The state receives a royalty share of oil and gas produced from the land the state has leased to the oil producers. By statute, regulation, and the terms of the oil and gas leases the state has the choice to take its royalty "in-kind" or "in-value." When it takes its royalty in-kind, the state takes possession of its royalty share of the oil and gas produced by the lessee and sells it. When the state takes its royalty in-value, the lessee takes possession of the royalty share and pays the state for it.
The Decision Process for the Sale of State Royalty Oil
Royalty-in-Kind or Royalty-in-Value?
Alaska law under AS 38.05.182 compels the Commissioner of Natural Resources to take oil and gas royalty in-kind unless he determines that taking royalty in-value is in the best interests of the state. Conversely, the law also requires that he must determine that taking royalty in-kind is in the best interest of the state.
Competitive Bid or Negotiated Contract?
Royalty oil must be sold by competitive bid (AS 38.05.183(a)). The commissioner may negotiate a royalty oil sale agreement with a single buyer if (a) he finds that a negotiated sale is in the state's best interest or (b) no competition exists for the royalty oil.
Export or In-state Use of Royalty Oil?
Under AS 38.05.183(d), the commissioner must determine if the royalty-in-kind oil is surplus to the "present and projected intrastate domestic and industrial needs" of the state.
What are the state's "best interests?"
The commissioner must consider the following in evaluating proposals for the disposition of royalty oil, whether the disposition is by competitive bid or negotiated agreements (AS 38.05.183(e)):
The Division must thoroughly document each of these decisions before a sale of royalty oil can occur. The law requires public notice and review of the royalty oil sale and the commissioner's best interest findings. As part of the public review of any royalty sale, commissioner will inform the Alaska Royalty Oil and Gas Development Advisory Board who will examine the proposed sale in a public hearing and, if necessary, recommend that the sale be approved by the Alaska Legislature.
Under AS 38.06.055, legislative approval is required for long-term royalty sales, i.e., dispositions in excess on one year. The legislature approves royalty sales by enacting legislation.
Final Best Interest Finding and Determination for an Amendment of the "Agreement for the Sale of Royalty Oil between and among the State of Alaska and the Tesoro Corporation and Tesoro Refining & Marketing Company LLC, October 25, 2013"It includes the following:It includes the following:It includes the following:
The state solicited "expressions of interest" from parties that may be interested in and/or affected by the sale of royalty-in-kind gas in Cook Inlet. The comment period closed April 2, 2004. The expression of interest invitation and responses are as follows:
Responses to Invitation:
The State sold North Slope royalty oil to Flint Hills Resources to supply it's North Pole Refinery. The Best Interest Finding and Determination for the Sale of Alaska North Slope Royalty Oil to Flint Resources Alaska, LLC describes the features of this sale. See also Appendix A: Proposed Contract
This proposed contract was approved by the Alaska Legislature and signed by the State and FHR on February 25, 2004. The final contract is the same as the proposed contract.
DNR solicited offers and negotiated a North Slope royalty gas contract with Anadarko and EnCana (formerly AEC) in March 2002. Although a preliminary Best Interest Finding was prepared, a hearing of the Alaska Royalty Oil and Gas Development Advisory Board, and preparation of a final Best Interest Finding was postponed.
Solicitation of Offers
For more information about the Royalty-in-Kind gas or oil please contact Kevin Banks by email or telephone 907-269-8781.