Dunleavy Offers Plan For Southcentral Gas Supply

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Category: News

Created on Friday, 27 October 2023 15:08

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By JAMES BROOKS

Alaska Beacon

Facing an impending natural gas production shortage in Southcentral Alaska, Gov. Mike Dunleavy plans to reduce or waive state royalty payments on new gas basins, effectively subsidizing the cost of new drilling.

The governor announced his proposal, which will be introduced to the Alaska Legislature in January, during a news conference on Thursday in Anchorage.

“We’re pretty confident we can squeeze more gas out of the Inlet through this process,” Dunleavy said, referring to Cook Inlet.

The governor said he also expects to introduce legislation to boost other forms of energy development. The details of those proposals are not yet available.

Projections by the state and firms involved in the natural gas industry indicate that gas production from Cook Inlet may run short of demand in two to three years.

The governor said he believes the new legislation could deliver results in that timeframe. That may not be enough to avoid cost increases; the region’s electric co-operatives and companies are considering gas-delivery contracts right now.

The problem isn’t one of supply — Cook Inlet remains gas-rich — but one of development; Hilcorp and the area’s few other producers have been slow to drill new wells.

The governor and Department of Natural Resources Commissioner John Boyle did not say that producers have committed to drill if the legislation becomes law, but said they think drilling is a likely outcome.

“We believe just through conversation, past practices, models occurring in other places, that if you reduce the royalty, it’s gas that becomes economical,” Dunleavy said.

In addition to production taxes, property taxes and the state’s corporate income tax, Alaska collects a share of gas and oil’s gross value of production because oil and gas is collectively owned by the state on behalf of its residents.

That share, known as the royalty, is generally between 12.5% and 16.67%. In Cook Inlet, the state collects about $60 million per year in royalties.

The governor’s proposal wouldn’t reduce that amount: It applies only to new basins.

The new proposal is similar to one already being used by Boyle. 

Earlier this month, Boyle unilaterally waived all royalties on a Cook Inlet lease sale under a provision of state law that allows him to do so if it’s deemed in the state’s best interest.

That provision applies only to existing oil and gas basins. The new legislation would allow the state to reduce the royalty on new basins as well.

Interest in Cook Inlet drilling has traditionally been low. A state-run lease sale last year returned only six bids.

The public is likely to know in December whether Boyle’s test of the relaxed-royalty system is successful. Bids will open to the public Dec. 13.

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https://alaskabeacon.com/james-brooks

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