Sponsors of HB 380 wanted to encourage Cook Inlet development

Petroleum News Alaska Staff

House Bill 380, sponsored by Rep. Mark Hodgins, R-Kenai, and cross sponsored by then Sen. Drue Pearce, R-Anchorage, passed the Legislature in 1998 only to be vetoed by Gov. Tony Knowles. His veto was overturned and HB 380 became law.

It was designed to encourage the development of older, economically marginal Cook Inlet oil and gas reserves by reducing the royalty rate lessees pay for six specific fields if they were brought into production by Jan.1, 2004.

The reduced royalty rate of 5 percent would be in effect for 10 years and only extend to the first 25 million barrels of oil and first 35 trillion cubic feet of gas produced. All of the fields specified in the bill were discovered more than 30 years ago, but industry representatives contended that had always been too expensive to develop.

The sponsor statement for HB 380 in 1998 read as follows:

“The intent of House Bill 380 is to encourage the development of gas reserves within the Cook Inlet sedimentary basin. New gas reserves developed as a result of the proposed legislation could be instrumental in maintaining reliable and economically priced gas supplies for Southcentral consumers, including residential and commercial users.

“In addition to stimulating the development of several known undeveloped fields, many of which were discovered more than 30 years ago, House Bill 380 has the potential to leverage additional exploration and development in the vicinity of new infrastructure, including pipelines and associated facilities, required to develop those known fields. Any new oil and gas production resulting from the development of these fields will in turn reduce the average cost of producing existing reserves, and extend the economic life of both existing and new Cook Inlet production and transportation infrastructure.

“Under the terms of the proposed legislation, lessees owning leases overlying previously discovered oil or gas fields in the Cook Inlet basin which have remained undeveloped or shut-in from at least Jan. 1, 1988 through Dec. 31, 1997, would have an incentive to develop those fields as rapidly as possible. The legislation would provide that, for oil and gas produced from undeveloped or shut-in fields brought into production before Jan. 1, 2004, lessees would pay a reduced royalty of 5 percent, instead of the 12.5 percent specified in the lease, for a period of 10 years following the date on which oil or gas production begins.

“By establishing a short period of eligibility — ending on Dec. 31, 2003 — House Bill 380 ensures that lessees diligently pursue development or forfeit the opportunity to pay reduced royalties. By limiting the period of reduced royalty payments from qualifying fields to 10 years following the beginning of production, the legislation provides a reasonable and measurable limit to the state’s foregone royalties in exchange for oil and gas production that may otherwise not occur. The state’s royalties from currently producing Cook Inlet oil and gas fields will not be affected by House Bill 380.

“By encouraging the development of existing uneconomic oil and gas fields, House Bill 380 will benefit the state and local economies through taxation and royalties, encourage future development of new oil & gas discoveries by lowering the costs of industry infrastructure, as well as taking care of job #1 — providing jobs for Alaskans.”