Calling it an arbitrary giveaway without economic justification, Gov. Tony Knowles today vetoed House Bill 380, the Cook Inlet oil royalty bill that granted a temporary 5 percent royalty reduction for six fields in Cook Inlet.
The bill, sponsored by Sen. Drue Pearce and Rep. Mark Hodgins, applied to specific fields that were discovered before January 1988 and have been undeveloped or shut-in from at least Jan. 1, 1988, to Dec. 31, 1997.
To qualify for the reduction under the bill, production was to begin before Jan. 1, 2004. The reduction would have been in effect for 10 years but was limited to the first 25 million barrels of oil and the first 35 billion cubic feet of gas. Falls Creek, Nicolai Creek, North Fork, Point Starichkof, Redoubt Shoals and West Foreland were the six Cook Inlet fields listed in the legislation.
The bill was supported by most of the Cook Inlet producers and explorers, but opposed by Alaska Department of Natural Resources oil and gas division director Ken Boyd.
“I have vetoed this bill because it violates two fundamental principles in current state law necessary to protect the public’s interests,” Knowles said. “HB 380 would grant arbitrary relief from lease terms without a thorough evaluation of economic need and it doesn’t allow the state to adjust royalties upward should oil prices later rise. Lacking these protections for the Alaska public, HB 380 is little more than a giveaway.”
Knowles noted that state law already allows royalty changes to encourage development of marginal fields that would not otherwise be economically feasible.
“Partnership means providing incentives to encourage development when necessary, but it also means the state should share in any unanticipated benefits,” Knowles said. “I support modifying the economic terms of oil and gas leases when necessary but only after a thorough analysis of the need and costs, long and hard negotiations, and extensive public debate. That kind of analysis simply has not been undertaken for these Cook Inlet leases.”
And since 50 percent of the royalties from these fields would go into the principal of the Permanent Fund, Knowles said a royalty reduction unwarranted by market conditions and allowing no adjustments for increased prices shortchanges Alaska’s Permanent Fund.