For the second time in a row, Hilcorp Alaska, LLC was the only bidder in the state of Alaska’s oil and gas lease sale for Cook Inlet.
The results of that sale were published by the Alaska Department of Natural Resources on Wednesday, and show there was little interest in the more than 3 million acres of state-owned land in Cook Inlet that was opened for bids.
John Boyle is the commissioner of Alaska’s Department of Natural Resources. Speaking from Morgan’s Landing in Sterling on Thursday, he said the results of the sale make clear companies aren’t tripping over themselves to acquire leases.
“The biggest takeaway for me is that we don't have a line of companies that are chomping at the bit to come in and invest in Cook Inlet,” Boyle said. “And the data point, for me, is that it says that our fiscal structure — that is both our tax and our royalty structures — certainly don't seem to indicate that they're overly generous, or that the economics of developing in the Cook Inlet are super profitable.”
Across Hilcorp’s three bids, 4,441 new acres of land will open to oil and gas development. When combined with the other Cook Inlet sale held this fiscal year, the department says the sum is higher than the region’s five-year average, but lower than the top two sales, which were held in 2022.
Hilcorp, which produces nearly all – 90% – of the oil and gas in Cook Inlet, was also the only bidder during the state’s last lease sale in that region. Boyle said the amount of acres the company leases in the inlet, combined with its ability to develop new projects, makes it an important player in the region.
“We're certainly working with the other smaller operators in the Cook Inlet and again, in the hopes that the royalty relief or other mechanisms might be attractive and help incentivize them to move their projects forward into development,” he said. “But Hilcorp is the operator that we have and so again, the state has to look at, how do we continue to make Cook Inlet an attractive place for Hilcorp, to invest its capital and to continue to produce more oil and gas.”
The most recent sale was the state’s second to offer bidders net profit share revenue terms. Boyle said the new structure, which only applies to new leases, was put in place to “sweeten the pot” for potential developers in the inlet.
Under that structure, a company is allowed to fully recoup the money it spent developing a new oilfield before paying the state a portion of its net profits.
The state’s previous structure allowed companies to deduct expenses from the amount they pay in product taxes on their net profit. That was in addition to a fixed royalty rate companies would pay the state per barrel of oil taken out of the ground.
For the most recent sale, that means Alaska will still make money off the sale of the Cook Inlet leases to Hilcorp, but will only start making more money once new development on the associated land becomes profitable.
Boyle said Alaska’s new structure is similar to those offered in other parts of the world with significant oil production.
“If a company goes to Iraq, they want to produce oil, they spend a billion dollars to develop an oil field, the government of Iraq will allow them to completely recoup all that $1 billion investment,” he said. “And then from that point on, as they start earning money, then they'll pay the government some percent of that overall share, which often can be very high — might be 90 something percent. But for a company, it's still a very good deal, because they've recouped their original investment. And then they're earning, now, an added return on that along with the share that they're paying the government.”
Looking ahead, Boyle said the state knows it can’t put all of its energy eggs in the Cook Inlet basket. Alaskans need gas for electric generation, but the state realizes there are other energy sources the state can be tapping into. He pointed to coal production and expansion of the state’s existing hydroelectric infrastructure as contenders for a new direction.
