Phillips, state reach settlement in royalty dispute

Posted: Friday, August 16, 2002

ANCHORAGE (AP) -- Phillips Alaska Inc. has agreed to pay about $6 million to the state to settle an oil royalty dispute.

''They'll be giving us a check, I think, next week,'' said Kevin Banks, petroleum market analyst with the state Division of Oil and Gas.

About 12.5 percent of North Slope oil production goes to the state as a royalty. When oil companies sell the oil, the state gets the proceeds minus certain expenses such as transportation costs.

Recently, both the state and Phillips proposed revisiting the complex formula used to calculate the amount the state receives.

In basic terms, the state felt that the old formula was not yielding fair market value for Alaska's oil, while Phillips thought that it was constrained from deducting higher hauling expenses brought about by the addition of new double-hulled tankers.

Two of those tankers, the Polar Endeavour and the Polar Resolution, already have begun hauling Alaska crude oil to West Coast refineries, with three more under construction. Each costs about $200 million and can carry just over 1 million barrels of cargo, or about one day's production of North Slope crude.

The $6 million is a retroactive settlement for January 2000 through February 2002, a period when the state's oil economics changed in part because Phillips hauls oil to a different lineup of West Coast ports from those used by Arco, its predecessor in Alaska.

The new formula favors the state by bumping up the ''destination value'' of royalty oil, thereby increasing proceeds to the state, Banks said. In the future, however, the additional shipping deduction given under the formula to Phillips could favor the oil company, he said.

Some of the $6 million will go into the Alaska Permanent Fund with the rest deposited in the Constitutional Budget Reserve Fund, into which legislators often dip to fund state services.

Alaska has a long and litigious history of tax and royalty disputes with oil companies.

Dawn Patience, spokeswoman for Phillips Alaska Inc., said only: ''We're happy we resolved the issue.''

''This is a fair settlement that fully protects state interests,'' said Gov. Tony Knowles. ''It also demonstrates our ability to quickly recognize changing circumstances and deal positively with the oil industry to resolve issues despite the complex and sometimes difficult nature of such negotiations.''

The Phillips agreement is similar to a deal the state signed in June with BP, another Alaska oil producer. BP already has paid $5 million in back royalties, according to state officials.

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