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Cook Inlet oil producer delays planned exploration until tax dust settles

  • Author: Alex DeMarban
  • Updated: May 7, 2017
  • Published May 7, 2017

An independent oil and gas producer has told federal regulators it is delaying exploration drilling at an untapped Cook Inlet prospect for a year because of potential legislative changes to the state's oil production tax system.

In a three-sentence letter to the U.S. Army Corps of Engineers on April 11, Cook Inlet Energy blamed "extenuating circumstances" for a yearlong delay at the Sabre prospect. The letter did not provide further explanation about the postponement.

The company had hoped to begin drilling at Sabre in April, according to an application for a permit that would be issued by the federal agency, one of multiple permits required from several agencies.

The letter said the project had been delayed to April 2018. It was signed by Conrad Perry, senior vice president of drilling for Cook Inlet Energy.

The project, if successful, would open a new geological structure to offshore oil or gas production in western Cook Inlet, providing critical state revenues and gas to produce electricity and heat in Southcentral Alaska.

The letter was dated the same day the Alaska Oil and Gas Conservation Commission upheld a $446,000 fine against the company for violating safety procedures at one of its wells.

The company did not dispute the violations but challenged the penalty as excessive compared with the agency's past fines.

The letter also did not mention problems the company continues to face after entering bankruptcy in 2015 along with its former parent, Tennessee-based Miller Energy Resources.

A few legal claims seeking money remain, but the company believes those have no merit, said Carl Giesler, chief executive of Glacier Oil and Gas, the new parent company of Cook Inlet Energy.

Giesler said on Wednesday those claims and the fine had nothing to do with the decision to delay. The timing of the letter and the fine was coincidental, he said.

"I had a hamburger that day too but the fine is not related to the hamburger," he said.

One legal claim against the company comes from former Miller Energy chief executive Scott Boruff, who says he is owed about $250,000 as part of his $800,000 a year base salary.

Cook Inlet Energy, like many oil and gas companies operating in the basin in recent years, has been heavily subsidized by Alaska tax credits for oil and gas producers. The Legislature in 2016 began phasing out those credits.

The state did not begin releasing names of companies that had been paid credits in cash until this year. But bankruptcy court records showed Cook Inlet Energy received more than $20 million in cash credits in 2015.

Last year, with Gov. Bill Walker and the Legislature moving to reduce tax-credit payments, Miller Energy received $3.4 million in cash credits, according to the state's first-ever disclosure of beneficiaries, released in April.

The Legislature is currently considering altering the production-tax system again under House Bill 111, including by further reducing state subsidies. The Senate and House have separate versions of the bill.

Cook Inlet Energy delayed Sabre because of the uncertainty over the outcome of that bill — and how it will impact the tax system, Giesler said.

He said he understands the state needs to look for new revenue sources to shrink multibillion-dollar deficits sparked by low oil prices.

"I empathize, but a byproduct of that process is we don't know what the (fiscal) regime will look like in Alaska," Giesler said. "We have to compete for capital from our investors with other options they have."

Investors and the company "need to know what it will cost us from a tax perspective," said Giesler, referring to the Sabre project.

Sen. Cathy Giessel, R-Anchorage, said Cook Inlet Energy is being pragmatic. The Legislature last year made significant changes to the tax system affecting Cook Inlet operators, and wanted those changes to remain in place, she said.

The revisions produced the state's first oil tax there and a gradual reduction in credits.

She said the House version of HB 111 would create a new working group to review oil and gas tax policies for the basin once again. The Senate version lacks that proposal. But another potential rewrite creates uncertainty.

"I'd hold back too," Giessel said.

Rep. Les Gara, D-Anchorage, said the Cook Inlet oil tax is too low at $1 a barrel.

Gara said Alaska's tax system must do more to increase revenues to ensure the state is treated fairly. If not, the public will continue to press for changes to the taxes.

"If the public feels it's getting fleeced, we'll continue to have instability in our oil and gas system," he said.

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