New law gives operators a chance for one-time lease term extension

Alaska Gov. Sean Parnell has signed legislation that could provide significant relief to diligent oil and gas companies facing the loss of expiring state leases.

House Bill 198 authorizes the commissioner of the Department of Natural Resources to grant a one-time extension to the primary term of a lease if deemed in the state’s best interests.

Parnell signed the bill into law on May 28 at Kenai. State Rep. Kurt Olson, R-Soldotna, sponsored HB 198.

The bill was introduced late in the legislative session, on April 2, and passed unanimously.

The new law is aimed at allowing companies to hang onto expiring leases, provided they can show they’ve already spent significantly on exploration and development. The law also allows the state to demand work commitments going forward, including specific dollar amounts to be expended.

The law gives companies a new option for retaining acreage that otherwise might go up for bid again in state lease sales.

Previously, operators had three ways to hold a lease beyond term: produce from the lease, engage in active drilling or commit the lease to an oil and gas unit.

The department, however, prefers not to approve a unit application unless it’s based on a hydrocarbon accumulation proven by drilling.

Industry support for bill

“The power assigned to the Commissioner in HB 198 would be a valuable tool in furthering investment and rewarding efforts to develop Alaska’s resources,” wrote John Barnes, senior vice president with Hilcorp Alaska LLC.

“This legislation offers an alternative to last minute rushes to create units, propose placement of rigs or other lease saving operations that would allow an operator to hold its oil and gas lease,” wrote John Hendrix, general manager for Apache Alaska Corp.

Hendrix continued: “As a new operator in Alaska we have acquired a significant amount of acreage which has leases that will expire before we are able to complete our seismic exploration activities, which help us delineate what, if any, potential oil or gas resources are under our leases.”

Apache acquired seismic on more than 200,000 acres in the Cook Inlet basin in 2012, Hendrix said.

Dozens of short-term leases

Apache holds the majority of these leases in Cook Inlet, with Repsol holding the majority in northern Alaska.

Many state leases have a 10-year primary term. But in 2007 through 2009, the state offered some leases with terms of five and seven years.

The intent was to encourage more rapid development, Barron said in a June 4 interview with Petroleum News.

“The goal was not achieved,” he said, as companies struggled to arrange financing, equipment and logistics in the tight timeframes.

The new law will allow a maximum 10-year lease, including the primary term combined with any extension.

The one-time extensions will not be automatic.

“The commissioner shall consider the funds expended by the lessee to explore and develop the lease, the types of work completed by or on behalf of a lessee, and any other relevant information in deciding whether to extend the lease,” the law says.

In exchange for an extension, the state “shall” increase the $3 annual rental per acre to $250 an acre for each of the last three years. However, the law says the rental can be less “if the commissioner determines that a lessee has exercised reasonable diligence to explore and develop the lease during the primary term.”

The law further states that the commissioner “may condition a lease extension on posting of a performance bond by the lessee, meeting a minimum work commitment, or both.”

The law gives lessees with significant investments more time to complete ongoing work and bring leases into production, which is what the state wants, Barron said.

—Wesley Loy