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Vol. 16, No. 4 Week of January 23, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

Alaska Offshore Special Report: Cook Inlet incentives, more SC energy

Kevin Banks

Director, Division of Oil & Gas, Alaska Depar

Alaska’s Cook Inlet provides one of the most favorable oil and gas tax and royalty environments in the United States. We believe this favorable environment, coupled with the interest and experience of new and existing operators, give Alaskans every reason to be confident that we can meet the energy needs of the region.

The state of Alaska is offering up to $25 million in tax credits for exploration expenses associated with the first well drilled from a jack-up rig, up to $22.5 million in tax credits for the second well drilled by another producer, and up to $20 million for the third well drilled by a different producer.

It doesn’t get much better than that. Not only is there a significant tax credit, there is an added incentive for being at the head of the line.

This fact has not gone unnoticed by industry. At the present time, both Buccaneer and Escopeta are competing to acquire jack-up rigs to meet their drilling obligations in the Cook Inlet.

Operators that are not currently planning offshore exploration or don’t meet the criteria for receiving the 100 percent credit, may still obtain credits available in Cook Inlet and everywhere else in Alaska, ranging 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.

Extra credits for smaller producers

There are even special credits for “small” producers whose annual production is less than 100,000 barrels of oil equivalent.

In Cook Inlet, there are additional incentives for natural gas exploration, nonconventional gas development, and gas storage projects.

Not only are there numerous tax credit opportunities, there is still a lot of gas to be found in Cook Inlet. A representative for Armstrong Oil and Gas, a company actively exploring in the Cook Inlet today, stated publicly in 2009, “It is our opinion that the Cook Inlet is a vastly underexplored province and with good science there’s a tremendous amount of gas yet to be found in the area.” In 2010, Armstrong drilled and completed two wells in the North Fork Unit on Cook Inlet’s west side, and recompleted an older well. The company is finishing up construction on a seven-mile gas pipeline from North Fork to Anchor Point, and estimate completion in the early part of February. First gas sales from the unit is anticipated in early 2011.

Apache is in the permitting process for 2-D seismic testing of 182,500 acres of previously leased state acreage acquired during 2010.

New companies entering Cook Inlet

At least four new companies have entered Cook Inlet in the past year, with others knocking at the door. Linc Energy Alaska acquired Geo Petro last summer and drilled their first well, announcing success in October, with results pending.

Buccaneer has applied for two proposed units and is in the permitting process for exploration wells in at least two locations. Buccaneer is one of two companies that have publicly stated their intention to bring a jack-up rig to Cook Inlet, to drill its first well at Southern Cross. (The other company with such stated intentions, Escopeta, has promised to have a jack-up rig on its way to Alaska by February, with its first well drilled by September 2011.) Buccaneer is also in the permitting process for a well on Mental Health Trust Land near Kenai.

Cook Inlet Energy, the fourth new company on the scene, is permitting three exploration wells for this winter in the West Foreland area onshore, with permits expected to be issued in January or February.

Interest in inlet lease sales

Other evidence of the renewed interest in the Cook Inlet area was shown most recently in early December, when the Mental Health Land Trust Office lease sale received 21 bids on 17 tracts, with high bids totaling $1.23 million for 64,240 of the 110,800 acres offered.

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. When the requirements for firm energy supplies from customers throughout the entire Southcentral region are added to the demand from Anchorage, the question whether there is a market for Cook Inlet gas is most definitely answered with a resounding yes.

The state is also sensitive to the 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.

The question of whether there was enough of a market to support increased development in the Cook Inlet kept exploration activity low in this region. But with changing times, the market is also changing. Utilities are signing up for shorter contracts with their usual suppliers. These contracts are for less than “full requirements.”

Together with a new gas storage project, the market is opening up for new producers.

The Alaska Division of Oil and Gas is continuing to pave the way for solutions to current Cook Inlet deliverability concerns by working with industry on processing gas storage leases and exploring new storage possibilities. It is in the state’s best interest, as it is in the producers’, to create a predictable production climate for Cook Inlet gas producers, currently and in the future. With a market hungry for more natural gas, there has never been a better time to explore for gas in Alaska’s Cook Inlet.

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