Dunleavy aims to lower some royalty rates to boost Cook Inlet gas production

Alaska Gov. Mike Dunleavy and members of his administration said Thursday they plan to introduce a bill during the upcoming legislative session to increase incentives for producers to help address a looming shortage of natural gas production in Cook Inlet.

The proposal comes as utilities along the Alaska Railbelt that rely on natural gas consider new energy alternatives to fill the gap, including importing liquefied natural gas, a potentially expensive proposition that could boost what many Alaskans pay for heat and power.

Administration officials, speaking at a press event, said there is plenty of natural gas yet to be discovered and produced in Cook Inlet, based on estimates by the U.S. Geological Survey and other reports.

But Hilcorp, the dominant oil and gas producer in Cook Inlet, told utilities last year that it did not currently have enough natural gas reserves in Cook Inlet to provide for new gas contracts in the coming years. A representative with the company said Thursday Hilcorp plans to drill more than a dozen new wells this year alone in search of new gas.

Experts have said the state’s small market for gas means that costly oil and gas projects are difficult to pencil out, reducing new investment.

The proposed legislation is expected to be introduced in January, officials said. It will call for reduced royalty rates paid by producers to the state, below the standard rate of 12.5%, they said.

John Boyle, Alaska Department of Natural Resources Commissioner, said the agency is working to determine the reduced royalty rate that might be proposed in the legislation.

If approved by the Legislature, the reduced royalty will apply to newly producing pools of oil and gas that come on line for areas already under lease. It would not change the terms for existing oil and gas production, officials said.

The proposed legislation comes atop a separate effort already announced by the Department of Natural Resources that waives royalty rates for new oil and gas leases in Cook Inlet that will be sold in the state’s lease sale in December.

Dunleavy said the legislation, if it passes, could attract new companies to the Inlet, and allow Hilcorp or other companies already operating in the Inlet to increase their gas production in as little as two or three years, he said.

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“We’ve got a lot of pockets of gas out there, there’s no doubt about it,” Dunleavy said. “That’s been confirmed by a number of different independent agencies. So we believe through this process, we make it more economic. They’ll drill, we’ll get more gas.”

The proposal drew criticism from Sen. Bill Wielechowski, D-Anchorage, who asserted on X, formerly Twitter, that the problem is that Hilcorp, the dominant producer in Cook Inlet, isn’t doing enough to produce gas on fields it’s already sitting on. Wielechowski said the state needs to enforce Hilcorp’s lease requirements so it produces more gas.

“The fundamental problem is that one producer — Hilcorp — has control over 90% of the basin and is flatly violating the terms of its state leases,” he wrote.

Luke Miller, a spokesman with Hilcorp, said that since 2012 Hilcorp invested more than $1 billion in Cook Inlet on new projects to produce more than 690 billion cubic feet of natural gas for Alaskan homes and businesses.

“Over the next five years, we anticipate investing a similar amount on capital projects, such as exploration drilling, new wells at existing fields, and new offshore platforms,” the statement said. “In 2023 alone, Hilcorp is spending several hundred million dollars in the Cook Inlet, operating four rigs, and drilling more than 15 wells to produce additional natural gas for Alaskans.”

Lorraine Henry, with the Alaska Department of Natural Resources, said in an emailed statement that Hilcorp and other oil and gas operators are subject to an array of obligations under the leases, agreements and plans they have with the state. She said the department fulfills its oversight of the operators, who engage in significant drilling, well work and other activity.

“Hilcorp is making substantial efforts to advance development in the inlet,” she said. “The department evaluates these activities annually for each development plan that Hilcorp submits.

“The ultimate remedy for failure to fulfill development obligations is relinquishment of assets -- whether at the exploration, development, or production stage,” she said. “The state does not believe efforts to compel or manage such a transition of actively-producing assets would benefit the public, especially given the need for additional production as soon as possible for Railbelt consumers.”

The Republican-led Alaska House Majority said in a statement that it applauds the governor’s efforts and anticipates working with him to help resolve the issue.

“The looming natural gas shortage in the Railbelt is one of the most important issues our state currently faces,” said Rep. Tom McKay, R- Anchorage and chair of the House Resources Committee in a prepared statement. “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.”