AGREEMENT FOR THE SALE AND PURCHASE
OF
STATE ROYALTY OIL
to
TESORO ALASKA PETROLEUM COMPANY
THE STATE OF ALASKA
Department of Natural Resources
Dated as of April 21, 1995
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS.................................................1
1.1 Commissioner ......................................1
1.2 Daily Royalty Oil..................................1
1.3 Day................................................1
1.4 Effective Date ....................................1
1.5 Field Cost Agreement. .............................1
1.6 Leases.............................................1
1.7 Lessee ............................................2
1.8 Month .............................................2
1.9 Oil................................................2
1.10 Point of Delivery .................................2
1.11 Royalty Oil........................................2
1.12 Royalty Settlement Agreements .....................2
1.13 Royalty Value .....................................2
1.14 TAPS ..............................................2
1.15 Unit Agreement.....................................2
ARTICLE II
SALE OF ROYALTY OIL ........................................3
2.1 Quantity...........................................3
2.2 Quality............................................4
2.3 Price of the Royalty Oil...........................5
2.4 Reopeners..........................................5
2.5 Point and Time of Delivery.........................7
2.6 Passage of Title and Risk of Loss..................7
2.7 Tesoro's Responsibility............................7
2.8 Transportation Arrangements .......................7
2.9 Absolute Obligations...............................8
2.10 Date of First Delivery.............................8
2.11 Performance Guaranty and Reservation Fee...........8
2.12 In-State Processing................................8
ARTICLE III
REPRESENTATION AND OBLIGATIONS OF TESORO....................9
3.1 Good Standing and Due Authorization................9
3.2 Financial Condition...............................10
3.3 Financial Statements .............................10
ii
ARTICLE IV
MEASUREMENTS AND TESTS ....................................11
ARTICLE V
PAYMENTS AND ACCOUNTING....................................11
5.1 Initial Billing...................................11
5.2 Initial Adjustment ...............................12
5.3 Subsequent Adjustments ...........................13
5.4 Payment...........................................13
5.5 Interest..........................................14
5.6 Late Payment Penalty..............................15
5.7 Payment to Lessee.................................16
5.8 Payment to Third Parties..........................16
ARTICLE VI
TERM ......................................................16
ARTICLE VII
DEFAULT OR TERMINATION.....................................17
7.1 Default...........................................17
7.2 Failure to Pay Debts..............................18
7.3 State's Remedies..................................19
7.4 Tesoro's Exclusive Remedies.......................20
ARTICLE VIII
DISPOSITION OF OIL.........................................20
8.1 Disposition of Oil Upon Default or Termination ...20
8.2 Inability to Receive Oil..........................20
8.3 No Right to Storage or Underlift .................21
ARTICLE IX
WAIVER.....................................................21
ARTICLE X
VALIDITY...................................................22
ARTICLE XI
FORCE MAJEURE AND CHANGE IN CONDITION......................22
11.1 Effect of Force Majeure ..........................22
11.2 Responsibility....................................22
iii
ARTICLE XII
NOTICES....................................................23
12.1 Method............................................23
12.2 Change of Address ................................24
ARTICLE XIII
RULES AND REGULATIONS......................................24
ARTICLE XIV
SOVEREIGN POWER OF THE STATE...............................24
ARTICLE XV
SECURITY...................................................24
15.1 Letter of Credit..................................24
15.2 Reduction of Term.................................26
ARTICLE XVI
PREFERENTIAL HIRING AND NON-DISCRIMINATION ................26
ARTICLE XVII ...................................................27
APPLICABLE LAW.............................................27
17.1 Alaska Law........................................27
17.2 Submission to Jurisdiction........................27
ARTICLE XVIII
WARRANTIES.................................................27
ARTICLE XIX
AMENDMENT..................................................28
ARTICLE XX
SUCCESSORS AND ASSIGNS.....................................28
ARTICLE XXI
HEADINGS ..................................................28
ARTICLE XXII
RECORDS....................................................28
22.1 Preservation of Records ..........................28
22.2 Inspection of Records of Parties..................29
ARTICLE XXIII
INTERPRETATION OF TERMS AND CONDITIONS ....................30
iv
ARTICLE XXIV
COUNTERPARTS ..............................................30
SIGNATURES......................................................31
ACKNOWLEDGEMENT ................................................32
EXHIBIT A.......................................................35
v
AGREEMENT FOR THE SALE AND
PURCHASE OF ROYALTY OIL
THIS AGREEMENT is effective as of April 21, 1995 by and between the State
of Alaska (State) and Tesoro Alaska Petroleum Company, a Delaware corporation
with its principal offices located at 3230 C Street, Anchorage, Alaska 99503 and
Tesoro Petroleum Corporation, a Delaware corporation with its principal offices
located at 8700 Tesoro Drive, San Antonio, Texas 78217 (collectively Tesoro).
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the following
respective meanings:
1.1 "Commissioner" means the Commissioner of the Alaska Department
of Natural Resources or his designee.
1.2 "Daily Royalty Oil" means the quantity of Royalty Oil produced
by the Lessees from the Prudhoe Bay Unit Area in a Day except as provided in
Article 2.1 (b).
1.3 "Day" means a period of twenty-four (24) consecutive hours,
beginning at 12:01 a.m., Alaska Standard Time.
1.4 "Effective Date" shall have the meaning set out in Article VI.
1.5 "Field Cost Agreement" means the Prudhoe Bay Royalty Settlement
Agreement effective April 1, 1980.
1.6 "Leases" means the Oil and Gas leases which are subject to the
terms of the Prudhoe Bay Unit Agreement.
1
1.7 "Lessee" means any person owning a working interest in any of
the Leases.
1.8 "Month" means the period beginning at 12:01 a.m., Alaska
Standard Time, on the first Day of the calendar Month and ending at the same
time on the first Day of the next succeeding calendar Month.
1.9 "Oil" means the same as the word "oil" under the Leases and the
Unit Agreement, except where inconsistent with Articles 2.1(b) and 2.2 of this
Agreement, in which case Articles 2.1(b) and 2.2 shall control. For purposes of
this Agreement, "Oil" shall also include natural gas liquids ("NGLs").
1.10 "Point of Delivery" shall have the meaning set out in Article
2.6.
1.11 "Royalty Oil" means the Oil which the State may take in-kind
(in amount) as its royalty under the Leases whether or not the State has elected
to take or is taking that royalty in-kind except as provided in Article 2.1(b).
1.12 "Royalty Settlement Agreement" means the written royalty
settlement agreements between the State and Exxon Corporation ("Exxon") dated
December 31, 1991.
1.13 "Royalty Value" means the royalty value of all liquid
hydrocarbons from the Prudhoe Bay Unit or the Prudhoe Bay Unit initial
Participating Areas as provided in Article 2.1(b) calculated in accordance with
the Royalty Settlement Agreement for West Coast placements as explained in
Article 2.3.
1.14 "TAPS" means the Trans Alaska Pipeline System.
1.15 "Unit Agreement" means the Prudhoe Bay Unit Agreement
effective April 1, 1977, by and between the Lessees and the State, as amended
from time to time.
2
ARTICLE II
SALE OF ROYALTY OIL
2.1 Quantity.
2.1(a) Prudhoe Bay Unit Quantity. The State agrees to sell to
Tesoro and Tesoro agrees to buy from the State that amount of Oil equal to 30.0
percent of the Daily Royalty Oil (Maximum Quantity). At any time upon six
months and ten days written notice, Tesoro may: (l) decrease the Maximum
Quantity; or (2) terminate this Agreement, in which case Tesoro shall not make
any payments as described in Article 2.11 .
Subject to the limitations in this article, Tesoro may temporarily
decrease or increase the amount of Oil to be tendered, but not the Maximum
Quantity provided in this article. To increase or decrease the amount of Oil to
be tendered, Tesoro must give the State at least six Months and ten Days written
notice. If, however, the increase or decrease is less than ten percent of
Tesoro's then current in-kind nomination, Tesoro must give at least one hundred
Days written notice. In addition, he new tendering will take effect on the
first Day of the Month after the applicable notice period expires.
The volume of Daily Royalty Oil available to the State will vary
and may be interrupted from time to time, and depends upon a variety of factors,
including the rate of production from the Leases. The State disclaims and
Tesoro waives any representation, covenant or warranty, expressed or implied,
that a specific quantity or the total or daily, monthly, average, or aggregate
volume of Royalty Oil will be sold or tendered under this Agreement. The State
warrants that it has good title to the Oil tendered under this Agreement.
3
If the State underlifts or stores Royalty Oil at the Prudhoe Bay
Unit, or if the State recovers underlifted or stored Royalty Oil, the quantity
of Oil tendered under this Agreement shall be calculated as if no Royalty Oil
were underlifted or stored or recovered.
2.1(b) Initial Participating Areas Quantity. The State may
choose, in its sole discretion, to sell to Tesoro, and Tesoro agrees to buy from
the state, oil that is produced solely from the initial Participating Areas of
the Prudhoe Bay Unit, as defined in the Unit Agreement, rather than from all
participating areas and Leases within the Prudhoe Bay Unit. If the State so
elects, the Maximum Quantity of Oil shall equal 35.2 percent of the Royalty Oil
produced from the initial Participating Areas in a Day. If the State so elects,
the terms Daily Royalty Oil, Oil, and Royalty Oil shall have the same meaning
set forth in Article I as limited in this article.
2.2 Quality. The Oil sold shall be the same quality as the
Royalty Oil delivered by the Lessees to the State at the Point of Delivery from
the Prudhoe Bay Unit Area. The quality of the Oil sold may vary from time to
time. The State disclaims, and Tesoro waives, any guarantee, representation, or
warranty, either expressed or implied, of merchantability, fitness for use, or
suitability for any particular use or purpose, or otherwise, of any of the Oil
delivered under this Agreement or as to any specific, average, or overall
quality or characteristic of Oil to be sold or tendered under this Agreement.
Tesoro expressly waives any claim that any liquid hydrocarbons made available to
the State by the Lessees, including such substances as crude oil, condensate,
natural gas liquids, or return oil from the Prudhoe Bay Unit Crude Oil Topping
Plant, that may be blended with crude by the Lessees before the Point of
Delivery and tendered as a common stream by the Lessees to the State as Royalty
Oil are not Oil, for purposes of this Agreement.
4
2.3 Price of the Royalty Oil. The price each Month for Oil
purchased under this Agreement shall be the Royalty Value for that Month of Oil
delivered to the West Coast by Exxon from the Prudhoe Bay Unit production. The
Royalty Value shall be determined according to the Royalty Value calculation
stated in Article 3.2 c) of its Royalty Settlement Agreement, except that the
Average Valdez Netback shall be the West Coast Valdez Netback. Exhibit A is an
illustrative calculation of the price if Tesoro had purchased Oil during the
Month of January, 1995.
If any applicable law of the United States of America or any rule
or regulation promulgated by a federal agency will, in the sole judgment of the
State, operate to prohibit or prevent the State from receiving the full amount
due under the above provision, Tesoro's obligation to pay the amount of the
purchase price in excess of the amount permitted will be suspended or adjusted
to the minimum extent required for the State to comply with that law, rule or
regulation.
2.4 Reopeners.
2.4(a) Export Ban Reopener. Neither Tesoro nor the State
shall have the right to reopen this Agreement, unless the export ban on Alaska
North Slope crude now in effect is lifted. Anytime after the export ban is
lifted, either Tesoro or the State may reopen this Agreement for purchase price
only, by giving the other party one month's prior written notice. Upon issuance
and receipt of a notice to reopen, Tesoro and the State will promptly commence
good faith negotiations in an attempt to establish a new purchase price. If
Tesoro and the State cannot agree on a price within three months after the
written notice to reopen, either Tesoro or the State may terminate this
Agreement upon nine months written notice to the other. The purchase price for
Oil tendered during any period pending termination shall be the price in effect
immediately before giving the
5
notice of intent to reopen. If a new purchase price is agreed to by Tesoro and
the State, the new price shall be effective for Oil delivered in the month
following the Agreement.
2.4(b) Royalty Settlement Agreement Reopener. Tesoro shall
not intervene or otherwise participate in any way regarding litigation, styled
ANS Royalty Litigation. Case No. 1-JU-77-847, any future royalty settlement
agreements with the Lessees, or reopeners or other discussions under or
pertaining to royalty settlement agreements. Any judgment resulting from the
ANS Royalty Litigation, any future royalty settlement agreements, or any
reopener under the Royalty Settlement Agreement shall be conclusively binding
upon Tesoro whether or not Tesoro agrees with or consents to the terms of any
such judgment, settlement, or reopener. Furthermore, Tesoro has no independent
right to invoke any of, the provisions of the Royalty Settlement Agreement. If
the Royalty Value is modified in the future as a result of a modification of the
Royalty Settlement Agreement, a corresponding retroactive modification will be
made to the price term of this Agreement and interest will apply to the
modification, whether resulting in an overpayment or underpayment, as set forth
in Article 5.6. Tesoro agrees to be conclusively bound by any such modification
agreed to by the State and Exxon.
Nevertheless, due to potential unpredictable increased costs to
Tesoro posed by any changes to Article III of the Royalty Settlement Agreement
and/or any changes made under the reopener procedures of Article IV of the
Royalty Settlement Agreement, the State shall give Tesoro notice of such changes
or a Notice of Reopener initiated by Exxon or the State. Such notice shall
include information on the nature of such changes and/or the reopener, the
requested effective date of any such changes or proposed changes, and the
position taken by Exxon and the State. Any changes
6
and/or Reopener action under the Royalty Settlement Agreement will give Tesoro
the right to terminate this contract upon six Months and ten Days written notice
to the State.
2.5 Point and Time of Delivery. Simultaneously with receipt of
its Royalty Oil from its Lessees, the State shall tender the Oil to Tesoro where
the State receives the Royalty Oil from its Lessees. That point presently
agreed to by the State and its Lessees in Article 2.3 of the Field Cost
Agreement is the TAPS Pump Station No. 1 Prudhoe Bay Custody Transfer meter
("Transfer Meter").
2.6 Passage of Title and Risk of Loss. Title and risk of loss to
the Oil sold under this Agreement shall pass from the State to Tesoro for all
purposes when the State tenders the Oil at the Point of Delivery.
2.7 Tesoro's Responsibility. Tesoro shall be responsible for
the Oil after passage of title. Tesoro will indemnify and hold the State
harmless from and against any and all claims, costs, damages (including
reasonably foreseeable consequential damages), expenses, or causes of action
arising from or in connection with any transaction or event which relates to the
Oil after title has passed to Tesoro.
2.8 Transportation Arrangements. Tesoro shall make all necessary
arrangements for transporting the Oil sold under this Agreement from the Point
of Delivery, including satisfaction of line fill obligations and storage tank
bottom requirements of the TAPS, if any. If requested by the State, Tesoro
shall submit specific information concerning its arrangement for transportation
of the Oil sold under this Agreement through and away from the TAPS and for the
resale or other disposal of the Oil. Such information may include the specific
tenders of Oil made to the TAPS and identification of tankers, if any, which
will transport the Oil. In addition, Tesoro will provide the
7
State, if requested by the State, with satisfactory evidence or reasonable
assurance of the existence and continuing validity of adequate arrangements for
the transportation or disposal of the Oil subject to this Agreement. Failure to
provide information, evidence, or assurances requested will, at the State's
election by notice to Tesoro, be a material default under this Agreement.
2.9 Absolute Obligations. The obligations of Tesoro to accept,
pay for, and arrange for the transportation of the Oil tendered or sold under
this Agreement are absolute and will not be excused or discharged by the
operation of any disability of Tesoro, event of force majeure, impracticability
or performance, change in conditions, or any other reason or cause.
2.10 Date of First Delivery. The date of First Delivery will be
the first Day of January 1,1996.
2.11 Performance Guaranty and Reservation Fee. If Tesoro does
not take the Maximum Quantity, Tesoro shall pay to the State, in addition to the
purchase price on the actual quantity taken, an amount equal to .75 percent of
the purchase price per barrel per Day on the difference between the Maximum
Quantity and the actual quantity tendered to and accepted by Tesoro for each Day
Tesoro does not take the Maximum Quantity.
2.12 In-State Processing. Tesoro agrees to use best efforts to
insure that any and all of the Royalty Oil tendered under this Agreement will be
processed through Tesoro's refinery near Nikiski, Alaska, or will be exchanged
for other crude oil which shall be processed at that refinery. "Process" means
the manufacture of refined petroleum products. In no event, however, shall the
quantity of Royalty Oil, which must be processed, be less than 80 percent of the
volume of Royalty Oil tendered under this Agreement. "Exchange" means: (l)
direct trades of equal volumes of crude oil; (2) trades of crude oil involving
either cash or volume adjustments, or both, provided that those
8
adjustments relate solely to quality or location differences; (3) sequential
transactions in which Tesoro receives back crude oil from a party other than the
party which receives the Royalty Oil in a trade from Tesoro; or (4) matching
purchases and sales of crude oil. The terms under which Tesoro receives crude
oil in any exchange shall not differ in any significant term from the terms
under which Tesoro delivered Royalty Oil except for terms which adjust for
differences in quality and location. Tesoro agrees that any trade or exchange
shall not reduce the price to be paid to the State and that trades or exchanges
shall be at no cost or expense to the State.
Tesoro's obligation to process Royalty Oil or exchanged oil
in-State may only be suspended or excused under the provisions of Articles VIII
and XI.
The State may, in its sole discretion, waive the in-State
processing requirement in whole or in part, if State is satisfied that Tesoro is
using its best efforts to process the Royalty Oil tendered or the oil exchanged
for Royalty Oil tendered under this Agreement at Tesoro's Alaska refinery and
that the waiver would not be contrary to the underlying intent of the other
provisions of this Agreement.
ARTICLE III
REPRESENTATION AND OBLIGATIONS OF TESORO
Tesoro warrants, represents, and agrees:
3.1 Good Standing and Due Authorization. Tesoro is, and at all
times during the operation of this Agreement shall remain, a corporation
organized and existing under and by virtue of the laws of the United States or
of any State, territory or the District of Columbia, and qualified to do
business in, and in good standing with, the State of Alaska. Tesoro has all
necessary corporate power
9
to enter into this Agreement and to perform the covenants and obligation under
this Agreement. All necessary corporate action has been taken to authorize
Tesoro to enter into this Agreement and perform its covenants and obligations
under this Agreement.
3.2 Financial Condition. The financial information submitted to
the State is complete and correct and fairly presents Tesoro's financial
condition when the information was submitted to the State. The financial
information was prepared in accordance with generally accepted accounting
principles consistently applied. Since the date the information was submitted,
the condition, business, and properties of Tesoro have not been materially
adversely affected in any way. Tesoro agrees to inform the State immediately
if there is any material adverse change in its condition, business, or
properties which may have an appreciable adverse effect on its ability to
perform under this Agreement. Tesoro, in addition, will immediately inform the
State of any significant change in ownership of Tesoro, affiliates, parent
company, and of any change in Tesoro's operations or Agreements, which may
appreciably affect Tesoro's performance under this Agreement.
3.3 Financial Statements. As soon as possible after the end of
the fiscal year of Tesoro, and in any event within one hundred twenty Days
thereafter, Tesoro will furnish to the State, at Tesoro's sole cost and expense,
a report or a complete copy of a report in a form to be prescribed from time to
time by the State which will include Tesoro's balance sheet as of the close of
the fiscal year and the income statement for that year, prepared in each case in
accordance with generally accepted accounting principles consistently applied by
certified public accountants of recognized standing. For purposes of complying
with this article, Tesoro may submit, and the State will accept, the annual
report of Tesoro Petroleum Corporation filed with the United States Securities
and Exchange Commission pursuant to Sec. 13 or 15 (d) of the Security Exchange
Act of 1934.
1O
ARTICLE IV
MEASUREMENTS AND TESTS
The quantity and quality of Oil sold under this Agreement shall be
determined at the Point of Delivery. Procedures and methods for measuring and
metering the Oil sold under this Agreement shall be in accordance with the
practices then in effect in the Prudhoe Bay Unit.
ARTICLE V
PAYMENTS AND ACCOUNTING
5.1 Initial Billing. The State will send to Tesoro, on or
before the tenth business Day of each Month after delivery of Oil, an invoice
statement of account of all Oil estimated to have been measured at the Transfer
Meter and tendered to Tesoro under this Agreement during the immediately
preceding Month according to the best information available to the State, the
estimated purchase price applicable to those deliveries, and the total amount
due (Initial Billing Invoice). The estimates will be made by the State
according to the best information reasonably available to the State. The State
may render its Initial Billing Invoice to Tesoro based in part upon information
reported by the Lessees to the State, information published by the U.S.
Government, and information published in Platt's Oilgram Price Report or any
other publicly available report. The State shall thereafter adjust its Initial
Billing Invoice under this article as soon as more accurate information
concerning the quantity and purchase price of Oil delivered each Month is
available. The State, however, shall not be required to adjust the Initial
Billing Invoice before the sending of the next Month's invoice statement of
account.
11
5.2 Initial Adjustment. After the Initial Billing Invoice under
Article 5.1, the next Monthly invoice will also state the State's initial
adjustments, plus interest, to be made, if any, to the Initial Billing Invoice
rendered in the immediately preceding Month, in accordance with any additional
or more accurate information which may have become available to the State
("Initial Adjustment Invoice"). Whether or not initial adjustments are made,
however, subsequent adjustments may be made under Article 5.5.
5.3 Subsequent Adjustments. Tesoro acknowledges that after the
Initial Billing and Initial Adjustment Invoices, more accurate information
concerning the quantity of or purchase price for Royalty Oil tendered may become
available to the State. If any such information should later become available
to the State, it shall furnish a corrected invoice statement of account to
Tesoro ("Subsequent Adjustment Invoice") and the State will adjust the amount
previously billed; and Tesoro will pay, or the State will credit or refund, the
amount of any Subsequent Adjustment Invoice plus interest. If the State should
render a Subsequent Adjustment Invoice to Tesoro, any amount to be credited or
refunded from the State to Tesoro or paid by Tesoro to the State will be
refunded or paid within thirty Days after the date of the Subsequent Adjustment
Invoice.
The parties recognize that subsequent adjustments may be necessary
after December 31, 1998, and, accordingly, the provisions of Article V will
survive any termination of this Agreement. Any Subsequent Adjustment Invoice
rendered more than six years after the date of delivery will bear interest for
only six years from the date accrued as defined in Article 5.5. This limitation
on interest does not apply to Subsequent Adjustment Invoices resulting from: (l)
regulatory, reopener or court proceeding (including appeals) commenced during
the six year period
12
whether or not the Tesoro or the State is a party and (2) bona fide audits by
the State of Exxon commenced during the six year period.
5.4 Payment. Tesoro will pay the Initial Billing Invoice on the
third business Day of the month following delivery or within three business Days
after the date of the invoice whichever is later; and the Initial Adjustment
Invoice within three business Days of the date of the invoice and on any
Subsequent Adjustment Invoice within 30 Days of the date of the invoice.
Payment shall be made without any deduction, set off, or withholding, by wire
transfer of immediately available funds to the State's account at the following
address:
State Street Bank & Trust Company
Boston, Massachusetts
ABA #011000028
For credit to the State of Alaska
General Investment Fund, AY01
Account #00657189
Attn: Kim Chan, Public Funds
Payment may be made in such other manner or to such other address
as the State may specify in the invoice statement of account or by other written
notice. All other payments to be made under this Agreement shall be paid in the
same manner. If payment is due on a Saturday, Sunday, or legal holiday of the
place where payment is to be received, payment shall be made on the next
following business Day. It is recognized that the State may bill, and that
Tesoro will pay, amounts that are based upon confidential information held or
received by the State. If confidential information is used as the basis for a
billing, then the State will furnish Tesoro, upon its request, with the
certified statement of the Commissioner that the amounts billed are correct
based upon the best information available to the State. If a dispute concerning
a bill arises, Tesoro agrees to pay the full amount billed by the State, except
for obvious clerical mistakes, pending final resolution of the dispute.
13
5.5 Interest. The Amount of all sums, which are not paid when
due under this Agreement or which are later determined to be due as an
adjustment, shall bear interest from the date accrued until paid in full at the
rate as provided in AS 38.05.135(d) or as that statutory provision may later be
amended. Currently, that interest rate in a calendar quarter is at the rate of
five percentage points above the annual rate charged member banks for advances
by the 12th Federal Reserve District as of the first Day of that calendar
quarter, or at the annual rate of 11 percent, whichever is greater, compounded
quarterly as of the last Day of that quarter. The term "date accrued" means the
date of the "Initial Billing plus three business Days." Interest shall apply to
both adjustments for overpayments and underpayments.
The following illustrates from what date interest will run:
January 1-31,1996--Tesoro takes 1996 January production;
February 9, 1996 -- State sends Tesoro the Initial Billing Invoice
for 1996 January production;
February 14, 1996 (Initial Billing plus three business Days) --
Tesoro must pay the Initial Billing Invoice for January 1996
production. If Tesoro does not pay on this day, the Initial
Billing Invoice bears interest from this date plus a late
payment penalty.
March 8, 1996 -- State sends Tesoro the Initial Adjustment Invoice
for January 1996 production. Tesoro owes the State an
additional sum.
March 13,1996 -- Tesoro must pay the Initial Adjustment Invoice
plus interest from February 14, 1996 throught the payment
date.
14
January 10, 1997 -- State sends Tesoro a Subsequent Adjustment
Invoice for January 1996 production. Tesoro is entitled to a
credit. State pays interest from February 14, 1996 through
January 10, 1997.
April 10, 2006 -- The State is notified by Exxon that, due to a
clerical error, it has revised the Royalty Value for January
1996.
April 17, 2006 -- State sends Tesoro another Subsequent Adjustment
Invoice for January 1996 production after Exxon a reports a
clerical error in its calculation of the Royalty Value.
Tesoro owes the State an additional sum.
May 17, 2006 -- Tesoro must pay the Subsequent Adjustment Invoice
for January 1996 production plus interest from calculated
February 14, 1996 through February 14, 2002. If Tesoro does
not pay the Subsequent Adjustment Invoice on this date,
interest will accrue from February 14, 1996 through the date
the payment is made and Tesoro must also pay a late payment
penalty.
November 10, 2006 -- Court settles dispute between the TAPS
carriers and shippers; Carriers are awarded a higher tariff
for January 1996.
November 30, 2006 -- State sends Tesoro a Subsequent Adjustment
Invoice. Tesoro is entitled to a refund which includes
interest calculated from February 14, 1996 through November
30, 2006.
5.6 Late Payment Penalty. If Tesoro fails to make a full
payment within three business days of the date of either an Initial Billing
Invoice or Initial Adjustment Invoice, or within thirty Days of the date of any
Subsequent Adjustment Invoice, then in addition to the amount due
15
plus interest from the date accrued until the date of actual payment, Tesoro
will pay an amount equal to five percent of the principal payment due as a late
payment penalty.
5.7 Payment to Lessee. At the request of the State in the
invoice statement of account or otherwise in writing, Tesoro shall pay all or
any portion designated by the State of that payment required to be made to one
or more of the Lessees at an address or addresses and in the manner designated
by the State. The payment will be made within the time limit specified in
Article V. The State may authorize and designate a third party to make the
request and designate the amount, manner and place of payment under this
provision. Unless otherwise specified, the balance of the payment due, if any,
and payment for subsequent Months, shall be made in accordance with Article V.
5.8 Payment to Third Parties. The State may direct that Tesoro
pay any amount due or which may become due directly to a third party in a manner
and time as may be directed by the State in written notice to Tesoro if, in the
State's sole discretion, the payment to the third party will assist the State in
monitoring or enforcing this Agreement.
ARTICLE VI
TERM
This Agreement shall become effective upon execution by the
parties. The State's obligation to sell and Tesoro's obligation to buy Royalty
Oil becomes effective immediately. Deliveries under this Agreement shall begin
on January 1, 1996, and shall end December 31, 1998. The provisions of Article
V shall survive the termination of this Agreement.
16
ARTICLE VII
DEFAULT OR TERMINATION
7.1 Default. If any one or more of the following events
("Events of Default") occur, then the State, at the its sole option, may
terminate or suspend its obligation to tender and sell Oil and exercise any one
or more of the rights and remedies provided in this Agreement:
(i) At any time, Tesoro (a) repudiates any of its
covenants or obligations under this Agreement, or (b)
fails, within five Days, after written request from
the State to provide the State with written
affirmation of this Agreement and of Tesoro's
intention to perform under this Agreement (together
with evidence or assurances of transportation
arrangement pursuant to Article 2.8 reasonably
satisfactory to the State);
(ii) Tesoro does not pay in full any sum owed under this
Agreement at the time when payment is due;
(iii) Tesoro fails to observe or perform any of its other
covenants and obligations under Article II;
(iv) Tesoro does not perform any act required or
contemplated under this Agreement and: (a) the
non-performance cannot be cured; (b) the
nonperformance continues for more than thirty Days
after the State has notified Tesoro of its
nonperformance; or (c) Tesoro has failed to perform
the same or any other act required or contemplated
under this Agreement;
17
(v) There is a material adverse change in Tesoro's
condition, business, or property which may appreciably
affect its ability to perform any of its obligations
under this Agreement and Tesoro is unable or unwilling
to give the State adequate assurance of continued
performance either within five Days of a request for
such an assurance or within such other shorter time
period as the State may request under the
circumstances;
(vi) Any representation or warranty made by Tesoro in this
Agreement was materially false or incorrect when made;
or
(vii) Tesoro's failure or inability for any reason
(including reasons beyond Tesoro's control) to
maintain the Security described in Article XV,
notwithstanding Tesoro's continuing willingness and
ability to perform its other obligations and covenants
under the Agreement.
7.2 Failure to Pay Debts. If Tesoro becomes unable to pay any
of its debts when due, or should otherwise become insolvent (regardless how that
insolvency may be evidenced), Tesoro will immediately give written notice of
that fact to the State. Whether that notice is given, if Tesoro becomes unable
to pay any of its debts when due or should otherwise become insolvent, the
State's obligation to tender and sell Oil will automatically and immediately
terminate without any requirement of notice or other action by the State;
however, Tesoro will nevertheless be and remain liable for payment and
performance of all of its obligations and covenants under this Agreement
regarding Oil actually tendered by the State to and after any such termination.
Within thirty Days after receipt of Tesoro's notice or, if no notice is given,
after the State otherwise becomes aware (as
18
determined in the State's sole discretion) of Tesoro's insolvency, the State
will have the right, upon written notice to Tesoro, to reinstate all of the
State's and Tesoro's obligations under this Agreement retroactively to the date
of termination.
7.3 State's Remedies. If any Event of Default occurs or if the
State's obligation to tender and sell Oil under this Agreement is terminated or
suspended, all of Tesoro's obligations accrued but not otherwise due and payable
under this Agreement will immediately be due and payable in full. In addition,
Tesoro will indemnify and hold the State harmless from and against all other
liability, damages (including reasonably foreseeable consequential damages),
costs, losses and expenses (including reasonable attorney's fees and
disbursements) incurred by the State and arising out of the Event of Default,
termination, or suspension. The State shall have the right cumulatively to
exercise any and all other rights and remedies and to obtain all other relief
available under applicable law or at equity, including mandatory injunction and
specific performance.
Additionally, in its sole discretion, the State, upon occurrence
of any Event of Default: (1) may dispose to third parties any or all Royalty Oil
to be tendered and sold under this Agreement and (2) may release Tesoro from the
in-state processing obligations set forth in Article 2.12 until the Event of
Default no longer exists or the obligation of Tesoro to take Oil under this
Agreement expires. If the State disposes of Oil to third parties, or if Tesoro
is released from Article 2.12, whether or not this Agreement is terminated,
Tesoro will nevertheless remain liable for the difference between the purchase
price for that Oil under this Agreement and the price received by the State by
disposition, including all of the expenses (including reasonable attorneys' fees
and costs), and losses incurred by the State arising out of the Event of Default
or disposition.
19
7.4 Tesoro's Exclusive Remedies. Upon any breach of, or default
in performance of any of the State's covenants or obligations under this
Agreement, Tesoro agrees that its remedies will not include a temporary
restraining order or preliminary injunction preventing the State from taking any
action regarding the Royalty Oil which is the subject of this Agreement.
ARTICLE VIII
DISPOSITION OF OIL
8.1 Disposition of Oil Upon Default or Termination. Tesoro
recognizes that the State may be required to give up to six Months notice to the
Lessees (or ninety Days if the amount of increase or decrease is less than ten
percent of the then current nominations or marine transportation is available)
to increase or decrease the amount of Daily Royalty Oil to be taken in-kind.
Tesoro agrees that the State's electing to invoke its rights to return to taking
its Royalty Oil in-value on less than six Month's prior notice, or to attempt to
secure a waiver of any condition or requirement, is at the State's sole
discretion. Notwithstanding termination of this Agreement for any reason,
Tesoro shall continue to take and purchase the State's Royalty Oil in the
amount and for the price set forth in this Agreement for up to six Months
following termination if the State, in its sole discretion, so requires.
8.2 Inability to Receive Oil. If for any reason, Tesoro is
unable or refuses to accept or receive any Oil tendered under this Agreement,
Tesoro shall nevertheless be and remain responsible for the disposal of that Oil
and for paying the State for the Oil as though it had been received and accepted
by Tesoro unless the State, in its sole discretion, elects to waive this
requirement. To secure Tesoro's obligations under Article 8.2 and Article 2.9,
Tesoro shall, if the State requests, assign or otherwise transfer to the State
or its designee all or part right, title and interest
20
of Tesoro under any nominations, Leases, agreements, contracts, charter parties
and other arrangements for the transportation of the Oil sold under this
Agreement through and away from the TAPS; provided, that the State shall not
have any liability or obligations under any such nominations, Leases,
agreements, contracts, charter parties or other arrangement unless, and to the
extent that, the State shall actually exercise its rights to succeed to Tesoro's
interest under them and shall obtain the benefits of them.
8.3 No Right to Storage or Underlift. Tesoro waives and
disclaims any interest or right that it may assert to storage of Royalty Oil,
including by underlift or other means, to which the State is or may become to be
entitled under the Leases or any other agreement.
ARTICLE IX
WAIVER
The failure of either party to insist upon strict performance of
any provision of this Agreement shall not constitute a waiver of, or estoppel
against, asserting the right to require that performance in the future. A
waiver or estoppel in any one instance shall not constitute a waiver or estoppel
with respect to a later breach of a similar nature or otherwise. A course of
performance established by a party shall also not estop the other party from
complaining of a later breach similar in nature.
21
ARTICLE X
VALIDlTY
If any provision or clause of this Agreement or application of this
Agreement is held invalid, that invalidity shall not affect other provisions or
application of this Agreement which can be given effect without the invalid
provision or application. If, however, an invalidity should operate to impair
any material right or remedy of a party to this Agreement, that party may
terminate this Agreement by notice to the other.
ARTICLE XI
FORCE MAJEURE AND CHANGE IN CONDITION
11.1 Effect of Force Majeure. Except for Tesoro's obligations
to pay for Oil tendered and to accept and dispose of Royalty Oil, neither party
shall be liable for any failure to perform when performance is prevented, in
whole or in substantial part, by force majeure after good faith efforts to
perform. The term 'force majeure" shall mean an event or condition not within
the reasonable control of the party claiming the benefit of this excuse. If,
however, any material obligation of Tesoro is excused or suspended by a force
majeure for sixty successive Days or more, the State will have the right to
terminate this Agreement. Before the State exercises its right to terminate,
Tesoro and the State shall in good faith negotiate to restore the benefits and
obligations of the force majeure condition.
11.2 Responsibility. If a party believes that force majeure has
occurred, the party shall immediately notify the other party of its claim of
force majeure. If force majeure occurs, that occurrence shall, so far as
possible, be remedied with reasonable diligence. Except for Tesoro's
22
obligations to pay for Oil tendered and to accept and dispose of Oil, the
disabled party's obligations to perform that are affected by the force majeure
shall be suspended from the time that notification occurs until the disability
should have been remedied with reasonable diligence, and for no longer.
ARTICLE XII
NOTICES
12.1 Method. All notices, requests, demands or statements shall
be in writing, and may be delivered personally, telecopied, or sent by
registered or certified United States mail, postage prepaid, with a return
receipt requested, to the party to be notified. Notice deposited in the mail in
this manner shall be effective upon the expiration of seven Days after it is so
deposited or upon the date of receipt, whichever is earlier. Notice given in
any other manner shall be effective only if and when received by the addressee.
For the purposes of notice, the address of the parties shall be as follows:
If to the State: State of Alaska
Commissioner of Natural Resources
400 Willoughby Avenue
Juneau,Alaska 99801
and
Director, Division of Oil and Gas
P. 0. Box 107034
Anchorage, Alaska 99510-0734
Telecopy Number: (907)562-3852
If to Tesoro:
Gaylon H. Simmons
Tesoro Alaska Petroleum Company
8700 Tesoro Drive
San Antonio, Texas 78217
Telecopy Number: (210) 283-2031
23
12.2 Change of Address. Each party may change its address for
notice by giving written notice of the change.
ARTICLE XIII
RULES AND REGULATIONS
This Agreement is subject to all present and future valid laws,
orders, rules and regulations of the United States, the State of Alaska, and any
duly constituted agency of the State of Alaska.
ARTICLE XIV
SOVEREIGN POWER OF THE STATE
This Agreement shall not be interpreted as a limit on the State of
Alaska's exercise of any of its sovereign or regulatory powers, whether
conferred by constitution, statute or regulation, including, but not limited to,
its regulatory power over the Leases. Its exercise of any sovereign or
regulatory power will not operate or be deemed to enlarge any rights of Tesoro
or to limit or impair any obligations or liability of Tesoro under this
Agreement.
ARTICLE XV
SECURITY
15.1 Letter of Credit. Seventy five Days before the Date of
First Delivery, Tesoro shall cause to be issued and delivered to the State an
irrevocable stand-by letter of credit, with an effective date no later than the
Date of First Delivery, issued for the benefit of the State by a State or
24
national banking institution of the United States ("Issuer"), which is insured
by the Federal Deposit Insurance Corporation and has an aggregate capital and
surplus of not less than One Hundred Million Dollars ($100,000,000), or other
banking institution acceptable to the State in its sole discretion. The
principal face amount of such letter of credit shall be a sum estimated by the
Commissioner, in his sole discretion, to be equal to the aggregate purchase
price for the approximate total amount of Oil to be tendered by the State to
Tesoro during the first seventy five Days following the Date of First Delivery.
The letter of credit shall be in a form satisfactory to the Commissioner, but in
any event shall not require any documents to be submitted in support of drafts
drawn against this letter of credit other than the certified statement of the
Commissioner or his designee and the Attorney General of the State of Alaska or
his designee that Tesoro is liable to the State for a sum equal to the amount of
such draft, and that sum is due and payable in full and has not been timely
paid. The letter of credit must be renewed seventy five Days before its
expiration so that a letter of credit is continuously valid for seventy five
Days after the date of the last delivery of Royalty Oil. If a replacement
letter of credit, in a form satisfactory to the Commissioner in his sole
discretion, is not received seventy five Days before the expiration of the
existing letter of credit, then Tesoro shall be deemed to have materially
breached this Agreement, there shall have occurred an event of default under
Article 7.1, and all obligations of Tesoro accrued, but not otherwise due and
payable under this Agreement, will immediately become due and payable in full.
If the State has reasonable grounds for asserting any claims
against Tesoro and does assert those claims in an aggregate amount in excess of
the aggregate principal face amount of the letter of credit then in effect,
Tesoro shall, upon the State's request (whether or not Tesoro may deny, reject
or otherwise resist such claims), cause the principal face amount to be
increased by an amount
25
equal to the excess. Tesoro shall also automatically increase the principal
face amount, without request from the State, whenever the face amount is less
than the expected purchase price of seventy five Days of Oil tenders, to an
amount equal to the expected purchase price of seventy five Days of Oil tenders.
Upon approval of the State in its sole discretion, Tesoro may decrease the
principal face amount if the face amount is more than the expected purchase
price of seventy five Days of Oil tenders to an amount equal to the expected
purchase price of seventy five Days of Oil tenders.
The letter of credit must allow drafts to be drawn and presented to
the Issuer up to and including the 75th Day after the last delivery of Royalty
Oil to Tesoro under this Agreement. The Commissioner may accept such other or
additional security as he, in his sole discretion, considers adequate to protect
the State.
15.2 Reduction of Term. The term of the letter of credit
required under Article XV shall be reduced from seventy five Days to sixty Days,
if Tesoro and the State can reach an agreement regarding the transportation of
Oil if Tesoro defaults under this Agreement. If the parties cannot reach an
agreement, then the letter of credit shall remain at seventy five Days or Tesoro
shall have the right, in its sole discretion, to terminate this Agreement as
provided in Article 2.1.
ARTICLE XVI
PREFERENTIAL HIRING AND NON-DISCRIMINATION
Tesoro agrees to employ Alaska residents and Alaska companies to
the extent they are available, willing and qualified for all work performed in
Alaska in connection with the Agreement. "Alaska resident" means an individual
who has resided in Alaska for one year at the time of
26
employment and "Alaska companies" means companies incorporated in Alaska or
whose principal place of business is in Alaska.
If this provision is determined to be unconstitutional, then Tesoro
agrees to employ Alaska residents and Alaska companies to the extent such
preferential hiring is determined to be constitutional.
ARTICLE XVII
APPLICABLE LAW
17.1 Alaska Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Alaska.
17.2 Submission to Jurisdiction. Any legal action or proceeding
arising out of or relating to this Agreement or for the enforcement of the
covenants or obligations of either party must be instituted in a State court of
general jurisdiction sitting in the State of Alaska, and Tesoro hereby
irrevocably submits to the jurisdiction of that court in any such action or
proceeding.
ARTICLE XVIII
WARRANTIES
The purchase and sale of Royalty Oil are subject only to the
warranties of the State expressly set forth in this Agreement and the State
disclaims and Tesoro waives all other warranties, express or implied in law,
whatsoever.
27
ARTICLE XIX
AMENDMENT
This Agreement may be supplemented, amended, or modified only by
written instrument duly executed by the parties.
ARTICLE XX
SUCCESSORS AND ASSIGNS
No assignment, pledge, or encumbrance of this Agreement shall be
made by either party without the written consent of the other party. The
Commissioner or the Commissioner's designee may grant or deny such consent.
Subject to the above requirements in this article, this Agreement will be
binding upon and inure to the benefit of each of the parties and its successors
and permitted assignees.
ARTICLE XXI
HEADINGS
Headings used in this Agreement are for convenience only and shall
not affect its construction.
ARTICLE XXII
RECORDS
22.1 Preservation of Records. Tesoro will preserve and maintain
all books, accounts, and records relating to or arising out of the performance
of this Agreement including, but
28
not limited to, the purchase or sale of Royalty Oil and its refined products,
for a period of no less than six years from the date of transaction or last
adjustment relating to the transaction. Tesoro will also maintain and preserve
all similar books, accounts, and records of which it has possession belonging to
those third parties with whom it contracts for the performance of various parts
of this Agreement. Neither Tesoro nor the State shall be required to retain any
records for more than six years unless retention of such records is specifically
required by applicable law or regulation, or this Agreement. Tesoro shall
either maintain its records within the State of Alaska or make such records
available to the State at Tesoro's principal office in the State of Alaska
within thirty Days after written request by the State.
22.2 Inspection of Records of Parties. Tesoro and the State
will accord to each other and to their authorized agents, attorneys, and
auditors during reasonable business hours access to any and all property,
records, books, documents, and indices directly related to Tesoro's or the
State's performance of this Agreement and which are under the control of the
party from which access is desired so that the other party may inspect,
photograph and make copies of that property, records, books, documents and
indices. The State shall not be required to disclose any information, data, or
records which are required to be held confidential by State or federal law or
regulation, or by agreement. If the information obtained by the State may be
held confidential under State or federal law or regulation, Tesoro may request
that information be held confidential by the State and the State will keep this
information confidential.
29
ARTICLE XXIII
INTERPRETATION OF TERMS AND CONDITIONS
Any disagreement about the meaning or application of a word, term,
or condition in this Agreement will be decided according to the dispute
resolution procedure set forth in this article. Either party may give the other
written notice of a disagreement. Within 60 days after written notice, Tesoro
must present any argument and evidence supporting its view in writing to the
Commissioner for consideration. Tesoro shall not have the right to civil
litigation-type discovery or a civil litigation-type trial with the right to
call or cross-examine witnesses unless granted by the Commissioner in his sole
discretion. The Commissioner will subsequently issue a finding on the meaning
or application of the disputed word, term, or condition, setting forth the basis
for the conclusions. Tesoro agrees to accept findings by the Commissioner under
this article which are supported by substantial evidence.
ARTICLE XXIV
COUNTERPARTS
This Agreement may be executed in multiple counterparts, the
parties need not sign the same counterpart. Each counterpart shall be deemed to
be an original and all of which taken together shall be one and the same
instrument.
30
SIGNATURES
the State: THE STATE OF ALASKA
/s/ John T. Shively
Commissioner
Department of Natural Resources
Date: April 21, 1995
Tesoro Alaska Petroleum Company: TESORO ALASKA PETROLEUM COMPANY
By: /s/ Gaylon H. Simmons
Its: Executive Vice President
Date: April 20, 1995
Tesoro Petroleum Company: TESORO PETROLEUM COMPANY
By: /s/ Gaylon H. Simmons
Its: Executive Vice President
Date: April 20, 1995
31
ACKNOWLEDGEMENT
State of Alaska )
) ss.
Third Judicial District )
THIS IS TO CERTIFY that on the 21 day of April, 1995, before me,
appeared John T. Shively, the commissioner, Department of Natural Resources,
State of Alaska; that Harry A. Noah executed that document under legal authority
and with knowledge of its contents; and that this act was performed freely and
voluntarily upon the premises and for the purposes stated in the document.
Witness my hand and official seal the day and year in this
agreement first above written.
/s/ Sharon Fromming
Notary Public in and for Alaska
My commission expires: 5-24-95
32
ACKNOWLEDGEMENT
State of Texas )
) ss.
County of Bexar)
THIS IS TO CERTIFY that on the 20th day of April, 1995, before me,
appeared Gaylon H. Simmons of Tesoro Alaska Petroleum Company, San Antonio,
Texas; that Gaylon H. Simmons executed that document under legal authority and
with knowledge of its contents; and that this act was performed freely and
voluntarily upon the premises and for the purposes stated in the document.
Witness my hand and official seal the day and year in this
agreement first above written.
/s/ Linda Iden
My commission expires: March 27, 1999
33
ACKNOWLEDGEMENT
State of Texas )
) ss.
County of Bexar)
THIS IS TO CERTIFY that on the 20th day of April, 1995, before me,
appeared Gaylon H. Simmons of Tesoro Petroleum Company, San Antonio, Texas; that
Gaylon H. Simmons executed that document under legal authority and with
knowledge of its contents; and that this act was performed freely and
voluntarily upon the premises and for the purposes stated in the document.
Witness my hand and official seal the day and year in this
agreement first above written.
/s/ Linda Iden
My commission expires: March 27, 1999
34
EXHIBIT A
CALCULATION OF ROYALTY VALUE
This exhibit shows the mechanics of the price calculation and data sources.
Exxon's Royalty Value for the Prudhoe Bay Unit lessees are taken from its
Royalty Report. Royalty Value currently is taken from Column H of these
reports. An example calculation using the information for January 1995 and a
hypothetical RIK volume sold to Tesoro is shown below. Attached are the
Royalty Report Summaries for the Prudhoe Bay Unit.
Exxon's Production Royalty Value Product of Volume Times
from the Prudhoe from Column H Royalty Value
Bay Unit of the Oil
Royalty Report
Summary
Lisburne Production 1,762,900.13 x $11.050 = $19,480,406.44
Center
Prudhoe Bay IPA 8,807,215.20 x $11.110 = $97,848,160.87
------------- ---------------
Total 10,570,115.33 $117,328,207.31
Exxon's Royalty Value = $117,328,207.31 - 10,570,115.33 = $11.09999
Should Article 2.1(b) apply, the Royalty Value will be calculated using the
Royalty Value and production volumes for only the initial Participating Areas.
CALCULATION OF INTEREST
Numbers in these examples are illustrative. They do not represent accurate
values that may have existed in the past or are forecasted for any time in the
future.
Mechanics of the calculations include:
1. The annual interest rate specified in legislation is converted to a
daily rate for calculations.
2. Credits are applied to the next monthly payment. Payment for an
underpayment is due (a) within 3 business of the date the bill is
sent for Initial Billings and initial adjustment or (b) within 30
days of the time the bill is sent for subsequent adjustments.
Interest on overpayments stops accruing on the date of the invoice.
35
Example 1: Initial Billing
Assumptions:
1. Month is February.
2. Royalty Oil delivered to Tesoro in January = 1,240,000 barrels.
3. Royalty Value for January, from Column H of Exxon's Oil Royalty
Report Summaries (attached) = $11.09999.
4. Bill sent to Tesoro on February 1st; Payment due to State by
February 6th (Initial Billing date plus three business days.
Method for calculating Tesoro's initial invoice for January deliveries:
Volume x Price = Initial Billing
1,240,000 x $11.09999 = $13,763,987.60
Note:
The lessees are required to submit their royalty reports to the State for
January's production by the last day in February. For this reason the State
will bill Tesoro for January production based on the December Royalty Value.
This is an interim value and is subject to revision, since the Agreement
requires that Tesoro pay the Monthly Price for the same production month. The
revised price is incorporated in the invoice submitted the following month
(March).
36
Example 2: Initial Adjustment
Assumptions:
1. Month is March.
2. Royalty Oil delivered to Tesoro in January = 1,240,000 barrels.
3. Revised Monthly Price for January = $11.00000.
4. Annual interest rate charged member banks for advances by 12th
Federal Reserve District as of January 1st is three percent.
Annual rate for contract = 11 percent.
5. Date of Initial Adjustment is March 1st.
Method for calculating Tesoro's revised invoice for January deliveries:
Volume x Price = Revised Billing
1,240,000 x $11.00000 = $13,640,000.00
Amount Paid by Tesoro for January deliveries (calculated in Example 1):
$13,763,987.60
--------------
Overpayment for January: ($123,987.60)
Difference between Initial Adjustment date (March 1st) and original accrual date
(February 6th) = 23 days.
Interest due = $123,987.60 x (11%/365) x 23 = ($859.42)
--------------
Credit due Tesoro for next month's billing = ($124,847.02)
37
Example 3: Subsequent Adjustment
This adjustment is assumed to occur after true-up of BP transportation costs, a
reopener for one of the Royalty Settlement Agreements, or for some other
reason. It is assumed to occur June 5th.
Assumptions:
1. Month is June.
2. Royalty Oil delivered to Tesoro in January = 1,240,000 barrels.
3. Adjusted Monthly Price for January = $11.11000.
4. Annual interest rate charged member banks for advances by 12th
Federal Reserve District as of January 1 assumed to be three
percent; as of April 1 and through the third quarter, seven
percent. Annual interest rate for contract = 11 percent for the
first quarter; 12 percent for the second and third quarter.
5. Tesoro is sent notice of underpayment on June 5th.
6. Tesoro's payment is received on July 5th.
Method for calculating Tesoro's revised invoice for January deliveries:
Volume x Price = Revised Billing
1,240,000 x $11.11000 = $13,776,400.00
Amount Paid by Tesoro for January deliveries
(calculated in Example 2): $13,640,000.00
--------------
Underpayment for January deliveries: $136,400.00
Days of interest in first quarter (Initial Billing date plus 3 business days
through March 3 1st)=53
Days of interest in second quarter (April 1 through June 30th)=91
Days of interest in third quarter (July 1 through July 5)=5
Interest for first quarter = $136,400.00 x (11%/365) x 53 = $2,178.66
Interest for second quarter = ($136,400.00 + $2,178.66) x
(12%/365) x 91 = $4,145.97
Interest for third quarter =($136,400.00 + $2,178.66 +
$4,145.97) x (12%/365) x 5 = $234.62
Payment from Tesoro due to the State within 30 days of
invoice date = $142,959.25
If payment in full not received by or on July 5th then additional interest will
accrue from July 6th through the payment receipt date, plus a late payment
penalty will be assessed.
38
The items omitted are a seven page sample summary report which gives examples of
the calculations referred to above.