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Vol. 12, No. 3 Week of January 15, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Sales set for March 1

Shorter terms, higher royalties for some North Slope, Beaufort Sea tracts

Kristen Nelson

Petroleum News

The state has set a date, March 1, for its North Slope and Beaufort Sea areawide oil and gas lease sales, kicked out of their October slot last year by the new Alaska Peninsula sale.

Compared to the last sales for these areas, in 2004, most lease terms have been shortened and, for the Beaufort Sea, royalty rates have been raised for tracts off the National Petroleum Reserve-Alaska and the coastal plain of the Arctic National Wildlife Refuge.

“With access expanding across the North Slope, we don’t believe it’s necessary that companies need 10 years to explore some of these areas,” said Bill Van Dyke, acting director of the Alaska Department of Natural Resources Division of Oil and Gas. With more explorers on the North Slope and more interest in the area, “the lease terms still provide an adequate time to go explore and then for companies that don’t explore, the leases will turn over quicker and can be re-offered to other companies.”

The remoteness of Beaufort Sea tracts “over against the Canadian border” is recognized, Van Dyke said, and the 10-year primary lease term retained for that area. “But when you’re talking about tracts in and around Kuparuk and offshore Alpine and certainly even offshore NPR-A these days ... five to seven years is more than adequate.”

Pat Galvin, division petroleum land manager, said unitization also played a role in shortening the primary term of the leases. Companies don’t need to explore every tract, just enough to justify unitizing to hold tracts beyond the primary term. “We’re seeing an expansion in unitization and using unitization to hold exploration acreage and that in response to that we don’t see a need to keep such long primary terms,” Galvin said.

Division Deputy Director Pirtle Bates said there is another reason for shortening the primary lease term. “And that’s the fact that the areawide leasing program has been going for a few years now and no longer does industry have to worry that we might not hold a sale for three to five to seven years for an area; they’re being offered each year.”

The North Slope and Beaufort Sea areawide sales, which have been held in October, were rescheduled last July when the administration decided to focus attention on the new Alaska Peninsula areawide sale, also set for October, and to spread the work of the state’s leasing staff more evenly over the annual schedule. The sales were originally rescheduled for February, and bids are still due that month, on Feb. 27.

North Slope terms shortened

The division said more northerly North Slope areawide tracts in the 2006 sale will be offered for a primary lease term of five years, compared to a seven-year term in the state’s last North Slope areawide sale in 2004. The more southerly tracts will be offered for seven years, compared to 10 years in the previous sale.

North Slope sale area royalty rates remain the same as in the previous sale: 12.5 percent for more southerly tracts and 16.67 percent for northern tracts.

The Beaufort Sea areawide sale, which has been divided into three areas, is divided into five areas this year, with primary lease terms of five, seven and 10 years, and royalty rates of 12.5 percent (in the 10-year term area) and 16.67 percent in the remainder of the lease sale area.

Tracts offered and tracts deferred in the Beaufort Sea are the same as in the last sale, Bates said. The previous sale tracts were divided into three areas: the left shoulder, the right shoulder and the core. There are five areas in this year’s sale, he said, although just three sets of terms.

The state’s core Beaufort Sea area and three tracts which include both state and Arctic Slope Regional Corp. land share the same set of terms, five-year primary lease terms and 16.67 percent royalty rates, and the Camden and western areas both have seven-year primary lease terms and 16.67 percent royalty rates. The farthest east area tracts have 10-year primary terms and 12.5 percent royalty rates.

Galvin said terms are being shortened for everything except the farthest east tracts, with the royalty raised for the far west and the near east.

Rates reflect interest

Van Dyke said increases in the royalty rates are “just an effort in part to get out ahead of the exploration interest and in part to recognize that there has been a shift in the commodity prices and just the overall attractiveness of the North Slope acreage.”

Galvin said before an annual sale the division evaluates whether changes are needed and then meets with the commission to discuss whether there are reasons to change the terms of the sale. This year in addition to other factors they also looked at changes in the price of oil and changes in the amount of activity, he said.

There is a “lot more interest in the Beaufort Sea right now,” Van Dyke said, while onshore, companies are continuing to march south from the coast.

This interest, Galvin said, “caused us to think now is a good time to reexamine our terms.”

The division also looks at what other oil provinces are doing, areas such as Alberta and Texas. Some of these areas have royalty rates up to 25 or 30 percent, Van Dyke said, with three-year lease terms. “We don’t have the same environment as Alberta or West Texas but the trends are the same.”

Van Dyke noted that the minimum bid per acre, $10 in both sales, is the same as the last sales. “We’re not trying to price anybody out of the sale,” he said.

As to the tracts that will be included, Jan. 5 was the cutoff date, Galvin said: tracts relinquished or in default on that date will be included in the sale.

The North Slope areawide sale covers an area of approximately 5.1 million acres, the Beaufort Sea sale area is 1.5 million acres.

Complete sale information, including tract maps, is available on the division’s Web page: www.dog.dnr.state.ak.us/oil/.



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