Saturday, October 1, 2011

Rentals encourage work; State sets varying minimum bids, annual rentals for Beaufort, North Slope sales

Kristen Nelson
Petroleum News

The Alaska Department of Natural Resources, Division of Oil and Gas, has developed new terms for its annual fall areawide oil and gas lease sales scheduled to be held Dec. 7.

As described in sale notices published Sept. 27 for the Beaufort Sea, North Slope and North Slope Foothills sales, the different minimum bids and rental rates seem designed to encourage development.

“These lease terms are designed to encourage financially sound, responsible operators to join in the accelerated development of the state’s natural resources,” Division Director Bill Barron said in a Sept. 28 news release on the sales.

“Our efforts have been undertaken as part of the state’s focus on boosting oil production on the North Slope,” he said.

Barron told Petroleum News in a Sept. 28 telephone interview that the state’s goal is to “encourage people to prudently and responsibly explore and delineate their acreage within the primary lease term.”

Under the new lease terms, rental rates for portions of the North Slope and Beaufort Sea sales increase from $10 an acre to $250 an acre after seven years of the 10-year lease term.

There is a stable rental rate for the first seven years, Barron said. But if leaseholders have not demonstrated diligent effort, then rental rates go up; if they have shown diligent effort and done work and brought on production, the commissioner can waive the increased rental, he said, describing the change in rental rates as performance-based.

Barron said the state looked at what other jurisdictions do, at suggestions from companies and at what changes it is allowed to make in lease sale terms. Some jurisdictions, he said, can change the length of leases based on performance. Alaska can’t do that, he said, but can work with rental rates.

The goal with the changes was to look at what could be done that would be in the best interests of the state to encourage development at a rapid pace, but in “absolutely the most responsible manner possible,” Barron said.

Terms, royalty rates

All leases in the three sales have 10-year lease terms. In last year’s sales, Beaufort Sea and North Slope tracts had either seven- or 10-year terms, based on location, with tracts nearer to infrastructure having seven-year terms; all North Slope Foothills’ tracts had 10-year terms.

For the this year’s Foothills sale, all tracts have a minimum bid of $10 an acre, a fixed royalty rate of 12.5 percent and rental rates standard for state lease sales: $1 per acre for the first year, $1.50 per acre for the second year, $2 per acre for the third year, $2.50 per acre for the fourth year and $3 per acre for the fifth and subsequent years.

For the Beaufort Sea and North Slope sales, tracts adjacent to federal lands (the Arctic National Wildlife Refuge, the National Petroleum Reserve-Alaska and the federal outer continental shelf) have a minimum bid of $10 per acre, and rental and royalty rates the same as those described above for the Foothills sale.

Barron said those areas adjacent to federal acreage are areas where the acreage is not yet fully assessed, while areas with higher bonus bid requirements and higher rentals are where prospectivity is known and higher.

Available tracts adjacent to federal acreage appear to include the majority of tracts in the Beaufort sale; they are a minority on the eastern and western edges of the North Slope sale.

In addition to what the state describes as a sub-region of acreage adjacent to federal acreage, the North Slope sale is divided into northern and southern sub-regions, with the southern sub-region, farther from infrastructure, having a 12.5 percent royalty rate (in common with the area adjacent to federal acreage) while the northern sub-region has a 16.67 percent royalty.

A striking feature of the North Slope sale is the division of 5,760-acre tracts into four parcels, designated A, B, C and D.

Barron said the division of tracts into smaller parcels, 1,440 acres each, was driven by recognition that a lot of the acreage available in the North Slope sale will probably be a target for unconventional shale development.

He said that because one well holds a lease and in unconventional plays like shale more wells are required for development, the idea is that leasing in smaller acreage sizes would increase activity and completion.

Barron said that in trying to work through issues of unconventional development and how wells do and do not connect and how to manage land, the division decided that breaking leases into smaller tracts would give everyone a better opportunity from the development standpoint.

Varying rental rates

For tracts in the Beaufort sale not adjacent to federal acreage and tracts in the south and north sub-regions of the North Slope sale, the minimum bid is $25 per acre.

In last year’s sales, the minimum bid was $10 an acre for all tracts in the Beaufort Sea and North Slope sales, $5 an acre in the Foothills sale.

In the North Slope sale tracts in the south and adjacent to federal lands sub-regions have a fixed royalty rate of 12.5 percent; tracts in the north sub-region have a fixed royalty rate of 16.67 percent.

The new higher rental rate, $10 an acre for the first seven years and $250 an acre thereafter, applies to all tracts in the Beaufort and North Sales except those adjacent to federal acreage.

The state said in its sale notice that the $250-per acre rental beginning in year eight applies, “except that beginning in the year after the year in which sustained production commences on this lease or the state otherwise determines in its sole discretion, upon request, that the lessee has exercised reasonable diligence in exploring and developing this lease the annual rental will be $10.00 per acre or fraction of an acre.”

In evaluating requests to decrease rental “based on the exercise of reasonable diligence, the state will consider the funds expended by the lessee to explore and develop this lease and the types of work completed by or on behalf of the lessee on this lease.”

Acreage

The state said the Beaufort Sea areawide sale area is divided into 573 tracts ranging in size from 640 to 5,760 acres located within the North Slope Borough. The sale includes state-owned tide and submerged lands in the Beaufort Sea between the Canadian border and Point Barrow and the southern fringe of the sale includes some state-owned uplands between NPR-A and ANWR.

The North Slope areawide sale is divided into 1,225 tracts ranging in size from 640 to 5,760 acres. The state said that for this sale certain tracts have been divided into four parcels, A, B, C and D. North Slope areawide sale tracts are within the North Slope Borough between the Canning River and ANWR in the east and the Colville River and NPR-A in the west. The Umiat Meridian baseline forms the southern boundary of this sale area.

The North Slope areawide is divided into three sub-regions: North, South and Adjacent to Federal Lands.

The North Slope Foothills sale area is divided into 1,347 tracts ranging in size from 1,280 to 5,760 acres. The tracts are between ANWR and NPR-A. The northern boundary of the sale is the Umiat Meridian baseline; the southern boundary is the Gates of the Arctic National Park and Preserve.

For complete sales details, including regional tract maps, see the division’s website http://dog.dnr.alaska.gov/.

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Republished with the permission of the Petroleum News