Bill slashing royalties for Cook Inlet gas and oil wins approval in Alaska House

The downtown Anchorage skyline is seen on June 3, 2022, from Earthquake Park. (Photo by Yereth Rosen/Alaska Beacon)
The downtown Anchorage skyline is seen on June 3, 2022, from Earthquake Park. (Photo by Yereth Rosen/Alaska Beacon)

The downtown Anchorage skyline is seen on June 3, 2022, nestled between the Cook Inlet coast and the Chugach Mountains. Anchorage, Alaska's largest city, and the wider Southcentral region depend on Cook Inlet natural gas as the source of energy for electricity and heat. (Photo by Yereth Rosen/Alaska Beacon)

With a Wednesday adjournment deadline looming, Alaska legislators moved forward with some legislation aimed at ensuring reliable energy deliveries from the Cook Inlet basin while continuing to debate other bills.

The House late Monday passed a measure, House Bill 223, that reduces royalties for new production of natural gas and oil from the Cook Inlet basin. Under the bill, state royalties that are normally 12.5% would be reduced to 3% for new Cook Inlet natural gas and 6.5% for new Cook Inlet oil.

The bill is one of the legislative responses to a looming shortage of deliverable Cook Inlet natural gas to the state’s most heavily populated region, which has depended on it for decades to produce electricity and heat. At stake, supporters argued, is the welfare of the Southcentral region, which includes Anchorage, and the entire Railbelt, the corridor running from Fairbanks to the Kenai Peninsula.

The bill’s main sponsor, Rep. George Rauscher, R-Sutton, described Cook Inlet natural gas situation as dire.

“The predicted shortfall presents a direct risk to our energy security, economic stability, quality of life,” he said in floor comments prior to the 34-5 vote to pass the bill.

Cook Inlet natural gas is critical not only to the 70% of Alaskans who are directly dependent on it for electricity and heat but also to the rural residents whose electricity rates are pegged to urban Alaska rates through the state’s Power Cost Equalization program, he said.

“Without change, Cook Inlet gas and oil fields will eventually be left, possibly abandoned,” leaving residents with reliance on costly imported liquefied natural gas as their only option, he said. “I’m asking everybody to support this bill. It affects Alaska all over, whether it’s PCE, whether it’s in your community, whether it’s not in your community, whether it’s on the Railbelt. This is a big one.”

The original version of the bill proposed a full elimination of royalties on new Cook Inlet gas. The revised version, in addition to putting that royalty at 3%, folds in the contents of a separate bill seeking to allow reserves-based lending. Under that measure, House Bill 388, the Alaska Industrial Development and Export Authority would be able to help finance Cook Inlet natural gas development, with hydrocarbon reserves used as collateral. The bill is largely aimed at a field, the Cosmopolitan Unit, that is believed to contain abundant but yet-unproduced natural gas. It is operated by a small company with little access to capital, Texas-based BlueCrest Energy.

The revised version of the bill strikes a balance, said Rep. Andy Josephson, D-Anchorage, who signed on as a cosponsor.

“I think our constituents in southcentral Alaska want to see us do something. And this is somewhat modest, but it’s not terribly risky,” Josephson said in floor debate.

The costs to the state in reduced revenue from royalties would likely be in the tens of millions of dollars over decades, he said. That compares favorably to Alaska’s previous experience with cash credits paid to oil and gas producers that wound up costing the state about $1 billion, he said.

Though the vote was overwhelmingly in favor, there were misgivings.

Rep. Donna Mears, D-Anchorage, said she feared that it might be the only significant Cook Inlet energy bill to win passage, “as we are in the 11th hour here.”

The legislative session is due to end at midnight on Wednesday night.

Mears lamented what she said was lack of progress on renewable energy, as well as what she considered to be a lack of reliable information about its effects. “We also don’t have a lot of information on how this will be implemented and actually affect us. We don’t know the costs on utility rates that would happen in other scenarios. And we don’t have any promises or forecasts on how much new gas this will get us,” she said. “I’m supporting this bill because we need an answer, but we’re over a barrel.”

On the Senate side, where a similar measure is pending, members have expressed skepticism about whether reduced royalties would spur new natural gas production. Last week, in two days of hearings on that measure, Senate Bill 194, members of the Senate Resources Committee heard from a hired consultant about Cook Inlet basin challenges. Those include the isolated market, aged infrastructure and a difficult physical environment, among other conditions.

Nicholas Fulford, a senior director and energy specialist with GaffneyCline, told lawmakers that royalty reductions could make Cook Inlet investment more attractive but that other factors were much more important.

The House bill’s inclusion of new oil production in the bill’s royalty reduction was controversial. Cook Inlet oil production is relatively small, expected by state officials to average 8,300 barrels per day over the 12 months to end on June 30, and continue dwindling in future years. That compares to peak production of 230,000 barrels per day in 1970.

The bill must pass the Senate to become law, and key senators have echoed Mears’ concerns and asked for more independent analysis.

Other Cook Inlet-focused energy bills were in various stages of approval.

A bill allowing an expansion of net metering – a practice by which utility customers get credits for producing their own renewable energy that is fed into the power grid – was headed for apparent final approval. The measure, Senate Bill 152, would allow communities or utility users collectively to benefit from net metering; currently, only individuals may use the practice to reduce their energy bills. The bill passed the Senate unanimously on April 22 and passed the House late Monday by a 24-15 vote, though there is a possibility of a reconsideration vote in that body.

Still being debated are complex bills that would revamp the energy transmission system that serves the Railbelt. The measures, Senate Bill 217 and House Bill 307, were both introduced by Gov. Mike Dunleavy.

The House version was due for a floor vote on Tuesday, while the Senate version was still being considered in that body’s finance committee.

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