State could net extra $3M with royalty oil sale to Marathon

  • The Alaska Department of Natural Resources has agreed to sell some of its royalty oil to Marathon for processing at its Kenai refinery in a deal that starts Aug. 1. The state could net an extra $3 million in revenue under the deal for 10,000 to 15,000 barrels per day. (Photo/Courtesy/Marathon Petroleum Corp.)

Department of Natural Resources Commissioner Corri Feige has approved a sale of the state’s oil that could net up to $3 million in additional revenue over the coming year and more importantly sets the stage for lawmakers to consider a similar five-year sale as well.

Feige signed off April 22 on the best interest finding for the one-year state royalty oil sale to Marathon Petroleum Corp. that will have the state make 10,000 to 15,000 barrels of oil per day available to the Kenai refinery between Aug. 1 and July 31, 2022. The sale should represent 19 percent to 25 percent of the state’s total available royalty volume, according to the finding.

DNR typically makes a small per-barrel premium on the state’s royalty oil when it is sold in-kind versus receiving an in-value payment from the producers for the state’s oil that they sell. Department officials and local refiners agree on a negotiated price differential that allows the state to capture some of the revenue lost from transportation costs when oil is otherwise shipped to West Coast refineries.

In recent royalty in-kind, or RIK, oil contracts the state has generally netted $1 to $2 more per barrel than if it sold its royalty oil in-value, according to DNR; however, the state briefly lost money when oil prices and demand collapsed last year along with the onset of the pandemic.

The Marathon agreement calls for an RIK differential price of $2.17 cents per barrel, meaning the state will collect incremental revenue as long as average marine transportation costs between Alaska and West Coast refineries remains greater than $2.17 per barrel.

A Department of Revenue forecast projects marine transport costs will gradually climb from $3.01 per barrel this year to $3.56 by 2030.

In 2016, DNR officials negotiated an RIK differential of $1.95 per barrel for a previous contract with Tesoro, a prior owner of the Kenai refinery.

That five-year contract was for up to 25,000 barrels per day and was unanimously approved by the Legislature, which must pass a bill authorizing each RIK sale longer than one year.

A Marathon spokesman did not respond to questions in time for this story, but the best interest finding indicates the company has agreed to start negotiations on another five-year contract that would commence in 2022.

DNR officials will make up to 95 percent of the state’s future royalty oil — in the range 70,000 barrels per day — available for nomination by refiners under RIK sales. They prefer to keep a small portion available for in-value sales due to higher royalty values for certain leases and to obtain pricing and other market information from in-value sales.

The Kenai refinery has a processing capacity of approximately 68,000 barrels of oil per day and generally produces about 59,000 barrels of refined products daily, according to DNR’s finding.

In addition to strictly the monetary benefit, DNR’s commercial negotiators also factor in more subtle reasons for selling the state’s oil locally, such as the incremental economic benefits of processing it here rather than having it sent elsewhere.

While being on the edge of Cook Inlet allows Marathon to import oil to the Kenai facility, approximately 90 percent of the oil refined there has been either from the North Slope or Cook Inlet in recent years, according to DNR.

Since 1979 the state has sold 964.5 million barrels of North Slope oil through in-kind sales, according to DNR data.

Elwood Brehmer can be reached at [email protected].

05/12/2021 - 11:19am