NSWA Join Renew
See More See More
<< Back to News

New State Incentives a Big Boost for Cook Inlet

-Tim Bradner
-Alaska Journal of Commerce

The state has sharply expanded oil and gas exploration and development incentives — mostly aimed at Cook Inlet — hoping to inspire existing producers to invest more and to lure more independents to explore the area.
Larger operating companies in the Inlet, such as Marathon Oil, are cautious in their assessments, saying the incentives will help but are not a "silver bullet" for solving problems the industry faces, which include high costs and, for natural gas, limited markets.
"It's certainly a step in the right direction," said Carri Lockhart, Alaska production manager for Marathon Oil.
Independent companies that want to explore Cook Inlet are enthusiastic, however.
State legislators passed two incentive bills, House Bill 280 and Senate Bill 309, as they adjourned April 18. Gov. Sean Parnell has signed both measures into law.
"No other legislation in the past 20 years will have as positive an impact as these two bills," said Bruce Webb, a consultant working with Aurora Energy, a independent natural gas producer active in Cook Inlet.
Under the new program, explorers that don't have existing production in place to use the investment tax credits can cash out the credits in the same year the work is done, Webb said.
This is a boon to small independents that can use almost immediate state cash payments to help follow-up work in a multi-year program.
North Slope producers were left out of the incentives package this year, but Gov. Sean Parnell says he hopes the Legislature will extend them to the Slope next year.
The expanded program allows 80 percent to 100 percent of the costs of drilling exploration wells in deeper waters of Cook Inlet, where a jack-up rig is needed, to essentially be paid for by the state in the year the wells are drilled.
There is a cap of $25 million in payments for any one well, however, and if a discovery is made, 50 percent of the amount of the credit must be paid back to the state.
This change occurred under SB 309.
Kevin Banks, the state oil and gas director, said the incentives are intended to help independents that hold leases in a geologically prospective part of Cook Inlet that cannot be reached from shore or existing platforms finance the movement of a jack-up rig to Cook Inlet. Once the rig is in the Inlet, multiple prospects can be explored over multiple years, Banks said.
Under HB 280, all types of well work in existing fields as well as new exploration would be eligible for a 40 percent tax credit, up from 20 percent previously.
Under the former system there was an exploration investment tax credit system for as much as 40 percent of investments, but only certain wells qualified and the credits had to be taken over a period of time. Now the qualifications are removed and the credits can be taken in a single year.
HB 280 also includes new tax credits for development of third-party gas storage facilities.
Cook Inlet badly needs new investment, Banks said. The region has been producing since the late 1950s and existing fields have declined to the point that many operations are marginally economic.
There is considerable potential for new discoveries but of the size that mainly interest major independents companies but not larger companies, Banks said.
The cost of mobilizing equipment, particularly a jack-up rig to drill offshore leases, has been a barrier.
The state has stepped in to help more. Under the previous program Alaska paid out more than $500 million last year in incentive cash payments or in revenue foregone as producers used the tax credits against their production tax liability.
That tab will increase under the expanded incentives. Marcia Davis, deputy state revenue commissioner, said that when companies cash out the tax credits, the state is obligated to make the payments under existing law. The payment doesn't have to wait for an appropriation from the Legislature, Davis said.
Independents have been positive.
"This new law will have a huge impact on the economics of new developments, especially for independent companies. We are going to see new companies moving into Cook Inlet," said Aurora Energy's Webb.
Webb said the state's previous exploration and development incentives were complex to the point that they mainly helped larger projects done by companies with sufficient financial resources that they didn't really need any help from the state.
Major producers are cautious in predicting increased investment because of the incentives. The combination of those with regulatory changes does help, the say.
"The tax incentives by themselves are not the silver bullet, but the combination of the incentives along with other changes made in the legislation, such as tax credits for new gas storage and clarifications of how gas storage will be regulated by the state, are very helpful," Marathon's Lockhart said.
One other helpful change in the legislation is legislative guidance given to the state regulatory commission that will secure approvals of gas sales contracts to utilities, she said.
Previously the RCA's statute required its commissioners to give primary consideration to the price of gas as a consumer protection measure. Under the change, the RCA will also have to consider the long-term security of supply.
That could mean that even if the gas price in a pending utility contract is higher, if it helps give producers the incentive to develop new gas reserves the consumer's interest will also be served.
Lockhart said the changes all together signal a willingness of the state to work with industry to solve problems, a turnaround compared with more strained relations a couple of years ago.