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Vol. 15, No. 46 Week of November 14, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

The Explorers 2010: What’s cooking in the Cook Inlet

New players are setting their sights on the Cook Inlet basin

Kevin Banks

Director, Division of Oil & Gas, Alaska Depar

Interest in natural gas exploration, production and storage in Alaska’s Cook Inlet is growing, thanks to efforts by the state to encourage exploration and drilling while remaining sensitive to the needs of industry to be able to respond to fluctuating energy demand in this still very vibrant resource area.

Over the past year and a half, the Division of Oil and Gas met with several companies interested in Alaska. The news last month that Chevron, a company that has been in Alaska since before Statehood, was looking to sell their Cook Inlet assets does not detract from our optimistic view of the future of the area. Chevron has been a good partner for the state for many years. Now, we are welcoming the entry of new, smaller companies with a more targeted focus on exploration and production in Cook Inlet, knowing that they will have opportunities to develop resources, provide jobs to Alaskans and make a good profit at the same time. Keep in mind that “smaller” doesn’t necessarily mean little: there’s interest in the Cook Inlet expressed by companies that have billions of dollars of assets and are perfectly capable of expanding exploration and production activities in the rich, under-explored Cook Inlet basin.

Together, the state and industry have shown detractors that Alaska remains open for business, and the ill-informed statement that “Southcentral Alaska is facing an inevitable shortage of natural gas” will be proven wrong.

Cook Inlet currently provides one of the most favorable tax and royalty environments in the world and there is every reason to believe we can meet the energy needs of the region. Last year the Division published the “Preliminary Engineering and Geological Evaluation of Remaining Cook Inlet Gas Reserves” that conservatively predicted that substantial gas reserves could still be developed within the existing fields of the Cook Inlet. This fall we’ve launched a follow-up study to gain a better understanding of the costs of developing these new reserves. We hope to have this second report published by the end of the year. Initial results indicate that the news should be encouraging for residents and industry alike.

In its last session, the Alaska Legislature passed a bill offering up to $25 million in tax credits for exploration expenses associated with the first well drilled from a jack-up rig. For operators who aren’t planning for offshore exploration or don’t meet the criteria for receiving the jack-up rig credit, there are other credits available — both in Cook Inlet and everywhere else in Alaska — of between 20 and 65 percent for all capital expenditures related to oil or gas exploration or development.

The Legislature also expanded the existing gas development tax credit, from 10 percent to 25 percent of costs of drilling and field development work in existing gas fields.

The state even offers special credits for “small” producers whose annual production is less than 50,000 barrels of oil equivalent.

In the past, the question of whether there was enough of a market to support increased development in the Cook Inlet kept exploration companies lukewarm about the prospects. But with changing times, the market is also changing. Anchorage, the state’s largest city and home to almost half of the state’s population, almost completely depends on Cook Inlet gas for home heating and electricity. Utilities are signing up for shorter contracts with their usual suppliers—and offering higher than historical prices—thereby opening up the market for new producers.

The state has also been sensitive to industry’s need to better manage seasonal fluctuation in demand for natural gas in the area supplied by Cook Inlet and how those fluctuations have forced producers to adapt their production rate to the rate of demand. Recent legislation established tax credits and expedited the leasing and permitting processes for natural gas storage facilities starting operations between Dec. 31, 2010, and Jan. 1, 2016.

Good rocks, zero production tax on oil, low production tax on gas, attractive tax credits and interest in the basin from new players means that the Cook Inlet is, indeed, cooking.

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