Senate Resources Committee hears presentation on proposed Marathon royalty-in-kind contract; vote delayed to April 25

Department of Natural Resources officials on April 23 presented Senate Bill 176 to the Alaska Senate Resources Committee, outlining a proposed contract that would permit the state to sell some of its royalty oil in kind to Marathon Petroleum's Nikiski refinery.

Derek Nottingham, director of the Division of Oil and Gas, summarized the proposal: "We're here to ask for your endorsement of Senate Bill 176, which is a bill that allows the State to execute a contract for the sale of Royalty Oil, to Marathon Petroleum." He said the current three-year royalty-in-kind contract with Marathon expires in July and the proposed contract would have a three-year primary term with options for one-year extensions.

Ryan Fitzpatrick, commercial section manager for the Division of Oil and Gas, explained RIK (royalty in kind) versus RIV (royalty in value) and the department's rationale for pursuing in-state sales to refiners. Fitzpatrick said state royalty oil typically represents roughly "12 and a half percent" of production on many leases and that, "Right now, that works out to be approximately 50,000 barrels a day of state royalty production." He described the proposed contract terms: nomination volumes of 10,000 to 15,000 barrels per day; a three-year primary term with seven one-year extension options (allowing up to a 10-year total term if both parties agree); and a pricing mechanism that ties the RIK differential to a Department of Revenue location-differential index minus $0.24 per barrel rather than a fixed historical differential.

Nottingham and Fitzpatrick told the committee the department expects the contract to generate a premium relative to taking royalty in value. Nottingham characterized the premium as "approximately $4,000,000 to $18,000,000 over the life of the contract," while the department also said it expects roughly "$4,000,000 to $6,000,000" in incremental revenue per year on average, equivalent to $12 million to $18 million over the initial three-year term. The department also cited nonfinancial benefits: Marathon's Nikiski refinery supports about 220 jobs and supplies a substantial portion of in-state jet fuel, gasoline and diesel.

Committee members asked detailed questions about the competitive process, security requirements, assignment provisions, legal review and whether extension options would bind future legislatures. Fitzpatrick said the department issues a public solicitation of interest before negotiating RIK sales and that historically the only concrete responses were from Marathon and PetroStar. On assignment and foreign-ownership concerns, Fitzpatrick said the contract allows assignment to a buyer of substantially all refining assets but noted other state and federal review mechanisms would apply to such sales; Sen. Wilkowsky asked whether the state could add restrictions and the department responded that adding such a provision would require restarting the public process.

Sen. Klayman asked whether exercising option years would require returning to the Legislature; the department said no because the option years are part of the contract now before the Legislature, but any modification of terms would require legislative review. On constitutionality and binding future legislatures, Fitzpatrick said the Department of Law participated in contract development though the department did not have a separate written opinion in the hearing record.

Because the committee lacked time to hear Marathon witness testimony and complete action, the chair said the bill would be the first item on the April 25 committee agenda for public testimony and formal action. "We don't have time to hear testimony from Mr. Sullivan who has called in for Marathon Petroleum nor do we have time to move the bill today so it will be the first item on Friday," the chair said. The committee adjourned and scheduled SB 176 for continuation at the April 25 meeting at 3:30 p.m.