The state of Alaska is conducting an open season for offers to purchase up to 70% of its royalty share of gas to be produced from the North Slope, in preparation for an open season on space in a proposed new pipeline to ship gas south to Canada and the Lower 48. The state expects a pipeline open season will occur in 2002, although not in the first quarter.

The state Department of Natural Resources (DNR), in an announcement Dec. 26, said it would accept proposals from potential buyers through Jan. 31, 2002. All offers received by the deadline will be opened and announced at a public meeting Feb. 1. DNR then will begin negotiating royalty-in-kind (RIK) sales contracts with successful proposers. The contracts then must be approved by the state legislature. The agency said it was considering selling up to 70% (350 MMcf/d) of the state’s royalty share.

Currently the state takes half of its royalty oil production as RIK at the Prudhoe Bay Unit and sells it to Williams Alaska Petroleum, Inc. for use in Williams’ North Pole refinery. Royalties on the current natural gas production of about 4 MMcf/d have been paid in cash.

“Construction of an Alaska North Slope (ANS) gas pipeline is by no means certain,” the state said in explaining its solicitation, but if a 4 Bcf/d line is built, as proposed, the state’s share could be 500 MMcf/d by the end of the decade. The state has been urged to hold an open season now so that purchasers may then nominate capacity when the transportation open season begins.

“In recent months companies have expressed an interest in securing a gas supply from the state as a precondition to their participation in an open season for a future Alaska gas pipeline. Companies have suggested using the RIK gas for marketing in the Lower 48, for potential in-state petrochemical plants, and as a backstop to gas production for North Slope lease holders. The State also received a proposal in December 2000 to buy gas to fuel a power plant for a large Internet data center on the North Slope.”

Both Anadarko Petroleum and AEC Marketing urged the state to hold the open season, saying that while they are actively exploring for non-associated gas in the foothills of the Brooks Range, they will not have proved reserves by 2002. They are afraid if a pipeline open season is held now, all the space will be taken, and they will be shut out, possibly for the next 30 years until the 30 Tcf of associated North Slope gas is drained. If the producers contract for the state’s royalty production, they can safely bid on pipeline capacity, which could later be used for their own production.

AEC pointed out that by allowing producers other than the major North Slope producers to gain pipeline space, the state will ensure that other Alaska reserves will be developed. In addition “the royalty gas sale will help counter the dominant market position held by the Alaska Gas Producer Pipeline Team (AGPPT), which owns practically all of Alaska’s proven gas reserves.”

The independent producers pointed out that the RIK bid process “creates an opportunity for the state to capture real economic value for its royalty gas volumes years before the state will actually have royalty gas volumes available to sell.” Alaska will collect the minimum cash bonus and/or cash option payments included in the bidding requirements “some seven to nine years in advance of production and sales.”

Ken Thompson, president of Pacific Rim Leadership Development LLC, and past president of Arco Alaska, suggested the DNR should limit the initial sale of state royalty gas to between 100-250 MMcf/d for no more than five years, to give the state latitude to provide gas in-state if it is needed. Thompson said the state could not count on exploration success in the Cook Inlet to continue to provide gas for residential and commercial uses in the area. He also suggested the state should accept two bids instead of one “to create more future competition for gas marketing, keeping various players interested and involved.”

The bid proposal requires participants’ offers to include a minimum cash bonus of $1.00 per Mcf per day of maximum quantities the buyer proposed to purchase. For instance, if a buyer proposed to purchase 200 MMcf/d, it must include a minimum $200,000 cash bonus with its proposal. The state will refund the cash bonuses of the offers that are rejected. The cash bonuses of successful offers will be refunded without interest “if the Royalty Board or the Legislatures has not approved the final contracts by Aug. 31, 2002, or if an open season has not occurred by Dec. 31, 2004 or if an ANS gas pipeline is not in service or royalty gas has not been delivered to the pipeline by July 31, 2012.”

Bidders must offer a base price which will be the higher of a fixed dollar per volume unit price or the volume weighted average of the amounts paid by the state’s lessees which pay cash royalties. The cash royalties are based on the field market price of gas.

Information about the open season may be found at https://www.dog.dnr.state.ak.us/oil/.

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