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Archive for the ‘Alaska’ Category

Comments on the major offshore provisions:

  • The bill neither repeals nor amends the massive land withdrawals by Presidents Obama, Trump, and Biden that have fenced the OCS program into portions of the central and western Gulf of Mexico. Worse yet, the bill tacitly endorses those withdrawals by specifically stating that they are not affected in any way (Sec. 20114).
  • Sec. 20107 mandates that at least 2 lease sales be held annually in the GoM. The certainty would provide some incremental benefit, but is unlikely to stem the decline in GoM reserves. We are becoming increasingly dependent on the 4% of our OCS that may be leased, about 3/4 of which is not prospective or has limited production potential.
  • The bill also mandates at least 2 sales per year offshore Alaska. What will be offered given that most Alaska areas are off limits? We have seen how little interest there is in the Cook Inlet.
  • Sec. 20601 lowers the revenue to the US Treasury and increases the revenue to Gulf producing states. This would garner further support from those states, but will have little effect on production.
  • Sec. 20106 requires DOI to publish information and report to Congress on the processing of drilling permits. However, delayed drilling permit approvals do not seem to be a significant issue on the OCS.

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Of the 1.7 billion acres of Federal land on the US Outer Continental Shelf, only about 73 million acres in the Gulf of Mexico and 1 million acres in the Cook Inlet may be offered for oil and gas leasing. Official or de facto exclusions prohibit leasing in the entire US Atlantic, the entire US Pacific, all Alaska areas except the Cook Inlet, and most of the Eastern Gulf of Mexico. No other coastal nation has restricted access to oil and gas resources to this extent.

As demonstrated in recent sales, many of the tracts being offered have little or no production potential. Only 308 tracts (1.7 million acres) received bids in GoM Sale 257. 94 of the high bids were for sequestration purposes and were arguably invalid. Sale 258 in the Cook Inlet only received a single bid.

The number of active leases, currently 2153, has been at a historically low level for the past 2 years. Only 0.7% of our OCS is leased and thus open to exploration. 26% (552) of these leases are already producing, leaving a historically low number of nonproducing leases.

Oil is where you find it, not where you wish it was or want it to be. Denying access to all but a small portion of the OCS limits exploration strategies and prevents publicly owned resources from supporting our economy in the manner intended by the OCS Lands Act.

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The shrinking of the OCS oil and gas program continues. In an attempt to placate opponents of the Willow project, the President has removed the entire Beaufort Sea from oil and gas leasing consideration. Unsurprisingly, the opponents of Willow are no less irate.

Under the authority granted to me in section 12(a) of the Outer Continental Shelf Lands Act, 43 U.S.C. 1341(a), I hereby withdraw from disposition by oil or gas leasing for a time period without specific expiration the areas designated by the Bureau of Ocean Energy Management as the Beaufort Planning Area of the Outer Continental Shelf that have not previously been withdrawn.  

White House directive

The 5 Hilcorp leases identified above (Northstar and Liberty projects) are all that remains of the once promising Beaufort Sea planning area.
The Kulluk, pictured above, was a unique conical shaped and ice strengthened drilling vessel that operated in the US and Canadian Beaufort from 1983-1993.
BP’s Mukluk well being drilled from an artificial island in the US Beaufort Sea in 1983. The $120 million exploratory well was the most expensive in history, but did not find commercial quantities of hydrocarbons.

Historical background

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Senator Manchin and the Alaska delegation criticized the DOI decision memo for Sale 258. The memo implied that the highest allowable royalty rate was chosen to minimize bidder interest and limit future production. Unfortunately, the “Inflation Reduction Act,” which mandated these lease sales, was not particularly helpful in creating interest in the less attractive OCS tracts like those in the Cook Inlet and the shallower waters of the Gulf of Mexico.

Sec. 50261 of the IRA raised the minimum allowable royalty rate from 12 1/2% to 16 2/3%, while capping the maximum rate at 18 3/4%. This provision favors deepwater operators, typically majors and large independents, whose royalty rates were capped at 18 3/4%, the same rate as for previous OCS sales.

Conversely, the IRA royalty provisions penalize the smaller companies and gleaners who are critical to sustaining shallow water (shelf) operations, including environmentally favorable nonassociated (gas-well) natural gas production, by raising the minimum royalty rate to 16 2/3%. DOI exacerbated IRA’s impact by electing to charge the highest allowable royalty rate for Cook Inlet and GoM shelf leases. The net result was a 50% royalty rate increase from prior sales (12.5 to 18.75%).

The table below illustrates the royalty rate implications of the IRA language and the DOI decisions.

AreaSaleDate% royalty: <200m water depth% royalty: >200m water depth
Cook Inlet2446/21/201712.512.5
GoM25611/18/202012.518.75
GoM25711/17/202112.518.75
Cook Inlet25812/30/202218.7518.75
GoM2593/29/202318.7518.75

Notes:

  • The base primary term for GoM shelf leases is only 5 years vs. 10 years for leases in .>800 m of water.
  • In lease year 8 and beyond the rental rates are nearly double for shelf leases vs. deepwater leases ($40/ac vs. $22/ac).
  • While deepwater development typically requires more time, the higher rental penalty for delayed shelf production (which must be approved by BSEE) is not warranted. $40/acre or $240,000 per year (plus inspection and permitting fees) is a high cost for a marginal shelf lease.
  • Cook Inlet Sale 244 drew 14 high bids totaling more than $3 million. Sale 258 drew only 1 bid of $64,000. While many factors influence lease sale participation, the 50% increase in royalty rate certainly made the Cook Inlet leases less attractive.
  • Other than the increased royalty rate, the terms for both Cook Inlet sales were essentially the same. The primary lease term was 10 years and the minimum bonus bid was $25/hectare for both sales. The rental rate was increased by only $3/hectare ($13 to $16).

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An internal memo from the U.S. Interior Department suggesting that the agency set the highest possible royalty fee on potential oil and gas development before last year’s Cook Inlet lease sale is drawing blowback from the Democratic chair of the Senate Energy and Natural Resources Committee.

West Virginia Sen. Joe Manchin said in a statement he was “appalled” by the memo, which he said was leaked and prioritized a “radical climate agenda” over the energy needs of Alaskans and the U.S.

Anchorage Daily News

From the decision memo:

While a 16 ⅔ percent royalty may be more likely to facilitate expeditious and orderly development of OCS resources and potentially offer greater energy security to residents of the State of Alaska, a reasonable balancing of the environmental and economic factors for the American public favors the maximum 18 ¾ percent royalty for Cook Inlet leases.

Sale 258 Decision Memo

The lower royalty rate probably would not have made much difference in the outcome of this sale, which only drew one bid, but the attitude expressed in the decision memo is rather disappointing given the Department’s mission, as expressed in the OCS Lands Act, to make resources available for expeditious and orderly development.

What might have made the sale more attractive was royalty suspensions, Option D.5.b (below). This would have been the best means of supporting the objectives of Senator Manchin, the other authors of the congressional leasing mandate, and the State of Alaska.

Option D.5.b: Offer Royalty Suspensions
BOEM could offer royalty suspensions with the goal of making resources available for expeditious and orderly development. However, BOEM does not recommend royalty suspensions as the recommended lease term options are expected to balance the goals outlined earlier in this memo

Sale 258 Decision Memo

Those who are concerned by the Sale 258 Decision Memo should be more troubled by the Proposed 5 Year Leasing Plan, most notably this stunning sentence which justifies the minimalist plan and signals a phasing out of offshore oil and gas leasing:

The long-term nature of OCS oil and gas development, such that production on a lease can continue for decades makes consideration of future climate pathways relevant to the Secretary’s determinations with respect to how the OCS leasing program best meets the Nation’s energy needs.

5 Year Leasing Program, p.3

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Did they write this news release with a straight face? Almost a shutout (could still be if the only bid is rejected). And they need 3 hours to process the results! 😉

That said, good for Hilcorp! They have a vision, and I hope they are successful.

As directed by the Inflation Reduction Act (IRA) of 2022, BOEM held Cook Inlet OCS Oil & Gas Lease Sale 258 on Friday, Dec. 30. 

The reading of the bids was conducted via livestream. The lease sale is now concluded. One bid was received on one block. The bid, in the amount of $63,983, was submitted by Hilcorp Alaska LLC.

Final sale results are currently being processed and will be posted to this page by 1 p.m. Alaska Time.

Following today’s sale, there will be a 90-day evaluation process to ensure the public receives fair market value before a lease is awarded, and a Department of Justice review of antitrust considerations. If a lease is awarded it will be posted to BOEM’s website when the review process is completed.

BOEM

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Northstar, Beaufort Sea

The only current Alaskan OCS production is from Northstar, a joint State-Federal Unit in the Beaufort Sea. The production island is in State waters, but 7 of the wells produce from the Federal sector. The field was originally developed by bp, but Hilcorp is the current operator. To date, BSEE has conducted 5 inspections of the facility in 2022, and no incidents of noncompliance (INCs) were identified.

Per BOEM records, 4 companies operate Pacific (California) OCS facilities that are currently producing. Three of those operators have superior 2022 inspection records. No INCs were issued to either Exxon (11 Santa Ynez Unit inspections) or Freeport-McMoRan (24 Platform Irene inspections). Only 2 warning INCs were issued during 12 inspections of Beta Operating Co. platforms Ellen, Elly, and Eureka in the Beta Unit offshore Long Beach.

Marine life on Platform Eureka, from this Hakai article

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  • Secretary of the Interior Haaland committed to releasing the Proposed Program by June 30, 2022. Will that deadline be met? BOE’s guess is that the deadline will be met. However, the White House Climate Policy Office, which seems to control energy policy, may have other ideas.
  • Number of regions in which lease sales will be proposed: BOE thinks 2, the Gulf of Mexico and Alaska. There is no chance of >2. A GoM only proposed program is possible, but we doubt that Alaska will be eliminated at this early stage.
  • Number of lease sales proposed: BOE guesses a total of 7 sales, 5 in the GoM and 2 in Alaska. The “under” is probably a better bet than the “over,” unless they eschew area-wide GoM sales and propose an increased number of more targeted sales.

For comparison, the previous six 5-Year Programs have included 10-12 GoM sales (11.3 average), 1-8 Alaska sales (4.3 ave.), 0-1 Atlantic sales (0.3 ave.), and no Pacific sales.

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Locked down for 561 days!

Chronology

What the law says vs. current reality

Remember this

Catch 22

Now <500 producing leases for the first time in more than 5 decades!

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