The State of Alaska is changing its leasing strategy to incentivize Cook Inlet oil and gas development during an upcoming lease sale.
Typically, oil and gas leases involve a royalty, a cut the state takes from any production on a leased site. In Cook Inlet, that rate is 12.5%.
Sean Clifton with the Department of Natural Resources Oil and Gas Division said the royalty system can discourage bidding, because it kicks in as soon as production begins.
“It puts the burden on the producer from the very start of production, and it makes it a little bit harder for them to pay their debts back and cover all the capital costs that they’ve incurred from building infrastructure like a platform, or a pipeline,” he said.
Clifton said that’s why this year, the state is offering a different model for the Cook Inlet lease sale. It’s using a net profit share system, which means companies don’t have to pay the state its share until they’ve already paid off certain capital and operating costs. Clifton said this should incentivize new companies that are intimidated by those upfront costs.
The net profit share option is a response to lackluster lease sales in recent years.
“I think it’s pretty clear looking at the records of past sales that the rate of bidding has slowed down a bit in recent years,” he said.
During a state lease sale last winter, only one company bid on more than 700 tracts.
The state is focusing on encouraging Cook Inlet development, because of a predicted shortage in natural gas that could soon affect the whole Southcentral region.
“This is important to us, and a lot of people are talking about it. And I think it’s going to continue to be that way until we find a good solution,” Clifton said. “And I think most folks agree that at the very least, in the near term, the best solution is producing more gas in Cook Inlet.”
The federal government took a different approach to its Cook Inlet oil and gas options this year. Last month, the Biden Administration announced a plan to have no federal offshore lease sales in Alaska for the next five-year period, in accordance with the Inflation Reduction Act.
Clifton said the federal announcements didn’t affect the plan for this sale, but he says it was disappointing to see a lack of federal options in the inlet.
Other lease sales this winter will be offered in the Beaufort Sea, on the North Slope, in North Slope Foothills and on the Alaska Peninsula, but those will follow the royalty format. Bidding opens Nov. 20, and the state will announce results Dec. 13.
