ABCs of state lease sales: from promise to fruition.

• Author: Bradner, Mike
• Position: Oil & Gas

[ILLUSTRATION OMITTED]

At statehood, Alaska was given a generous endowment of 103 million acres of land by the federal government, the idea being that the young, new state could use the lands, believed then to have undiscovered natural resources, to support itself.

Petroleum was the most likely resource to be developed with potential for paying substantial revenues, although Alaska had also long had a mining industry. The discovery of oil on the Kenai Peninsula in 1957 by Richfield Oil Co. gave congressmen, who were reluctant about Alaska's ability to financially support a State government, the confidence to go ahead and approve statehood.

The concept of a land endowment supporting the state has been a brilliant success. The new state began a program of lease sales, auctioning off the exploration rights to its lands. Since the early 1960s, the leasing of State lands for petroleum development has generated the income that has paid for State government (this year alone oil pays for 87 percent of the State budget). And for the last 40 years, Alaskans have been able to live in a relatively tax-free environment.

MECHANICS IN MOTION

The mechanics of those lease sales, and the leases themselves, have some interesting aspects. There were also some early policy calls by Alaska leaders that were to have important repercussions. And, some of the issues developed from the leasing over the years are still somewhat unresolved, some of the most important being the work commitments and responsibilities for the leaseowners to be diligent about pursuing development. Two cases in point are the recent litigation over State leases at Point Thomson, an area east of Prudhoe Bay where ExxonMobil 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...