Gara wants pause on Nuna royalty for new administration

Rep. Les Gara is asking state officials to delay a decision on reducing royalty rates for a proposed North Slope development until after Governor-elect Bill Walker takes office.

“The outgoing Parnell Administration should leave the initiation of a proposal on this major royalty reduction for Governor-elect Bill Walker. A departing governor should not set in motion a proposal decreasing the revenue we receive for our oil by potentially tens of millions of dollars, or more, in his last two weeks of office,” Gara wrote to Natural Resources Commissioner Joe Balash and Division of Oil and Gas Director Bill Barron.

In an Oct. 28 ruling signed Oct. 29, the Alaska Department of Natural Resources proposed to drop the royalty rate on five leases at the proposed Nuna development to 5 percent if operator Caelus Natural Resources Alaska LLC sanctions the project by the end of the year and meets spending and development targets through early 2017.

The existing royalty rates on those fives leases are 12.5 percent and 16.667 percent.

Because of its “gross value reduction” provision, the More Alaska Production Act, also known as Senate Bill 21, “already produces a negative or near zero production tax worth for post-2003 fields like Nuna” according to Gara. “Reducing the separate ‘royalty’ Alaskans receive from this field by over 50 percent might leave Alaskans with very little worth for our oil, and that may not be justified under a fair review of the facts,” he added.

The Nuna project would be an extension of the existing Oooguruk unit.

Pioneer Natural Resources Alaska Inc. brought the Oooguruk unit into production in 2008 and proposed the Nuna Development Project in 2010. The company spent several years drilling exploration and appraisal wells before selling its Alaska assets to Caelus.

The Texas-based Caelus was enthusiastic about Nuna from the start.

When the company arrived in Alaska, in November 2013, officials said they would start work on Nuna “pretty much immediately.” In April 2014, after closing on the sale, Caelus Chief Executive Officer Jim Musselman told Petroleum News, “We’ve got the funds committed and we’re moving forward as quickly as we can.” But in July 2014, the company told state officials it could only pursue development with a royalty reduction.

In its application, Caelus requested a flat 5 percent royalty rate on 11 leases until revenues covered upfront development costs. At that point, the royalty rates would have increased by 1.875 percent annually, for four years, and then returned to original levels.

State statutes give the Department of Natural Resources the ability to reduce royalty rates on leases if rising costs or falling commodity prices threaten the economics of a field.

After reviewing proprietary economic modeling, and running alternative projections, the state agreed to reduce the royalty rate on five leases. The reduction would remain in effect until Caelus earned a set amount of revenue from the Nuna development project.

While acknowledging that officials are allowed to reduce royalty rates, Gara believes the decision should be left to the incoming administration. “The Walker Administration will have qualified agency experts, and we should leave this multi-million dollar tax break decision for the Governor Alaskans just elected. The public is entitled to know, with confidence, that this is not a last minute proposed giveaway of our oil wealth,” he wrote.

In his ruling, Balash offered to discuss the matter with state lawmakers. The Legislative Budget & Audit Committee plans to discuss the matter at a Dec. 2 meeting, the day after Walker is scheduled to be sworn-in at a ceremony in Juneau. Walker recently announced plans to replace Balash as Natural Resources commissioner with former Alaska Division of Oil and Gas Director and former U.S. Geologic Survey Director Mark D. Myers.

Even with its claim that Nuna is only economic with royalty reduction, Caelus is moving ahead on development work this winter. The company plans to lay gravel this winter, install flowlines and facilities in early 2016 in preparation for start-up in the fall of 2016.

- Eric Lidji