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New RIK contract in works for Marathon's Kenai crude refinery
Kristen Nelson Petroleum News
The Alaska Royalty Oil and Gas Development Board is scheduled to meet March 24 on the royalty-in-kind contract proposed by the commissioner of the Alaska Department of Natural Resources in a preliminary best interest finding and determination for a proposed sale of North Slope royalty oil to Marathon Petroleum Supply and Trading Co.
In a March 4 public notice DNR's Division of Oil and Gas said it is seeking comments on the preliminary best interest finding, a proposal to sell some 10,000 to 15,000 barrels per day of the state's North Slope royalty-in-kind oil to Marathon for processing at its Nikiski refinery. The deadline for public comments is 4:30 p.m. April 11.
The Royalty Oil and Gas Development Board will review the proposed contract at its March 24 meeting, and comments from that meeting will be used along with public comments received by DNR in determining whether the sale is in the state's best interest. If the DNR commissioner determines that the sale is in the state's best interest and the Royalty Board recommends that the sale go forward, a bill will be introduced in the Legislature to approve the contract.
The contract The division said the DNR commissioner proposes to sell the oil under a three-year contract, with delivery estimated to begin Aug. 1 and continue until July 31, 2028.
"The price provision in the proposed contract is based on a formula that relies on accepted industry price reporting services and resembles the formulas used to calculate value of royalty oil paid to the State by the North Slope producers," the division said.
The preliminary BIF says the proposed sale is for a portion of the state's North Slope royalty oil. After three years, the contract may be extended on an annual basis for seven additional years, unless either party withdraws by Nov. 1 of the year prior to the extension.
Oil sales under the proposed contract will help meet the needs of Marathon Kenai refinery's for in-state crude and help facilitate continuing operation of the refinery. The refinery has been operating since 1969.
DNR said those two considerations were paramount in the state's decision to sell with a third concern to avoid interruptions of delivery of in-state crude to in-state refineries.
Royalty in kind The preliminary BIF says that from November 1979 through November 2024 the state disposed of 998 million barrels of royalty oil through in-kind sales, some 45% of its North Slope royalty oil, using negotiated non-competitive sales since 1986. Marathon Petroleum acquired the Kenai refinery in 2018 from Andeavor, formerly known as Tesoro.
Based on forecast volumes, some 41,000 to 82,000 bpd of North Slope royalty oil is expected to be available, with Marathon's nominations representing some 12% to 36% of the state's North Slope royalty oil.
Marathon has a current royalty-in-kind contract obligating the state to deliver between 10,000 and 15,000 bpd to Marathon between Aug. 1, 2022, and July 31, 2025.
Petro Star has a royalty-in-kind contract with the state obligating the state to deliver between 10,000 and 12,500 bpd from January through December 2027.
The total of the two contracts is between 20,000 and 27,500 bpd, representing between 24% and 67% of the state's expected North Slope royalty oil during the initial three-year term of the Marathon contract.
Volumes available The preliminary BIF said the state keeps a small percentage of royalty oil in-value "due to higher royalty values for certain leases, and to obtain pricing and other information from in-value dispositions for comparison purposes," so will limit total nominations to 95% of North Slope royalty oil. Another consideration is that volume is based on forecast and the state has, in the past, experienced periods when the forecast for royalty oil has been optimistic, "with realized production often falling below forecasted levels."
At a 95% level, however, the forecast "would need to be seriously deficient" for the state to have to struggle to meet its contractual volume obligations.
There is also seasonal variability in North Slope production, with peaks in the winter and declining levels in the summer, which "is part of the consideration when negotiating nomination ranges with refiners."
More revenue The state has historically received more revenue from royalty-in-kind sales than from royalty-in-value sales, DNR said.
A chart in the preliminary BIF illustrates petroleum revenue from fiscal year 2009 through fiscal year 2024 and projected through fiscal year 2029. For the FY09 through FY24 period, the state sold 173.4 million barrels of royalty in-kind, generating "an incremental revenue of $188.3 million over what would have been realized if those volumes were sold as royalty in-value," DNR said, with the price for RIK oil during the period typically higher than the price of RIV oil.
More than 90% of the RIK oil the state takes comes from Prudhoe Bay and Kuparuk, and if the state had taken this royalty as in-value it would have been subject to a deduction for marine transportation because the state selects RIK oil from fields whose production would otherwise be sold out of state and "subject to a deduction reflecting the marine transportation allowance."
In-state refineries There are five active in-state refineries, DNR said in the preliminary BIF, three producing refined petroleum products for the consumer market -- Marathon's Kenai refinery, Petro Star's North Pole refinery and Petro Star's Valdez refinery. Those three all refine Alaska crude and supply refined petroleum products to the Alaska retail market.
The Petro Star refineries "both exclusively refine ANS drawn from TAPS," DNR said. The North Star refinery has a maximum throughput capacity of 22,000 bpd while Valdez has a maximum capacity of 60,000 bpd. Some 63% of Petro Star output is jet fuel with the remainder ultra-low sulfur diesel, asphalt and heating oil, with most of the refined product produced by the refineries remaining in Alaska.
Marathon's Kenai refinery is not tied into TAPS, so some feedstock arrives over water, allowing the Kenai refinery to source crude from the world market, the Valdez Marine Terminal or Cook Inlet. Importation of non-Alaska crude has been relatively infrequent in recent years, with 90% of the crude refined at Kenai from either the North Slope or Cook Inlet.
Because it is not located along TAPS, the Kenai refinery cannot re-inject unprocessed crude back into the line and portions of a barrel not refined into saleable product must be shipped out to another Marathon facility or sold to a third party for further processing.
And, unlike the Petro Star facilities, where refineries are fueled by crude from TAPS, Marathon fuels primarily with Cook Inlet natural gas.
Most of Marathon refinery output is consumed in Alaska, with nearly all the jet fuel transported to Anchorage by pipeline with the majority consumed at Ted Stevens Anchorage International Airport.
--KRISTEN NELSON
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