House panel advances bill to sell state's royalty oil to Marathon Petroleum

ANCHORAGE, Alaska — The Alaska House Resources Committee voted April 16 to advance House Bill 194, clearing the way for the Department of Natural Resources to enter a royalty-in-kind contract to sell portions of the state's royalty oil to Marathon Petroleum for in-state refining.

The measure, introduced at the committee hearing by Department of Natural Resources officials, would authorize a contract with a three-year primary term and seven optional one-year extensions (up to 10 years total if all options are exercised). The department told the committee the pricing formula in the proposed contract is pegged to the Department of Revenue's volume-weighted location differential, with a 24-cent-per-barrel improvement to the state compared with that published index. DNR staff estimated the arrangement could add roughly $4 million to $6 million per year in state revenue compared with taking royalties in value.

DNR Deputy Commissioner John Crother and Ryan Fitzpatrick, commercial manager in the Division of Oil and Gas, presented the bill and described the royalty-in-kind (RIK) practice, under which the state takes physical oil from production leases and sells the crude itself rather than taking a cash royalty. "When the state leases its oil and gas lands for development, we reserve a portion of the produced oil to the state," Fitzpatrick said. "We have the option to take that oil either in value ... or take that oil in kind, which is where we actually take physical possession of the oil and then sell the oil ourselves." Fitzpatrick explained the RIK pricing formula starts with West Coast price markers, subtracts a location differential and regulated pipeline tariffs, and adjusts for quality bank and line loss.

Fitzpatrick said the proposed contract differs from some past RIK contracts because it uses a dynamic differential pegged to the Department of Revenue index rather than a fixed dollar amount, and the department negotiated a 24-cent-per-barrel improvement to that published differential. He also told the committee the contract would provide a base supply to support in-state refining at the Nikiski/Kenai refinery and that the state historically has received a premium for RIK sales versus taking royalties in value, though some months have been slightly below parity.

The DNR described a public process required by statute that includes a solicitation for interest, development of a best-interest finding, public comment and review by the state's royalty board; the department said the royalty board recommended adoption and that Marathon was the only firm purchaser to come forward in this solicitation. The proposed contract would target deliveries in the range of about 10,000 to 15,000 barrels per day, DNR staff said. Fitzpatrick said refineries also source crude from other areas, including Cook Inlet and occasional out-of-state purchases, depending on product slate and feedstock chemistry.

Casey Sullivan, government and public affairs manager for Marathon Petroleum, testified in support of the bill. "We absolutely believe in Alaska's future," Sullivan said. "We're committed to continuing our longstanding legacy of safely and reliably producing quality fuel products day in and day out for Alaskans." Sullivan described the Kenai refinery's capacity and the contract's value in providing a stable supply to meet seasonal and blending needs.

Committee members asked clarification questions about the dynamic pricing mechanism, the periods for which extensions could be exercised and whether the department would return each year to approve option years. Crother said the committee's approval would include authority to exercise the optional years and that the department would assess each extension year for the state's interest rather than return annually for legislative approval. Fitzpatrick confirmed the history of premiums and said occasional months have fallen below parity but that RIK sales have generally outperformed equivalent royalty-in-value receipts.

Cochair Deibert moved House Bill 194 out of committee with the attached fiscal note and recommendations; no objection was voiced and the committee chair announced that the bill "passes from committee." The transcript does not record a roll-call vote or individual yes/no tallies.

The committee adjourned with notice that its next meeting is scheduled for April 23 at 1 p.m.