Department approves temporary royalty relief for 5 Caelus leases on North Slope

The Alaska Department of Natural Resources has approved temporary royalty relief for five North Slope leases that it said could not economically be developed otherwise.

The reduced royalty rate would apply to five leases held by Caelus Natural Resources Alaska LLC that otherwise have rates of 12.5 percent and roughly 16.7 percent. The reduced rate of 5 percent comes with conditions. For example, Caelus will have to decide whether to move forward with the project by March 31.

Caelus also must submit a non-confidential project summary before commercial production of the Nuna development begins. The royalty modification would be rescinded if Caelus sells or transfers ownership of any of the affected leases.

Acting Natural Resources Commissioner Marty Rutherford said in a release that the benefits to the state, from added revenue, production, jobs and new information that will help other North Slope projects, "starkly outweigh" the cost of the royalty modification.

The department said the project is expected to begin producing oil in 2017 and produce 15,000 to 18,000 barrels of oil a day at its peak. The modification will be rescinded if sustained production does not begin by Sept. 30, 2017.

Caelus said in a statement that it was still evaluating the state's decision, but it was pleased to have reached this point. It said the state's finding "substantiates" the project.

Caelus applied for royalty modification for 11 leases, but the department found that only five leases are expected to include production from Nuna.

The department said it would increase the rate by which Caelus could deduct certain costs if at least 80 percent of the workers it hires are Alaskans. That would be in effect while the royalty modification is in effect.

Department spokeswoman Elizabeth Bluemink said by email that it's hard to estimate how long the royalty modification will last, given uncertainties with price and production. But she said it will be in effect until a gross revenue target of about $1.3 billion is met. Rates will be fully restored to their original levels four years after that.

The prior administration had recommended offering royalty relief. Bluemink said the final finding, issued late Tuesday, includes more information about how the state reached the conclusions that it did.