Cook Inlet sale points to larger industry trends, analysts say

a Cook Inlet oil platform
An oil platform in Cook Inlet. (Rashah McChesney/Alaska’s Energy Desk)

As the clock ticked down on 2022, the federal government held a controversial oil and gas lease sale in Cook Inlet, auctioning off nearly 1 million acres of federal offshore leases to the highest bidder.

The Dec. 30 sale drew a lot of attention, both from local and national groups.

But, in the end, there was just one company that made a single bid — Hilcorp Alaska, which bid about $64,000 on a 2,304-acre lease in the inlet.

Industry watchers said they weren’t surprised that Hilcorp had zero competition and that the other tracts up for auction will go untouched, at least for now.

Hilcorp is the only company that has federal tracts in the inlet already and that turns out for these sorts of sales, and Cook Inlet’s federal waters have never produced any energy for Alaska — all the offshore oil and gas in the inlet comes from state leases. In the most recent state lease sale, too, Hilcorp was the only bidder.

But analysts say the lackluster interest point toward bigger trends around the globe, as production becomes more costly and renewable energy production picks up steam.

“Companies are remaining selective around the world, it doesn’t matter the basin,” said Mark Oberstoetter, an analyst with research group Wood Mackenzie.

That’s true for aging oil fields like Cook Inlet, in particular, where companies know well what to expect and what the risks of development are.

But Oberstoetter said oil and gas companies everywhere are pickier.

“The idea that you go into the basin, lease up the whole thing, spend a lot of bonus money on something that’s not proven — that’s changed,” he said.

Energy companies globally are contending with a lot of unknowns.

On the one hand, there’s a good deal of international demand for oil and gas today. The crisis in Ukraine sent that need skyrocketing. That’s true locally, too; Hilcorp supplies area utilities with most of their gas, and warned last year it might not have enough to meet their needs beyond current contracts.

But oil and gas development is a long game. Mark Squillace, a professor in natural resource law at the University of Colorado, said offshore development is expensive and time-intensive. And regardless of what’s happening in the short term, the tide is heading toward renewables. That provides a lot of uncertainty in the long run.

“If you’re looking at a window of five years or more to develop your lease and you don’t know where the market’s going in the next five years, then it seems to me like it’s a very risky kind of investment,” Squillace said. “And that seems to be what oil companies are saying, right? By refusing to bid on these lease tracts.”

In some ways, Alaska’s market is unique. It’s always been expensive to produce in Alaska, and big oil and gas companies like Shell and Chevron, left the inlet long ago. The region hit its oil-production peak half a century ago, and much of that was from onshore wells.

The geology of the federal offshore tracts in the inlet has also proven poor, which is why there’s been little interest in Cook Inlet federal lease sales for years, said Alaska economist Roger Marks.

Some federal offshore leasing programs, meanwhile, have been more successful than Cook Inlet. The Gulf of Mexico is the crown jewel of offshore leasing, representing 97% of the federal program’s production.

Still, Squillace said future sales in those areas, too, might see the same sort of apathy that Alaska has.

“I think that the efforts to lease more oil and gas in the Gulf of Mexico — you probably won’t see quite the same level of disinterest that we saw in the Cook Inlet sale,” he said. “But certainly I’m not expecting there’s going to be a huge rush to develop leases in that area, as well.”

Regardless of industry disinterest in new offshore federal leases, Southcentral Alaska is still going to need natural gas to heat homes, said Obersoetter. He said his company estimates Hilcorp has a little over five years of life left in its reserves for the inlet.

“Which isn’t a long time, right? Which means we need to start looking at alternative sources of energy or ways to prolong that gas,” he said. “Or we’re going to need to find some new options.”

Even as interest wanes in federal lease sales, it’s unlikely the federal government will stop holding them any time soon. The recent sale in Cook Inlet was mandatory, part of a compromise between U.S. Senate Republicans and Democrats in the Inflation Reduction Act as a counterweight to the act’s investment in renewables.

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