State receives only three bids in Cook Inlet oil and gas lease sale, continuing multi-year trend of low interest from industry

Alaska received bids on three state oil leases in its annual areawide Cook Inlet lease sale in results announced June 12. Hilcorp Energy, the major Cook Inlet oil and gas produced, was the only bidder.

The state received $177,636 in cash bonus bids for leases covering about 4,441 acres, the state Department of Natural Resources said. All tracts sold were onshore. One tract won was on Cook Inlet’s west side near the gas-producing Pretty Creek, Lewis River and Ivan River fields. Two others were on the Inlet’s east side near the closed Sterling Unit, which has a history of gas production.

“While the state of Alaska is disappointed by the low level of interest in this sale, it is encouraging to see Hilcorp continuing to invest in oil and gas leases in Southcentral Alaska,” said John Boyle, Alaska’s Commissioner of Natural Resources.

Hilcorp is the major producer and owner of oil and gas facilities in Cook Inlet and it’s important to keep the company interested in the Inlet. Hilcorp is now mostly focused on its North Slope operations.

The June sale in the Inlet fell well below the state’s five-year average of 13,400 acres leased in the annual fall areawide sales. Most recent sales have resulted in a handful of leases sold adjacent to or near existing production and usually by owners and operators of existing production.

Areawide sales involve the offering of all unleased state land in a region. The Cook Inlet areawide sale, which also includes state land on the Alaska Peninsula, is typically held in late spring. North Slope areawide sales are held in late fall and include state-owned submerged lands in the offshore Alaska Beaufort Sea and the North Slope “foothills” region, on the southern slope, as well as the central North Slope where most industry activity is focused.

The sale was the second in which the state to offer net profit share revenue terms rather than a traditional one-eighth royalty share to the state. Hilcorp offered an average net profit share of 5% on the three leases in lieu of the state’s traditional 12.5% royalty on gross production royalties.

The state has been experimenting with different ways of stimulating interest and the net profits bidding option is intended to improve the economics of marginal projects because the payments to the state come from net income rather than gross revenues. That allows for faster recovery of capital, Boyle and other state officials have said.

A second area offered in the sale, for land on the Alaska Peninsula west of Cook Inlet, drew no bids.

The sale continued a multi-year trend of low and modest bidding for Cook Inlet state acreage. What was somewhat encouraging to Boyle was that Hilcorp was focused on natural gas, which is a prime goal for the state because existing Cook Inlet gas production is expected to begin declining in 2027.

This is important because gas fuels space heating and most power generation in Southcentral Alaska, where about half of Alaska’s population lives. State officials hope to offset the decline with new incentives.

Cook Inlet is Alaska’s oldest producing region where production both onshore and offshore began in the late 1950s and early 1960s.

In the 1960s offshore platforms were built in the Inlet, many of which continue to operate but at low levels of production. Hilcorp is the sole operator.

Oil production continues fall off, which is concerning to Boyle and other state officials because Cook Inlet crude oil is important to the Marathon Petroleum refinery at Nikiski, which is on the Kenai Peninsula and supplies the bulk of Alaska’s gasoline and much of the jet fuel used in the state.

Marathon also refines crude from the North Slope that is transported to Nikiski from the Trans Alaska Pipeline System’s Valdez Marine Terminal in Prince William Sound, which is east of Cook Inlet.