Corp. and its partners have made gas discoveries, and in Cook Inlet where a small independent oil company, Escopeta Oil and Gas Co., has had to seek extensions of its State offshore leases because of difficulties in lining up a “jack-up” rig to drill exploration wells. In both of these cases the State had to press the lessees to fulfill lease obligations, although the leaseholders argued there were extenuating circumstances. Some lease sale mechanics: In theory, leasing land for oil and gas development is not a lot different than any landowner renting or leasing land for commercial purposes. The lease has a term, after which there can be options for renewal. There are also provisions for lease cancellation if there is no performance by the leaseholder. There are various forms of payment to the landowner. In Alaska and most U.S. states (and many foreign nations) where the leasing model is used, the most common payment provision is a royalty, or a share of the income or production to the landowner. In Alaska, and elsewhere, there are also annual rental payments for the leases and, also important, usually some form of up-front
cash bonus payment paid to the landowner by the lessee. Alaska law also allows for the royalty to be in a share of production net profits, as well as the traditional gross revenue form of royalty, and some leases issued by the State in the past have had both the conventional gross revenue royalty, as well as the net profit share. Alaska law also allows the State to have net profits bidding in a lease sale as an alternative to the conventional up-front cash bonus, but the one experiment with this type of bidding in 1979 created some problems and it has not been used since.
In-Kind, In-Value
An important feature of Alaska’s oil and gas leases is they allow for payment of the royalty to be made “in-kind,” or in the physical form of oil or gas, as an alternative to payment “in-value,” or in cash. In its leases the State is given the ability to switch, at six months’ notice, from receiving its royalty in-value to being paid the royalty in-kind, or production. This feature in the lease is unusual although some other govern-
ments have similar features in leases. The royalty in-kind feature has given Alaska important flexibility. For example the State has been able to supply independent refineries in the state with State royalty crude oil. The ability for the State to do this was crucial in the refiners’ decisions to build plants in Alaska in 1968 and 1975 and 1976. Alaska also uses a model of competitive-bid leasing similar to that used in many states and the U.S. government for federal lands. The procedure is relatively straight-forward in that the government lays out of the basic terms of a lease such as the royalty, including the in-kind provision, the rental terms, the work commitment and the term of the lease, and then auctions the lease to the highest bigger in a closed-bid lease sale. The bidder submitting the highest cash bid gets the lease. This isn’t the only model of leasing the State can use. In the early days of statehood the State considered a “noncompetitive” form of leasing, similar to that used at the time by the federal government in its Alaska leasing. In this system the state sets out the royalty, the rental, the lease term and other fixed provisions in the lease, but selects the winners by some means other than cash bonus bidding, typically some form of lottery. When it used this system in the 1960s, the federal government used a lottery where the winners were selected at random out of a basket. Alaska’s decision to use competitive bonus-bidding is seen now to have been wise, and successful but the State did consider using the noncompetitive lottery-style leasing method in some of its early North Slope lease sales of the 1960s.
Differences Reviewed
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An important difference in the two approaches is that competitive cash-bonus bidding gives the advantage to major oil and gas companies that can muster to financial resources to make the bids. Individuals are at a disadvantage, as are smaller companies. The major argument for the noncompetitive approach was it allowed for individuals and smaller firms to become leaseholders, and while many of these would wind up selling their leases to larger companies – the diversity of the landholding and the competition induced by numbers www.akbizmag.com • Alaska Business Monthly • February 2011