Alaska's exploration licensing system: an alternative to traditional leasing.

• Author: Bradner, Mike
• Position: OIL & GAS

Alaska's system is really kind of a hybrid between concessions as other nations do them and the state's traditional leasing.

Alaska's oil and gas Exploration Licensing system has now been in place for almost two decades, giving petroleum explorers an alternative to the state's traditional leasing system.

The difference between the two is that traditional leasing involves companies bidding competitively for lease tracts of about five thousand acres with the land to be leased for periods of five to ten years. With leases a royalty share of any oil and gas production is paid to the state (the royalty is the "landowner share," typically one-eighth of production) as well as annual land rentals and a cash bonus bid paid to the state for the lease. If more than one company bids on a lease, the firm proposing the higher cash bonus bid wins.

A license, however, can be for much larger areas, up to five hundred thousand acres (the minimum is ten thousand acres), and is similar to a negotiated concession that is granted in most other petroleum-producing regions. The license is for exploration only, however, and involves no cash bonus. Companies instead commit to spend money on exploration.

Hybrid System

Alaska's system is really kind of a hybrid between concessions as other nations do them and the state's traditional leasing. If exploration is encouraging or if discoveries are made, the license, or parts of it, must be converted to state leases with the standard terms for royalty and land rentals, but again no cash bonus payment.

Companies propose dollar amounts to be expended on exploration rather than specific exploration activities, and this gives them the flexibility to shift their program if needed. It also provides the state a quantitative measure, in dollars, of the work to be performed. This gives the state a simple way to evaluate any competing proposals for an exploration license, in that one license applicant would typically propose a higher amount than another.

This recently happened, in fact. The Division of Oil and Gas had its first competing offer for a license area for the recently-issued southwest Cook Inlet license. Cook Inlet Energy was awarded the license, but there was another offer from an unidentified company. Cook Inlet offered the higher dollar amount, however, and got the license.

Alaska may be the only state in the United States offering such an alternative on public lands, and while the state's license program has yet to result in a discovery of a commercial petroleum deposit, several license holders have gone as far as converting parts of their licenses to leases.

Targeted Drilling

One of these is Doyon Limited, the Interior Alaska regional Native Corporation, which started out with a license in the Nenana Basin, converted some of the license to leases...