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Bill would allow subsurface only, Kachemak Bay gas-only leasing
Kristen Nelson Petroleum News
There is an area of state waters off the southern Kenai Peninsula closed to oil and gas leasing, but adjacent to an area where Hilcorp Alaska is developing the Seaview unit - a natural gas unit expected to come online later this year.
If the natural gas resource at Seaview extends out under state waters in the inlet, the area immediately offshore the Seaview unit could not be leased because it lies within the Kachemak Bay Oil and Gas Closure Area, which means the state could not collect lease bids, rental payments and royalties from the area.
The administration has introduced a bill which would allow the Alaska Department of Natural Resources, Division of Oil and Gas, to issue gas-only leases allowing drilling from shore but no surface access to tracts in this offshore area.
Sponsor statement In a sponsor statement Gov. Mike Dunleavy said “gas reservoirs in Cook Inlet do not abide by lines demarcated” in statute for the Kachemak Bay Oil and Gas Closure Area established in Alaska Statute 38.05.184. He said, “certain surface leases on both state and private onshore land in the Cook Inlet area have the potential to produce gas from adjacent deposits lying beneath the seabed,” and without the proposed legislation, “the state may be left without a clear mechanism to collect royalties from gas being produced from such undersea areas by adjacent leaseholders.”
The proposal would open a small area to non-surface leasing, specifically within Township 5 South, Range 15 West, Seward Meridian.
Lessees would be prohibited from using the surface of the leased area to drill for or extract gas, but the state would be able to collect royalties on gas that might otherwise be produced by adjacent leaseholders.
“By prohibiting surface use, the bill adequately protects the habitat while ensuring the state obtains its fair share of gas produced from state land,” Dunleavy said.
The bill would add a section to the Alaska Land Act clarifying that “when a statute restricts the surface use of an oil and gas lease area, it does not also restrict subsurface uses unless specifically provided. Adding this section would pave the way to allow subsurface oil and gas leasing in additional areas in the future,” he said.
Fiscal note Senate Resources heard the bill, Senate Bill 62, on March 10 (the House version, House Bill 82, referred to the House Special Committee on Fisheries and to House Resources, had not yet been scheduled for a hearing when this issue of Petroleum News went to press).
A fiscal note signed by Tom Stokes, director of the Division of Oil and Gas, said the bill would not significantly alter department activities, “instead, it removes an artificial barrier to allowing the Division to offer leases for oil and gas exploration in a small portion of the Cook Inlet, adjacent to the current leasing program.”
Committee hearing Haley Paine, deputy director of the Division of Oil and Gas, told Senate Resources the bill would allow the division to capture revenue from state-owned resources which underlie lands restricted to surface use, while only allowing drilling and development from unrestricted land and not granting any right for use of the surface of the restricted land.
The lands made available for subsurface only leasing in the bill are adjacent to active development at Seaview, she said, and she noted that at the Cosmopolitan unit to the north, all the resources are on state offshore leases but are being developed from onshore.
Revenues available from surface-use restricted lands could include lease sale bids, annual rental payments and royalties.
Paine said modern drilling technology enables the development of oil and gas from adjacent lands with no impact to the surface of the subject land and said the state would benefit from the ability to capture revenue through development of state resources with no impact to the surface of projected lands using established regulatory methods.
The main concern is to have a mechanism for collecting royalties and she said if unleased land is drained from adjacent leases, royalties may not be paid or revenue could be diminished and remedy might have to be sought through the Alaska Oil and Gas Conservation Commission.
Paine noted that the division can’t exercise all of its regulatory authority over unleased acreage and told the committee the lease is the primary mechanism for enforcing mitigation measures and for sharing of drilling and reservoir data.
Bill specifics The bill applies specifically to the area within Township 5 South, Range 15 West, Seward Meridian and would authorize gas-only leases. Paine said the intention of the bill is to provide a general framework, and any similar area identified in the future with restricted surface access and resources adjacent to state onshore leases from which drilling and development could occur would require a separate bill.
She said the bill creates an opening in case of future opportunities but is targeted to the area specified in the bill.
- KRISTEN NELSON
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