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Two producers bid in state’s royalty-free Cook Inlet lease sale

The view of Cook Inlet from Kenai in fall 2023.
Riley Board
The view of Cook Inlet from Kenai in fall 2023.

Only two companies bid in the state’s first royalty-free Cook Inlet lease sale. The bids totaled just about $600 thousand dollars and cover almost 15 thousand acres, and a press release from the state describes the sale as “promising.”

The sale, announced in October, was devised as a way to incentivize production in the inlet as the Railbelt stares down a natural gas shortage. Rather than paying a set royalty rate, producers only pay the state its share once they’ve already paid off certain up-front capital and operating costs. The system is called a net profit share. The sale also featured a fixed rate of $40 an acre, and the net profit share served as the bid variable instead of the cost per acre.

In the 2022 state lease sale, just one company bid. Sean Clifton with the Department of Natural Resources Oil and Gas Division said the results of this year’s sale are promising, but complex to evaluate.

“The number of bids and the bidding behavior was not too far outside of normal, and that’s fine. We’re happy with it,” Clifton said. “These are different terms than we’d offered in the past, though, so it’s not really an apples-to-apples comparison.”

Hilcorp Alaska, the primary producer in Cook Inlet, bid on and won three tracts comprising more than 13,000 acres. The company HEX Cook Inlet came away with about 1,700 acres.

HEX was formed in 2019 when its owner, John Hendrix, bought out Furie Operating Alaska, following its bankruptcy. For years, Hendrix has been in a legal battle with the state and Kenai Peninsula Borough about the property taxes he pays on a gas producing unit and platform he acquired from Furie.

Clifton said the royalty-free sale represents one of many strategies for increasing Cook Inlet gas production.

“This is just one part of a broad approach,” he said. “There’s some levers we can pull, one of them is adjusting the lease terms.”

Another approach, proposed by Gov. Mike Dunleavy in October, is a reduced royalty rate.

Clifton said the state plans to hold more sales like this in the future, and said he expects there will be more participation as companies adapt to the new terms.

Riley Board is a Report For America participant and senior reporter at KDLL covering rural communities on the central Kenai Peninsula.
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