Give Cook Inlet natural gas producers a break on state royalty to get more gas supply, governor says

Alaska Gov. Mike Dunleavy will propose reductions in royalties on state leases in Cook Inlet to spur more natural gas coming from the Inlet, where production is declining.

It is the second initiative the governor has announced this year to increase the gas supply for Southcentral Alaska communities. The first is an option for net profits bidding in an upcoming lease sale, which is hoped will bring in more bids for leases along with exploration.

Dunleavy made the announcement on the royalty reduction in a press conference in Anchorage Oct. 26. Royalties are now set at one-eighth or 12.5 percent of the value of production.

A target for the reduction, which would be allowed to 10 years, was not announced but the state has previously reduced oil production royalties for periods of five years as an incentive for producers to keep oil production platforms in Cook Inlet are marginally economic in operation.

State officials, speaking on background, said the reduction would be allowed only for new, undeveloped gas pools known to exist in existing state leases. Pools within reservoirs that now produce gas would not be eligible for the incentive, the officials said.

Dunleavy’s proposal would deal with a pending decline in natural gas production from existing Cook Inlet fields that is expected to start in 2027. Regional utilities use gas for power generation and to fuel space heating in residential homes and commercial and institutional buildings, so the decline is a matter of serious concern.

The utilities, led by Enstar Natural Gas Co., the regional gas distributor, and Chugach Electric Association, the state’s largest electric utility, are considering imports of liquefied natural gas from British Columbia or Mexico to augment declining gas supplies.

Dunleavy said he think the reduced royalty can result in new production within two to three years, delaying the need for imports.

If the Legislature makes the needed statutory changes the state Department of Natural Resources, which manages state lands and oil and gas production royalties, would manage the program but the Alaska Oil and Gas Conservation Commission, a regulatory body, would make the approvals of new pools and sort out the royalties where new gas and old gas are produced and comingled in producing fields.

It is uncertain whether the Legislature will approve the reduction. Lawmakers will convene their 2024 legislative session in January with an adjournment in May, and this issue could always be pushed to the side by other bills that are priorities.

Some lawmakers are already signaling support for the governor’s plan. Rep. George Rauscher (R – Sutton), chairs the House Special Committee on Energy, which has been focused on addressing the challenges of the looming Cook Inlet gas situation.

He is also a member of the governor’s Energy Security Task Force, which is now finishing its report.

“Our primary concern is in mitigating the anticipated rise in gas prices within the Cook Inlet, while also striving to secure the lowest possible price per kilowatt for consumers,” Rauscher said.

“To prevent the looming energy rate increases, we are diligently scrutinizing all available options and proposing the most effective solutions for both gas and new energy development. In preparation for the upcoming session, I am currently reviewing a series of legislative proposals slated for this session, including two of my own, which have emerged as a response to this challenge,” he said.

Rep. Tom McKay (R- Anchorage), chair of the House Resources Committee, said: “The looming natural gas shortage in the rail belt is one of the most important issues our state currently faces. My office has spent much of the interim focused on potential policy solutions and it is extremely encouraging that the governor's office is similarly concerned.”

“We owe it to Alaskans to find local solutions for jobs and economic stability and look forward to working with the Dunleavy administration on this matter in the House Resources Committee,” McKay said.

State natural resources commissioner John Boyle said: “There are known gas resources in Cook Inlet that are currently economically challenged. Governor Dunleavy’s proposed legislation gives us additional tools to incentivize exploration and development.”

“Royalty is the main economic lever the state can adjust in the Cook Inlet Basin to incentivize new activity and increase energy security. Royalty drives economics, and economics drives production,” Boyle said.

In state Fiscal Year 2022 the royalty from existing gas production in Cook Inlet amounted to about $45.2 million, the commissioner said. That would not be affected by the new proposal, which would apply to only new gas pools, he said.

The governor said other proposals will be made later this fall to encourage new Alaska energy production that will include renewable energy as well as traditional oil and gas. Renewable energy projects like wind and geothermal that are now proposed in Southcentral Alaska also pay a royalty to the state for the use of state land, and those developers are likely to ask for similar incentives.