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Oil Patch Insider: Hilcorp Anchor Point lease approved by Kenai Borough
Steve Sutherlin Petroleum News
The Kenai Peninsula Borough Assembly has passed an ordinance granting an oil and natural gas lease on borough lands in Anchor Point to Hilcorp Alaska LLC (see initial report in Petroleum News Oct. 28 edition). The action was taken at the Nov. 20 regular meeting of the assembly in Soldotna, following a lands committee hearing earlier the same day.
The ordinance, numbered 2018-34, was introduced to the assembly Oct. 23 by Borough Mayor Charlie Pierce.
The lease carries a negotiated 12.5 percent royalty rate to the borough and covers five parcels scattered about the unincorporated Anchor Point community on the Lower Kenai Peninsula. The primary term of the lease is five years.
The lease area of 19.1 acres, more or less, includes two parcels on Milo Fritz Avenue consisting of the 1.7-acre site of the Anchor Point Volunteer Fire Dept. and Rescue - and across the street the 0.69-acre site of the Anchor Point Fire and EMS training facility. Lease royalty payments attributable to the fire and rescue locations will be distributed at 9.7 percent to the Anchor Point Fire & Emergency Medical Service Area, with the remainder to accrue to the Land Trust Fund.
The primary consideration is the royalty, Borough Land Manager Marcus Mueller told Petroleum News, adding, “There was a nominal bonus paid.”
Remunerations to borough “The Land Trust income benefits Anchor Point in a diffuse way,” Mueller said. “The borough’s land program puts land under solid waste facilities, schools and other borough needs.”
Land Trust income goes to the management of the borough lands, some 130,000 acres of land in total, he said.
“It’s unusual to have oil and gas royalties issues because the land transferred to the borough from the state does not include mineral interests per the Alaska Constitution, which disallows the transfer of such interests,” Mueller said.
“The mineral issues arise on lands that are purchased or acquired through tax foreclosure,” Mueller said. “The borough does have a provision for oil and gas leasing without surface use; surface use would be by separate agreement.”
Exhibit B of the lease specifies that no operations are permitted on the surface of the leased land, however the lessee will have the right to drill and operate directional wells through and under the land irrespective of the bottomhole locations of the wells. The exhibit further describes a subsurface easement for all purposes associated with the wells, commencing at and continuing below the depth of 500 feet.
Three thumbs up The Anchor Point Advisory Planning Commission advised in favor of the ordinance, Mueller told the Borough Assembly Lands Committee in hearing testimony Nov. 20.
Additionally, the Anchor Point Fire & Emergency Medical Service Area board recommended passage of the ordinance by unanimous consent, he said, adding that at the Nov. 13 meeting of the Borough Planning Commission it was recommended for approval by majority consent.
Mueller also noted that Section 3.4 of the lease had been altered to eliminate any deductions from royalties for production expenses. In the originally proposed version of the lease the section said, “In computing the royalty, lessee may deduct the costs of heating, sweetening, gathering, transporting, dehydrating, compressing, extracting, processing, or manufacturing.”
“The change to the lease is making it deduction free,” Mueller said. “That does bring it into conformance with state oil and gas rates for the area.”
In follow-up questions to Mueller, assembly member Willy Dunne indicated that under borough code 12.5 percent was the minimum lease rate that could be considered for oil and gas leases, and he asked if there had been an attempt to negotiate a higher rate.
Mueller said he was satisfied that the rate was in line with prevailing state rates.
“That is a concern of a lot of my constituents, that we were just offered the minimum without any negotiation or any discussion over what we could get for more,” Dunne said. “The state does have a number of leases for the 16 2/3 royalty, and that apparently there’s been some leases in Cook Inlet with private individuals for up to 20 percent.”
Mueller said the borough could ask for more, but he did not recommend it.
“As land manager, I think it is important for us to be very stable with how we approach our market,” Mueller said.
- STEVE SUTHERLIN
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