State prepares for Cook Inlet lease sale

The Alaska Department of Natural Resources’ Division of Oil and Gas will start taking bids in June for 9.95 million acres of oil and gas leases on the Alaska Peninsula and Cook Inlet. The opening of the state’s annual lease was announced Friday.

In upper Cook Inlet, the auction-style sale will offer leases on 4.2 million acres of state-owned subsurface mineral rights — divided into 815 tracts ranging from 640 to 5,760 acres — for oil and gas exploration and drilling by corporations and individuals.

The bidding offers coastal and onshore leases for most of the western Kenai Peninsula north of Anchor Point, with leases in the middle of Cook Inlet available from just south of Kalgin Island to the top of Knik Arm, with other onshore leases available in the west Inlet and the Susitna River area. A map can be found here.The minimum bid is $25.00 per acre. Bidding will start with in-person submission on June 19 in Anchorage, and will open to the public on June 21.

The upcoming auction will also offer 5.75 million acres on the Alaska Peninsula. This area, largely lacking the road, utility, and pipeline infrastructure of Cook Inlet, has not been as popular with bidders. Bids on the Alaska Peninsula leases are infrequent, with none occurring between 2007 and 2014, and only a few since then. Accordingly, the minimum bid is a fifth of Cook Inlet’s, at $5 per acre.

Proximity to an established market may also make Cook Inlet’s leases more valuable, said Petroleum Land Manager Kyle Smith of the Department of Natural Resources. Most of the roughly 15,000 barrels of oil per day produced in Cook Inlet are used by the Tesoro petroleum refinery in Nikiski, and much of Cook Inlet’s natural gas is bought as fuel by local utilities.

“There’s a ready market for gas and for oil and such,” Smith said of the Inlet region. “The gas that’s produced here is mainly marketed here, and you don’t have a ready market out there on the Alaska Peninsula.”

Smith said the leases on offer this year are essentially the same as those offered in last year’s sale, which was canceled the day after in-person bidding opened, with no oil companies expressing interest.

Half the money collected in the bidding is put into the Alaska Permanent Fund, while 49.5 percent becomes general fund money and .5 percent funds education, said Smith. Minimum bids are determined by analyzing past sales.

“We have what we call a core team here, made up of commercial analysts and geologists, and some other technical disciplines, and they do a sort of analysis of past bids, what’s gone on in past lease sales, so we can make a determination as to what level we feel comfortable with offering the lease tracts for,” Smith said. “Basically we do sort of a search back into the last 20-30 years, and mainly we focus on the last ten years to try to derive a price that would keep the state’s interest and continue to be an attractive price for new entries.”

Cook Inlet was first included in the state’s annual lease sales in 1999. In the early 2000s, sales here typically brought in about $1 million.

Though the million-dollar stability lasted at least until 2003, recent sales have been far more erratic — the low oil-price year 2009 brought only four bids, but when oil was greater than $100 per barrel in 2014, the state sold 34 tracts for a total of $6.34 million.

The high bidder that year was Apache Corporation, which bought 7 tracts for $2.18 million. It was followed by Hilcorp, which spent $1.82 million on 13 tracts.

Apache had explored on leases north of Nikiski since 2010, but left Alaska in March 2016. Its leases expired at the end of that year and will be available once again in the upcoming sale.

The Cook Inlet and Alaska Peninsula lease sales have traditionally been held in May, but this year they’ve been pushed back until June to coincide with a planned sale of federal oil and gas leases in neighboring waters. The federal Bureau of Ocean Energy Management (BOEM) plans to offer oil and gas leases in waters beyond Alaska’s offshore boundary just south of Kalgin Island and further than three miles from shore, covering about 1.09 million acres from that border to near Augustine Island. Here’s a map of the federal lease area.

“Essentially companies can come and bid on both sides of the line,” Smith said. “…We suspect that there is probably some advantage to having both lease sales open at the same time, and people being able to bid across the lines.”

State sales on the north slope are usually held alongside the federal sales, but in Cook Inlet the most recent federal sales haven’t taken place. The last bid received on Cook Inlet’s federal oil and gas leases was in 1997. The subsequent federal lease sale in 2004 passed without bids, and sales in 2007, 2009, and 2011 were canceled due to lack of industry interest, according to BOEM records.

Nonetheless, BOEM announced in October 2014 that it was planning for another Cook Inlet lease sale, and subsequently released a draft Environmental Impact Statement on the plan in July 2016 and held public hearings on it in August 2016. The environmental impact statement was finalized in December 2016. Alaska Governor Bill Walker received a formal notice of the plan in February 2017, and his office will finish a review of it on May 1. Smith said the BOEM sale is planned for June 21.

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