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Royalty In-Kind. Presentation to the Joint Legislative Budget and Audit Committee and Senate Resources Committee Interim Hearings Alaska Natural Gas Issues Division of Oil and Gas September 1, 2004. Alaska Department of. Natural Resources. krb 09/04. The State’s Royalty Share.
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Royalty In-Kind Presentation to the Joint Legislative Budget and Audit Committee and Senate Resources Committee Interim Hearings Alaska Natural Gas Issues Division of Oil and Gas September 1, 2004 Alaska Department of Natural Resources krb 09/04
The State’s Royalty Share • Is a percentage of production. • Usually is 12.5 percent of production. • May be taken “in-value” or “in-kind.” • When taken “in-value,” the royalty share is left with the producer, who must sell 100 percent of the oil or gas, and pay the State 12.5 percent of the net proceeds from the sale of 100 percent of the oil or gas, OR the market value of the oil or gas, whichever is higher. • When taken “in-kind” the State physically takes 12.5 percent of the oil or gas and sells it itself. The State assumes the responsibility to market its royalty share. krb 9/04
Why take RIK? • “The commissioner determines that the taking in kind would be in the best interest of the State” [AS 38.05.182(a)] • The commissioner may award an RIK contract “to the prospective buyer whose proposal offers the maximum benefits to citizens of the State.” [AS 38.05.183(e)] • The Alaska Royalty Oil and Gas Development Advisory Board is directed to “facilitate the wise development of Alaska’s oil and gas royalty interests by providing means and procedures…calculated to promote private economic growth consistent with applicable environmental standards and public fiscal stability” [AS 38.06.101] krb 9/04
The State’s Right to RIK or RIV • Is a term of the lease agreement. • Allows switching between RIK and RIV on six month’s notice. • Is the same for oil and gas • Has been a part of the State’s lease form for more than 40 years. krb 9/04
The State has the Right to Switch • The State’s right to take royalty in-kind, and to switch between royalty in-kind and royalty in-value, is valuable. • If the reported proceeds on royalty in-value appear low, the State can test the market by offering royalty for sale in-kind. • If in-state producers are unwilling to sell to in-state purchasers (who may also be competitors of the producers), the State can supply in-state purchasers. • The State may be able to command a premium for its gas if it is willing to sell on terms different from the industry standard. • If the State is unwilling to take royalty in-kind, the State can take its royalty in-value and rely on the ability of the lessees to capture value in the market. krb 9/04
Historical Royalty Oil and Total RIK krb 9/04
Historical Prices - RIK v. RIV Oil Source: DNR krb /9/04
Historical Price Differential - RIK v. RIV Oil Source: DNR krb 9/04
Recent RIK Contracts • Flint Hill Resources 2004 ANS Oil Contract • Anadarko Petroleum and EnCana Corporation (formerly AEC, Inc.) 2002 ANS Gas Contract krb 9/04
Flint Hill ANS Royalty Oil Contract • Price • Special Commitments • Quantity • Term krb 9/04
Anadarko/EnCana - Background • In the Spring 2001, Anadarko/EnCana explorers came to DNR with concerns about access in the gasline. • In the Fall 2001, DNR issued a press release announcing its intention to examine an RIK gas sale option • DNR published the first Preliminary Finding on October 29, 2001 followed by a Final Finding and Solicitation for Offers on December 26, 2001 • Offers were submitted to DNR by January 31, 2002. An ad hoc proposal evaluation committee convened February 14, 2002 and recommended that the State negotiate contracts with Anadarko and EnCana • A contract with both companies was successfully negotiated by March 29, 2002 and DNR published a second Preliminary Finding describing specifics of the contract. • No further action has been taken on the contract. krb 9/04
Anadarko/EnCana ANS Royalty Gas Contract • Price • Special Commitments • Quantity • Term krb 9/04
RIK Summary • The State has historically taken possession of RIK at the same point where RIV is measured and valued. • Taking royalty gas in-kind will involve new challenges for the State. krb 9/04