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Kicking the Tires
When we talk about Alaska getting a fair share for our oil, we’re usually discussing oil taxes. But there's another important piece we seldom discuss.
A share of every barrel out of the ground belongs to the owner (usually 1/8.) It's called "royalty" oil because monarchs used to own all the resources. Under Alaska's constitution and the Statehood Act, the oil belongs to all of us, through our state government. We get value from our royalty oil two ways. The first option is “royalty in value.” That's pretty straightforward. The oil companies sell some our royalty share along with all the other barrels and give us the cash they get for it.
The second option is called “royalty in kind.” That means the producer pumps the oil and we sell it ourselves. We’ve long done a mix. That lets us sell oil to refineries operating here in Alaska. Historically, we've gotten more value for it in two ways. First, when we sell it in state, we don’t have to deduct the cost of tankers to the Outside refineries where the rest of Alaska's oil gets sold. Second, adding value to our resources in state means more jobs and economic activity.
This can be dangerous stuff. Government sales of valuable resources to big businesses in the jurisdiction is a recipe for corruption in vast swaths of the world. Alaska has an extensive set of rules and processes to prevent that from happening here.
I tell you all this because one of our two RIK contracts got renegotiated this year. It's been reviewed by a board, and they supported going forward. Now the legislature is taking a close look before we give it the final thumbs up or down.
There are two big changes proposed from past contracts: how we calculate the price and how long the contract lasts.
For a long time, we've set the price for RIK oil by looking at the price Alaska oil gets on the west coast and then subtract an agreed-upon dollar amount. The flat dollar amount has been our best guess at the cost of getting oil from the wellhead to the refinery over the term of the contract. The lower that number, the more money the state makes.
But predictions are tricky. So the new contract doesn’t set a flat dollar amount. Instead, it would track the actual costs, less 24 cents per barrel. The quarter-per-barrel would be a little premium for Alaskans over market rates. In exchange for that premium, the refinery gets a guaranteed supply for its first 10-15,000 barrels per day from a very reliable provider. And nobody is left holding the bag if they guess wildly wrong about the cost of moving oil around in the later years of the contract.
That brings us to the second big change: the term. Alaska RIK contracts classically run between three and five years. This one would go three years with seven optional one-year extensions. That means it could be another decade before the legislature gets to give a thumbs-up-or-down on behalf of Alaskans.
I don't see any giveaways or sweetheart provisions in this contract proposal. But combining the move to a new way of figuring price with a much longer possible term gives me some butterflies in my tummy.
The legislature doesn’t get to modify RIK terms. It's yes or no from us. I’ll keep doing my homework to make sure this is a good deal for Alaskans before I cast my vote. I would welcome your thoughts!
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