Cook Inlet bills move
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Proposed legislation for encouraging new gas development reaches House Finance
Alan Bailey for Petroleum News
Three bills designed to encourage natural gas exploration and development in the Cook Inlet basin have been passed from the House Resources Committee to the House Finance Committee for review. And on April 4 House Finance listened to presentations on the bills. The bills consist of House Bill 257, to authorize the Alaska Department of Natural Resources to supply certain Cook Inlet seismic survey data free of charge to people qualified to use it; House Bill 223 to eliminate state royalties on newly developed Cook Inlet gas fields; and House Bill 387 that would award tax credits to a company that brings a jack-up rig to the Cook Inlet.
Four other bills aimed at encouraging Cook Inlet development remain in House Resources.
The bills come in response to growing concerns about pending shortages of natural gas supplies from the Cook Inlet basin. Natural gas is used to heat buildings and is the primary fuel for power generation in Southcentral Alaska.
Free seismic data HB 257 would make state-owned seismic data available free of charge to accredited domestic research institutions; anyone involved in Alaska oil, gas or minerals exploration; or to anyone in a situation where the provision of the data would serve the best interests of the state.
Rep. Tom McKay, chair of the House Resources Committee, told House Finance that making seismic data more accessible can stimulate more interest and investment in oil and gas development.
"This bill represents a pivotal step towards realizing the untapped potential of Cook Inlet, encouraging innovation, and fostering a competitive energy market," he said.
Trevor Jepsen, staff to Rep. McKay, said that the relevant seismic data had been relinquished to the state 10 years after it had been gathered by companies that had received state geological and geophysical tax credits. By giving out the seismic free of charge, rather than selling it, the state would forfeit a small amount of revenue. In return the state would encourage more interest in Cook Inlet exploration and development, Jepsen said.
Royalty reductions HB 223 would eliminate state royalties for natural gas production and reduce royalties by 50% for oil production for 10 years from gas and oil fields in the Cook Inlet basin that start production after July 1, 2024. The reduced royalty rates would also apply to a field that has been shut in during 2024 but is later brought back into production, or to production from a prospect outside an area accessible to existing wells.
Rep. George Rauscher, vice chair of House Resources, told House Finance that the bill represents a crucial step in revitalizing the gas industry in the Cook Inlet basin. The bill aims to elevate Alaska's competitiveness for natural gas investments, he said. Rauscher said the bill resulted from the merger of the bill in its original form with a near identical bill that Gov. Mike Dunleavy had prepared.
Derek Nottingham, director of Alaska's Division of Oil and Gas, told the committee that at present Cook Inlet gas production is expected to fall below the anticipated 70 billion cubic feet per year annual demand level in 2027 and 2028. But, with appropriate development incentives, the timeframe for the shortfall could be extended out to around 2029 or 2030, he said. Moreover, the sale into storage of excess gas produced in that timeframe could potentially extend the adequacy of gas supplies through to 2037. Although this analysis is subject to uncertainties such as future consumer gas pricing, development incentives are anticipated to extend the timeframe within which gas production could meet demand levels, he indicated.
More effective than existing procedure Currently the Department of Natural Resources does have a procedure whereby it can authorize the reduction of royalties for a specific field. Asked why this arrangement would not suffice to achieve the objectives of the proposed legislation, DNR Deputy Commissioner John Crowther said that reducing a royalty level via this existing route is typically a complicated, very time consuming and expensive process.
"We think the legislation is much more effective at immediately promoting investment," Crowther said.
And rather than depending on the vagaries of the gas market to drive development decisions, a competitive royalty environment can induce companies to make the necessary investments, he said.
Nottingham presented data estimating the levels of gas supply cost reductions that a developer might gain from the enactment of the proposed legislation. Other data provided estimates of how the reduced royalty rate could potentially reduce the payback time on a development by several months to more than a year, while increasing the development's internal rate of return by around five percentage points.
Jack-up rig tax credit HB 387 would enable the award of a state tax credit to any entity that installs a jack-up rig in Cook Inlet, provided that the rig is used, or contracted to be used, for at least three years in the inlet. Currently the only jack-up rig in the inlet is contracted by Hilcorp Alaska for its offshore drilling operations -- the idea is to make a rig available to other operators for offshore exploration and development. The credit would equal the total cost, to a maximum of $75 million, of purchasing or leasing the jack-up rig and transporting the rig to Cook Inlet. The rig could operate in state or federal waters.
"If we wanted increased drilling activity in Cook Inlet, at least offshore, we would need another jack-up rig, because the current rig in the inlet is pretty much full up drilling wells for Hilcorp," McKay told House Finance. It is necessary to have another rig, to have any impact on increased gas production, he added.
Encourage further offshore drilling Jepsen said that the current jack-up rig in the inlet, the Spartan 151, is primarily being used by Hilcorp to enable the company to meet the terms of its firm gas supply contracts. In addition, there are prospective areas of the Cook Inlet where the water is too deep for the Spartan rig to operate, he said.
"The state fully or partially subsidizing the purchase or transfer of another jack-up rig, to develop Cook Inlet offshore reserves, will offset the risk and increase the rate of return for a potential project," Jepsen said.
The credit would apply to any company that brings a rig to the inlet, and not necessarily to an oil and gas company, he commented. McKay commented that, although there are already land rigs for conducting land based drilling, some of the larger gas prospects are offshore.
Asked about a previous state jack-up rig tax credit, Jepsen said that, whereas that credit had only applied to drilling up to three exploration wells, the proposed credit would target having a rig available for non-stop drilling for at least three years for both exploration and development wells.
In response to a question about alternative ways of drilling offshore in the inlet, McKay commented that it would likely be impractical to use a dynamically positioned drill ship, in particular because of the high fuel costs involved in stabilizing the position of the ship in the tidal currents.
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