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Vol. 15, No. 38 Week of September 19, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Arctic Directory: Alaska more pro-investment than ever

Cook Inlet has most investment-friendly tax, royalty regimes in US; benefits extend to other areas of state

Kevin Banks

Director, State of Alaska’s Division of Oil a

Thanks to actions by the Alaska Legislature this year, Alaskans can pay even less attention to reality-challenged statements such as “Alaska is closed for business” and “Southcentral Alaska is facing an inevitable shortage of natural gas.”

We now have in Cook Inlet one of the most favorable tax and royalty environments in the United States—in fact, there is none better—and there’s every reason to be confident that we can meet the energy needs of the region.

Up to $25M in credits for first jack-up

For example, consider this whopper of an incentive: we’re offering up to $25 million in tax credits for exploration expenses associated with the first well drilled from a jack-up rig. It doesn’t get much better than that.

And even if an operator isn’t planning an offshore exploration operation or doesn’t meet the criteria for receiving the 100 percent 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 100,000 barrels of oil equivalent.

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

And 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, told a newspaper 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 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. Utilities are signing up for shorter contracts with their usual suppliers, thereby opening up the market for new producers.

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 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 has also been 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.

In 2010, the Alaska Legislature passed legislation establishing tax credits and expedited leasing processes for natural gas storage facilities starting operations between December 31, 2010, and January 1, 2016.

Tax and royalty rates below all others

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, and communities, there has never been a better time to explore for gas in Alaska’s Cook Inlet.

Total tax and royalty rates are at or below every other major producing state

Cook Inlet oil has a 0 percent gross production tax and a 12.5 percent royalty rate

Cook Inlet gas is taxed at just 18 cents per Mcf, which at $7.00/Mcf equals 2.6 percent.

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