Alaska offering royalty-free lease terms to stimulate Cook Inlet gas development

To try to entice investment in new natural gas development in Southcentral Alaska’s Cook Inlet basin, state officials are trying something new: a waiver of royalties in the upcoming annual lease sale.

The Alaska Division of Oil and Gas this month announced five upcoming lease sales that include the unusual terms in the Cook Inlet area.

The impetus is the concern that the state’s most populous region may soon be running low of the natural gas that is its main source of power for heat and electricity, a division official said.

“We’re kind of in a bind in terms of having a gas shortage, potentially, in the next few years,” said Sean Clifton, a policy and program specialist with the division. “We’re trying to be innovative and try new things within the bounds of the laws we already have on the books.”

Instead of requiring new leaseholders to pay royalties once production starts, the state is offering a net profit-sharing arrangement aimed at reducing companies’ economic risks. And instead of expecting bidders to compete for exploration rights, the division is setting a fixed price of $40 an acre for the 3.3 million acres that are being offered in the sale.

While royalties on oil and gas produced from state territory generally hover between 12.5% and 16.67%, state law gives the commissioner of the Department of Natural Resources the authority to vary those terms if doing so is deemed in the state’s best interest. The commissioner also has the authority to set up profit-sharing arrangements for oil and gas leases. The Division of Oil and Gas is part of the Department of Natural Resources.

Various options of lowered or sliding-scale royalties, profit-sharing systems or combinations of the two have been occasionally used in past lease sales, Clifton said. But total elimination of royalties is a tool that has not been used before, as far as the division’s records show, he said.

Recent lease sales for territory in the Cook Inlet basin, whether conducted by the state or by the federal government, have failed to win many bids. Clifton said it has long been difficult to attract investment to the basin, where oil production peaked in 1970 and where natural gas production now serves an entirely in-region market.

“It’s just always been a struggle, even back in the heyday,” he said. The industry built a lot of platforms in the 1960s, “and then there wasn’t a whole lot of activity after that.”

The Cook Inlet lease sale is scheduled at the same time as the state’s other annual areawide oil and gas lease sales — for state territory on the central North Slope, territory in the Brooks Range foothills, an offshore area in the Beaufort Sea and territory on the Alaska Peninsula in the southwestern part of the state.

Bids on all the sales will be accepted through Dec. 7, with results to be made public on Dec.. 13, the division said in its notice.

The annual North Slope areawide sale generally draws the most industry attention, as it is the area where existing Alaska oil development is concentrated. This year’s North Slope sale is offering about 5 million acres in 3,121 tracts.

At the other extreme is the annual Alaska Peninsula areawide sale. While the first Alaska Peninsula sale drew 37 bids when it was held in 2005, there has been almost no industry interest shown since then. No bids have been offered in any of the Alaska Peninsula sales since 2014. This year’s Alaska Peninsula sale is offering about 5 million acres of land in 1,004 tracts.

Originally published by the Alaska Beacon, an independent, nonpartisan news organization that covers Alaska state government.