State may bid for oil and gas leases in Jan. 6 sale in Arctic refuge

A state corporation has been given approval by its board to bid for acreage in a planned Jan. 6 federal lease sale in the Arctic National Wildlife Refuge. The Alaska Industrial Development Authority, or AIDEA the state’s development finance corporation, was given authorization to place up to $20 million in bids for the acreage.

Former Alaska Gov. Frank Murkowski thinks the idea is good because the state is in a unique situation of getting half its money spent on bids returned by the federal government, an advantage no private company has.

However, a former state oil and gas director, Kay Brown, questions whether the authority has the expertise or capability to participate in a lease sale as high-risk as ANWR.

AIDEA’s bidding in the sale is a contingency in case bidding from industry is light and some tracts receive no bids, said Alan Weitzner, executive director of AIDEA. The authority’s board is being asked to give Weitzner approval to submit lease offers if it appears there will be little interest from companies.

If the state obtains leases it would work with companies in a farm-out, or sublease, arrangement, for subsequent exploration, particularly after data from a three-dimensional, or 3D, seismic exploration program set for this winter and spring is available.

It is not clear BLM will approve the seismic program, which is planned by SA Exploration, an Alaska company, but the program would not be completed in any event prior to the Jan. 6 lease sale.

State officials have talked about bidding in an ANWR sale for some time, but the recent interest was motivated by former Alaska Gov. Frank Murkowski who urged the state to bid after becoming concerned about light interest from industry and opposition to the sale.

“So far, there has been no indication from the (Alaska) producers of an intent to bid on the tracts. We hope some of the smaller independent producers will bid, but we haven’t heard from Exxon, ConocoPhillips or Hilcorp (which is now active on the slope). BP has already left Alaska,” Murkowski wrote in an Op-Ed for Alaska newspapers.

In comments to the AIDEA board last Wednesday, Murkowski said the state is in a strong position because federal law provides that 50 percent of lease sale bonuses, rentals and royalties are shared with the state. This means that the state gets back half of what it spends on leases.

Alternatively, the state could up its bidding to $40 million and get $20 million back, therefore doubling the impact of a $20 million authorization by the authority’s board. “Only AIDEA is in a position to get acreage at a 50 percent discount,” Murkowski told the AIDEA board.

However, former state Division of Oil and Gas director Kay Brown she doesn’t think it wise for the state to dabble in lease bidding, a risky enterprise best left to oil and gas companies who have expertise. “AIDEA has neither the capability nor the expertise required,” said Kay Brown, who is also a former legislator along with having managed the oil and gas division, which among other things conducts lease sales and administers leases on states lands.

“Being a federal lessee is not an appropriate role for AIDEA. It’s a dubious investment – as evidenced by industry lack of interest (at least by major oil companies) which is driving the justification for AIDEA to bid. The world is moving on and away from oil dependence, as evidenced by the recent actions of financial institutions in our country and worldwide, dampening future prospects for financing arctic oil development,” Brown said in remarks to the AIDEA board.

AIDEA mainly does infrastructure financing and lending for business and real estate development with commercial banks. The authority has participated in financing small oil and gas exploration and development projects on the North Slope and in Cook Inlet, such as the small Mustang field project; Cosmopolitan, a small oi field in Cook Inlet, and the Kitchen Lights, a small gas field in the Inlet.

The authority’s oil and gas expertise is limited to financing industry projects rather than in bidding in a lease sale or evaluation of tracts. However, it is possible that geologists from the state Department of Natural Resources, which has access to ANWR geological data, will advise the authority in submitting bids and negotiating farmouts to companies if leases are acquired.

The state also has access to confidential data from the lone exploration well drilled in the coastal plain, a Chevron-BP drilling initiative in the early 1980s. Information from the KIC No. 1 well has never been released and is still protected as confidential well data.

This information is on file with the Alaska Oil and Gas Conservation Commission, a quasi-judicial state regulatory agency that is separate from the DNR. However, it is believed, but not confirmed, that it is also available to the state natural resources department.

Although the KIC well data is filed with the state there may be complications in using it in the lease sale, however. The well was drilled on private land in a 91,000-acre inholding in the refuge owned by two Alaska Native corporations, Kaktovik Inupiat Corp. and Arctic Slope Regional Corp.

If the two Native corporations agree the data could be used by the state in planning bids or subsequent negotiations with oil and gas companies. ASRC and KIC would likely request some form of compensation for access to the data since it is private property.

ASRC’s role in a lease sale or following it has also become a topic of conversation as the sale date approaches. The corporation, based in Utkiagvik, formerly Barrow, is one of most financially successful and influential among Alaska’s Native corporations. It owns the subsurface rights in the 91,000 enclave in the coastal plain, while Kaktovik Inupiat Corp. the village corporation for the nearby Inupiat community of Kaktovik, owns the surface lands.

Because of that, ASRC and KIC have large financial stakes along with the state of Alaska in the outcome of the BLM’s sale on Jan. 6. If a discovery is made on federal leases sold in the sale it would enhance the value of the 91,000-acre inholding. Conversely, if dry holes are drilled it could degrade the value of the ASRC and KIC lands.

It’s also possible that ASRC could bid for leases being sold, either on its own or in partnership with the state. The corporation has oil and gas technical expertise through its subsidiaries that provide services to North Slope operating companies.

ASRC is also an owner of mineral rights elsewhere on the North Slope and now receives royalty payments on production. Through its exploration subsidiary ASRC has also bid on and won leases in state sales on the slope and has done exploration drilling and made discoveries.

If the courts or the Biden administration halts the lease sale ASRC might have grounds to seek to develop its lands as well as a right-of-way or corridor across the coastal plain to provide access from its enclave to state-owned lands across the Canning River, which forms the western boundary of ANWR.

Previously ASRC and KIC were allowed to do exploration on their lands, which led to the KIC No. 1 well, but were precluded from developing any discovery on their lands until Congress approved exploration and leasing in the coastal plain. That has now been done, however, in the 2017 federal tax reform act. It’s possible that this would lift restrictions on development for ASRC and KIC.

BLM will conduct the lease sale 10 days before President-elect Joe Biden, who opposes ANWR leasing, is sworn into office. If the sale comes off — there are efforts underway by conservation groups to stop the sale in the courts – the outcoming Trump administration is likely to move to award leases before Biden takes office.

That would create a property right for leaseholders, including possibly the state of Alaska, that could complicate efforts by Biden to thwart drilling on the leases. The Jan. 6 lease sale will be held via video streaming at blm.gov/live.