In a first, no bids offered at Cook Inlet lease sale

No bidders showed up for a Cook Inlet oil and gas lease sale planned for May 5, and a top industry official blames a toxic political environment that has developed in Juneau over oil and gas tax legislation.

“It is no wonder there were no bids,” said Alaska Oil and Gas Association President and CEO Kara Moriarty. “What company would even consider new projects in Cook Inlet at a time when the Alaska Legislature is considering changes that will make it more expensive to operate in the basin?”

A top state official said other factors were in play, however.

“We attribute the lack of participation in this lease sale to a protracted period of low prices as well as a limited amount of available acreage around producing areas and infrastructure in Cook Inlet,” Division of Oil and Gas Director Corri Feige said in a statement. “The number of state oil and gas leases currently leased in Cook Inlet is above the historical average. Currently, there are 335 tracts leased in Cook Inlet, totaling over 911,000 acres of state land,” Feige said.

The sale is held annually in the spring and offers all unleased state-owned uplands and submerged lands in the Cook Inlet basin in Southcentral Alaska.

Moriarty said the message people should take from the no show of bidders, is that, “Alaska is an unpredictable, unstable, and uncertain place in which to do business.

“If the governor and sympathetic members of the Legislature make it even harder for companies to invest in Alaska, this lease sale result is likely just the beginning in a series of similar announcements. Either way, Alaska loses.”

State lawmakers are in an extended legislative session in the state capitol wrestling with a series of proposed changes to petroleum exploration and development tax credits.

The changes would either end or phase out a set of incentives in Cook Inlet the state has offered that include cash rebates to companies. Gov. Bill Walker said the program has become too costly for the state, which is being battered by sharply lower oil revenues.

Moriarty said some changes proposed would cut tax credits just as companies are beginning development of new projects, jeopardizing their financing.

Cook Inlet has seen a burst of new exploration and development in recent years mostly by independent companies purchasing assets and exploring. The state's incentive program was a particular encouragement for small independents that could use the state tax credits to get financing for drilling.

Several gas discoveries have resulted from the exploration by independents and one company, BlueCrest Energy of Fort Worth, Texas, is now developing an oil discovery.

Industry bidding was trailing off even last year as oil prices fell. In the state’s 2015 Cook Inlet areawide lease sale, held last May 7, the state Division of Oil and Gas auctioned seven oil and gas leases May 7 to three companies, Hilcorp Energy LLC and AIX Energy LLC, two producers in the region, and Woodstone Resources LLC, a small independent company based in Texas. The state collected $749,819 in bonus bids on the seven tracts.

However, having no bids at all is a first for a state oil and gas lease sale in one of the state’s main producing areas.

There have been previous cases where no bids were received for state leases in remote areas such as the Brooks Range foothills in the southern North Slope and the Alaska Peninsula in southwest Alaska.

A federal Outer Continental Lease sale in lower Cook Inlet was once cancelled for lack of bids but the region is in deeper water and farther offshore than is the case in upper Cook Inlet where the state owns submerged lands and industry is active, with producing offshore platforms.

There are also other complications in the Cook Inlet situation than low oil prices and the pending winding down of state incentives, however.

The regional geology is gas-prone and while new gas discoveries have been made, and while regional gas prices, at $7 to $8 per thousand cubic feet, are among the highest in the nation, there is also a limited local market. Most of the market is with regional utilities that now have contract needs met until 2022 and 2024.

Major gas users are also now purchasing their own reserves so they are less dependent on producers. Chugach Electric Association, the state’s largest electric utility, recently joined with Anchorage’s Municipal Light & Power to purchase one third of the Beluga gas field, on the west side of Cook Inlet, where ML&P already owns a third.

ConocoPhillips previously provided an alternative export market for gas through the company’s liquefied natural gas plant near Kenai, but with low LNG prices in Asia it is considered unlikely that the plant will make gas purchases for export shipments this year.

Updated: 
05/05/2016 - 11:04am

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