William Seward statue

The statue of William Seward was placed in the plaza in front of the Alaska Capitol in Juneau in 2017. Seward was the Secretary of State in 1867 who negotiated the purchase of Alaska from Russia.

Officials in the Alaska Department of Natural Resources have agreed with Petro Star Inc. on a royalty oil sale that avoids the need for legislative approval.

A best interest finding signed by DNR Commissioner Corri Feige and published Sept. 23 along with the proposed contract states that department officials, for their part, opted for a shorter contract out of concerns a longer approval process could lead to interruptions in the delivery of royalty oil to Petro Star.

The longer-term contracts DNR officials have often negotiated with the state’s refiners are required to be reviewed by the state Royalty Oil and Gas Development Board and approved by the Legislature. The longer contracts are rarely politically controversial but they can move slowly, the best interest finding notes.

“This approval process takes time, and here, could mean months without royalty oil being delivered to Petro Star’s two refineries, but contracts entered into to relieve market conditions are not required to go through these steps so long as they are for one year or less, pursuant to (state law),” the document states.

Petro Star Inc. is a wholly owned subsidiary of Arctic Slope Regional Corp. Its refineries largely produce jet fuel, diesel and heating oil.

The state’s existing contract with Petro Star expires in December. It took effect in 2018.

DNR sells much of the state’s royalty oil to local refiners because the state can typically make a small per-barrel premium 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 with the onset of the pandemic.

DNR officials estimate the Petro Star sales could net the state roughly $4 million over what it would receive from royalty in-value, or RIV, sales in which the producers sell Alaska’s oil — typically to West Coast refineries — on the state’s behalf.

The marine transportation costs for Alaska North Slope crude are expected to total approximately $3.25 per barrel in fiscal years 2022-23, according to state projections.

The agreement with Petro Star calls for the state to cumulatively sell 10,000 barrels of oil per day in 2022 to the company’s refineries in North Pole and Valdez for a RIK price differential of $2.17 per barrel, meaning the state would generally collect the delta between the marine costs and the RIK differential as additional income.

The volume represents about 12% to 17% of the state’s available royalty oil based on production forecasts, according to the finding, and the RIK differential matches the contract DNR officials signed with Marathon Petroleum Corp. in late April.

The contract with Marathon, which owns the Kenai refinery, is for 10,000-15,000 barrels per day and is also for one year.

DNR officials do not commit all of the state’s oil to RIK contracts, in order to maintain some RIV sales through which they can gain insight to oil market information that otherwise is difficult to come by.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

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