Gov. Dunleavy introduces proposal to incentivize future natural gas production in Cook Inlet

Gov. Dunleavy introduces proposal to incentivize future natural gas production in Cook Inlet
Published: Oct. 26, 2023 at 4:41 PM AKDT
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ANCHORAGE, Alaska (KTUU) - Alaska Gov. Mike Dunleavy is now taking action to increase the amount of natural gas being produced in Cook Inlet as the state’s supply of the fuel struggles to keep up with demand.

Dunleavy said his administration is proposing legislation to incentivize future natural production in the Cook Inlet. The proposal would make it more economically feasible for companies to increase natural gas production in Cook Inlet by reducing the royalty rate on all new oil and gas reserves purchased online for ten years after their startup.

“We could all recall back in 2010 when we’d see brownout commercials by the mayors at that time,” Dunleavy said. “That was addressed at that time through some incentives.”

Alaska Department of Natural Resources (DNR) Commissioner John Boyle said the proposal isn’t aimed at changing the terms for existing production. He said that production will continue to be taxed and will continue to pay a royalty at the standard 12.5%.

Furthermore, he said the issues with supply constrained in the Cook Inlet aren’t related to the geology, they are related to the economics. Boyle said the USGS estimates that there are over 19 trillion cubic feet of natural gas available in the Cook Inlet that’s technically recoverable.

“I mean, we firmly believe that by creating a more competitive economic environment in the Cook Inlet that we will see economic activity increase. We will see more exploration. We’ll see more development, and ultimately, we’ll see more production, which will trickle out to greater energy security for the Railbelt and for Alaska at large,” Boyle said.

The commissioner added his department isn’t solely resting on this legislation alone “as the only solution in the toolbox.”

DNR recently announced an upcoming lease sale in which the department is changing the terms of the leases, shifting over to where the state will have a fixed bonus bid component and net profit share component to new leases. He said instead of coming in and paying a state a flat royalty rate as they start producing new oil, companies will only pay the state based upon their ability to be profitable or not.

“So by making the state a partner with them in terms of we take our share when they’re profitable, when they’re actually cashflow positive and making money ... we can help ensure that those companies have the incentive and have the underlying economics that will help support that new development,” Boyle said.

Cook Inlet Gas Supplies

Gov. Mike Dunleavy speaks on what he calls "the looming shortage of natural gas produced in Cook Inlet."

Posted by Alaska's News Source on Thursday, October 26, 2023

Alaska Department of Revenue Deputy Commissioner Fadil Limani said Cook Inlet gas royalties averaged just 3.6% of state royalty income in fiscal year 2022, amounting to $45.2 million. He said the forecast revenues for fiscal 2024 for the existing royalties based on the current proposed legislation are projected at $60 million.

“So, in essence, 1% of something is better than 100% of nothing. If a qualified new production does come online as a result of the proposed legislation, then that would essentially have a positive revenue impact,” Limani said.

Dunleavy said the proposed legislation will give Alaska the tools to help companies unlock a substantial amount of natural gas in the Cook Inlet for several years to come.

“We believe that we can get gas flowing in two to three years, which will then assist with that drop off in some of the gas that we’re currently producing. We got a lot of pools of gas out there, we got a lot of pockets of gas out there. There’s no doubt about it. That’s been confirmed by a number of different independent agencies,” Dunleavy said.

Anchorage Mayor Dave Bronson attended Dunleavy’s announcement and said energy security is critical for Alaskans. Bronson said he fully supports the governor’s proposal.

“We will be down in Juneau here this spring supporting this effort because of the importance of it — this is talking about keeping lights on and keeping our homes heated. Right now, we need to understand Cook Inlet does have the natural gas that we need, it’s there,” Bronson said. “This is a critical issue for the Railbelt, Alaska and certainly for the city of Anchorage. Geographically, we’re the single largest user of natural gas on the Railbelt.”

During the announcement, Dunleavy took a shot at the Biden administration by saying, “Alaska is being singled out and brutalized by this administration” and “it’s a constant fight with our own government to try and let us survive as a state and prosper as a state.”

“When you sow uncertainty across the board, it shouldn’t surprise anyone that investors are hesitant to invest, especially in a place like Alaska, because of its small size, especially in a place like Alaska, that the federal government and a lot of their acolytes would like to believe should be a national park for the entire country,” Dunleavy said.

Dunleavy said legislation will be introduced in the upcoming legislative session, and If passed, new drilling and development activities would be incentivized immediately.