from the North Slope for the company’s Alaska refinery near Kenai.

Notice of the sale, in a state Best Interest Finding document, was published on the state Division of Oil and Gas website.

Kevin Banks, chief of the commercial division in the state Division of Oil and Gas, said deliveries are to begin Feb. 1. The contract will end Jan. 31, 2015.

Tesoro’s refinery has a total capacity to process 72,000 barrels per day of crude oil but in practice processes less than that, about 65,000 barrels per day in summer, a period of high gasoline demand, and about 45,000 barrels per day in winter.

The sale will not require approval of the state Legislature because the quantities of royalty oil being sold are below the threshold requiring an OK by legislators.

Last spring the Legislature approved a larger royalty oil sale to Flint Hills Resources for that company’s refinery near Fairbanks.

The Tesoro agreement followed an informal solicitation of interest for purchases the state conducted last fall, Banks said. There were four responses, two from North Slope producers BP and ConocoPhillips, one from Flint Hills Resources and one from Tesoro. Petro Star Inc., which also operates refineries near Fairbanks and Valdez, did not respond.

Alaska has the option of taking its royalty share of oil and gas produced on state-owned leases in kind, in delivery of actual oil and gas, or in value, or payments in cash.

Traditionally the state has taken much of its oil royalty in kind, about half, to ensure that in-state refiners have a supply of crude oil.

“Some portion is always taken in value, in payments by producers, so the state has an indicator of market value to establish values for payment by refiners for royalty oil,” Banks said.

If both Tesoro and Flint Hills take the maximum amount of royalty oil their contracts allow, about 95 percent of the state’s royalty oil would be sold to the in-state refiners.

Royalties from state leases typically vary between one-eighth and one-sixth of production, although there are some leases with higher royalty rates.

Pricing terms on the Tesoro contract are similar to those in the Flint Hills contract, and are based on average west coast sales prices for North Slope crude with transportation costs subtracted.

The transportation deduction from the west coast Alaska North Slope crude price for Tesoro is $1.95 per barrel, which is the estimated difference between the west coast price and Valdez after transportation costs are accounted for. The Best Interest Finding said the state will earn a small premium on the royalty sale compared with what would have been paid by North Slope producers had the royalty been taken “in-kind,” or in cash payment.

If market price conditions between 2008 and 2012 continue through the contract period, the premium would be about 25 cents per barrel, the Best Interest Finding said.

Under state royalty sales contracts, the purchaser takes delivery of oil on the North Slope and makes arrangements for shipping with a Trans-Alaska Pipeline System owner.

To get the oil to its Kenai refinery, Tesoro uses a small shuttle tanker used now for Cook Inlet crude oil deliveries, to get oil from Valdez, in Prince William Sound, to Kenai.

Tesoro now purchases about 90 percent of its crude oil requirements from Cook Inlet and North Slope producers but has imported crude in the past. In 2012, the company imported three cargoes of foreign crude oil, according to the state Best Interest Finding.

The Kenai refinery was originally built to handle light Cook Inlet crude oil but as oil production from the Inlet declined over the years crude has had to be purchased elsewhere.

North Slope crude is heavier than Cook Inlet oil, which required Tesoro to import some lighter oil from foreign sources including at times Sakhalin, in Russia’s Far East, which has lighter crude.

Tesoro’s refinery supplies products to 31 company-owned Alaska retail outlets and 44 “branded” outlets operated by franchise owners, according to the Best Interest Finding document.

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