Legislature(2025 - 2026)ANCH LIO DENALI Rm
08/21/2025 01:00 PM House LEGISLATIVE BUDGET & AUDIT
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| Audio | Topic |
|---|---|
| Start | |
| Presentation(s): Nicolai Creek Unit Royalty Modification | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
LEGISLATIVE BUDGET AND AUDIT COMMITTEE
August 21, 2025
1:01 p.m.
MEMBERS PRESENT
Senator Elvi Gray-Jackson, Chair
Representative Zack Fields, Vice Chair
Senator Cathy Giessel
Senator Bill Wielechowski
Representative Neal Foster
Representative Andy Josephson
Representative Cathy Tilton
Senator Scott Kawasaki (alternate)
Representative Bryce Edgmon (alternate)
MEMBERS ABSENT
Senator Bert Stedman
Senator Lyman Hoffman
Representative Chuck Kopp
COMMITTEE CALENDAR
PRESENTATION(S): NICOLAI CREEK UNIT ROYALTY MODIFICATION
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
JOHN CROWTHER, Commissioner
Department of Natural Resources
Juneau, Alaska
POSITION STATEMENT: Co-presented the Nicolai Creek Unit Royalty
Modification presentation.
WESTON NASH, Commercial Analyst
Division of Oil and Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Co-presented the Nicolai Creek Unit Royalty
Modification presentation.
ACTION NARRATIVE
1:01:52 PM
CHAIR ELVI GRAY-JACKSON called the Legislative Budget and Audit
Committee meeting to order at 1:01 p.m. Representatives Foster,
Josephson, Edgmon, and Fields and Senators Giessel, Wielechowski
(via teleconference), and Gray-Jackson were present at the call
to order. Representatives Tilton (via teleconference) and
Kawasaki (via teleconference) arrived as the meeting was in
progress.
[Due to technical difficulties, portions of the audio are
indiscernible throughout.]
^PRESENTATION(S): Nicolai Creek Unit Royalty Modification
PRESENTATION(S): Nicolai Creek Unit Royalty Modification
1:02:25 PM
CHAIR GRAY-JACKSON announced that the only order of business
would be the Nicolai Creek Unit Royalty Modification
presentation.
1:03:04 PM
SENATOR GRAY-JACKSON gave the following opening remarks
[original punctuation provided]:
This is an informational hearing no votes will be
taken today. We all know how important Cook Inlet
natural gas is to the people of Alaska, especially
Southcentral and the Railbelt, and to the overall
economy of our state. That's why our job today is
oversight making sure Alaskans understand the
tradeoffs when the State reduces its share of resource
revenues. A royalty modification means the State takes
a smaller share of oil and gas revenues up front, with
the hope that it will encourage more investment and
production. We need to ask whether this proposal is
truly in the best interest of Alaskans, balancing
energy security with protecting the State's long-term
finances.
Thank you to the Department and my colleagues for
joining us on short notice we look forward to an
informative discussion.
1:04:48 PM
JOHN CROWTHER, Commissioner, Department of Natural Resources
(DNR), said DNR has been actively trying to understand the Cook
Inlet natural gas supply and use its authority to maximize gas
production and availability for Alaskans while paying close
attention to royalty revenue obligations to make best interest
findings. He said the purpose of today's hearing is to share
information on the department's proposal.
1:06:21 PM
WESTON NASH, Commercial Analyst, Division of Oil and Gas,
Department of Natural Resources (DNR), gave a PowerPoint
presentation, titled "Preliminary Findings and Determination
Nicolai Creek Unit Royalty Modification" [included in the
committee packet]. She began the presentation on slide 2,
"Outline," which read as follows [original punctuation
provided]:
1. Executive Summary
2. Royalty Modification Relevant Statutes and
History
3. Nicolai Creek Unit Background
4. Statutory Criteria
5. Best Interest of the State
6. Scenario Modeling Key Results
7. Quantified Impacts and Unquantified Indirect
Benefits of
Royalty Modification
8. Royalty Modification Mechanism
1:07:46 PM
MR. NASH continued to slide 3, "Executive Summary," which read
as follows [original punctuation provided]:
• Amaroq Resources, LLC (Amaroq), operator of the
Nicolai Creek Unit (NCU), submitted a
royalty modification application to Department of
Natural Resources (DNR) on September 3,
2024
• The application to reduce royalty is intended to
prolong the economic life of the unit as per barrel
equivalent costs are increasing due to declining
production
DNR engaged in an extensive review and analysis of
both public and confidential financial and production
information provided by the applicant
• DNR concluded that, absent additional production
from new drilling, the unit would likely reach the end
of the economic field life in September 2026
• DNR recommends a royalty modification mechanism
based on cumulative gross revenues beginning on
September 1, 2024
• DNR analyses showed that royalty modification would,
in the mean case, extend the life of the field by four
years with an expected $0.9 million increase in direct
revenue to the State
1:10:39 PM
MR. NASH advanced to slide 4, "Royalty Modification Relevant
Statutes," which read as follows [original punctuation
provided]:
• The Commissioner:
• Alaska Statute (AS) 38.05.180(j)(1)(B): may provide
modification of royalty "to prolong the economic life
of an oil or gas field or pool as per barrel or barrel
equivalent costs increase or as the price of oil or
gas decreases, and the increase or decrease is
sufficient to make future production no longer
economically feasible."
• AS 38.05.180(j)(4)(B) "may not grant a royalty
reduction ? under (1)(B) of this subsection...of less
than three percent ..."
• The lessee needs to:
• AS 38.05.180(j)(2): "make a clear and convincing
showing that a modification of royalty" meets the
statutory requirements and "is in the best interest of
the state."
• AS 38.05.180(j)(3): The royalty modification
mechanism "? shall be based on a change in the price
of oil or gas and may also be based on other relevant
factors such as a change in production rate?"
1:12:14 PM
VICE CHAIR FIELDS shared his understanding that Hilcorp, a
monopoly producer, is refusing to explore beyond its minimum
contract obligations with utilities, which is pushing up the
price of gas. He asked whether that increase would justify a
royalty modification for future producers in the Cook Inlet
basin.
MR. CROWTHER said an increase in the price of gas alone wouldn't
suddenly make operators eligible that otherwise wouldn't be
eligible.
VICE CHAIR FIELDS sought to confirm that its no longer
economically feasible to price the production at a competitive
market price at a certain point in time.
MR. CROWTHER said yes, for a modification to be granted, per
barrel costs must be increasing and one would need to consider
whether the modification would extend the end of field life in
the best interest of the state. It's quite feasible that
increased prices and end of field lives extending would make it
harder to receive the royalty modification in the context of
best interest.
1:14:35 PM
MR. NASH resumed the presentation on slide 5, "Royalty
Modification History," which showed a complete list of royalty
modifications and their outcomes. He continued to slide 6,
"Royalty Modification Results," explaining that the two active
modifications are the Badami Unit and the Kitchen Lights Unit
(KLU). The Badami Unit was granted in 2023 to extend the field
life and has produced 1.3 million barrels since 2023 with plans
for new drilling in 2025. The KLU royalty modification was
granted in 2024 for the purpose of extending the field life and
has resulted in three new wells and produced 1.1 billion cubic
feet (Bcf) of Cook Inlet Gas on top of expectations.
1:19:45 PM
REPRESENTATIVE JOSEPHSON referenced the "Oooguruk (Nuna Torok
Pool)" and sought to confirm that ConocoPhillips Alaska, Inc.
acquired leases in 2019 and began drilling new wells in 2023
with a fully royalty.
MR. NASH responded correct, there was no royalty modification.
1:20:14 PM
MR. NASH resumed the presentation on slide 7, "NCU Background
Unit Location," which read as follows [original punctuation
provided]:
• Unit formed in 1968 by Texaco
• 470 acres
• Originally produced until 1977
• Production restarted by Aurora Gas in 2001
• Amaroq acquired NCU in 2018 due to Aurora Gas'
bankruptcy
• Annual production 0.2 percent of total Cook Inlet
production
MR. NASH continued to slide 8, "NCU Background Lease
Information," which showed the layout of the unit and a detailed
table with information on the 5 leases that it's comprised of.
1:25:13 PM
SENATOR GIESSEL asked for an explanation of the columns on slide
8.
MR. NASH explained the Overriding Royalty Interest (ORRI), total
burden, production allocation, shallow burden, and deep burden
categories to illustrate the complication of the lease
structure.
1:27:28 PM
MR. NASH continued the presentation on slide 9, "NCU Background
Production History," which read as follows [original
punctuation provided]:
• Amaroq produced about 60 million cubic feet (MMscf)
through June 30, 2025
• Production comes from three wells:
• NCU 02
• NCU 09
• NCU 11
1:29:02 PM
MR. NASH turned to slide 10, "Statutory Criteria," which read as
follows [original punctuation provided]:
• Amaroq demonstrated the per-barrel-equivalent costs
increase will make future production uneconomic per AS
38.05.180(j)(2)
• The increase in per-barrel-equivalent costs is
mainly due to declining production from current wells
• Continued operation of the NCU would be uneconomic
due to per-barrel-equivalent costs
• Amaroq demonstrated that royalty modification would
prolong the economic life of the NCU per AS
38.05.180(j)(1)(B)
• Absent relief, the NCU would begin shutting down in
September 2026 as operating the field would become
uneconomic
• With relief, modeling showed operations could
continue for an additional year
• Amaroq proposed a royalty modification mechanism at
a fixed rate until profitable
1:31:01 PM
MR. NASH moved to slide 11, "Statutory Criteria [continued],"
which read as follows [original punctuation provided]:
• Amaroq demonstrated that under current royalty it
was uneconomic to drill additional wells per AS
38.05.180(j)(1)(C)
• Amaroq provided a reserves report analyzed by a
third party identifying proven and probable gas
reserves in the NCU
• Amaroq provided sufficient information for the
development costs and financing to show that drilling
would be uneconomic without relief
• With relief, Amaroq's economics are improved and
will help secure funding for the drilling program
1:33:22 PM
VICE CHAIR FIELDS asked why a 9 percent reduction is necessary.
MR. NASH responded 9 percent provides the best economic outcome
for drilling the wells.
MR. CROWTHER added that toggling the royalty rate extends the
rate incrementally. He stated that getting the most activity in
the unit is the most important thing for the state, which would
likely occur at [9] percent.
VICE CHAIR FIELDS asked whether data supports the positive
binary decision at 9 percent, versus 5 or 7 percent. In
addition, he asked whether the statutory minimum is 3 percent.
MR. CROWTHER said when evaluating royalty modifications, the
focus is on expected recovery rate, revenue, and maximizing the
dollar.
1:36:22 PM
MR. NASH resumed the presentation on slides 12-13, "Best
Interest of the State," which read as follows [original
punctuation provided]:
Modification is in the best interest of the State per
AS 38.05.180(j)(2)
• DNR modification extends field life and provides:
• Continued Cook Inlet gas production
• Diversity in Cook Inlet explorers and producers
• Additional indirect benefits (details on slide
18)
• DNR's royalty modification expected to extend field
life by one year
• Modification mechanism accounts for price and
production
• Multiple development, price, and shutdown
scenarios were modeled
• Preserves potential of additional drilling
• Amaroq is seeking funding to drill two or three
additional wells
• Further extend field life
• Produce additional gas (details on slide 18)
• Wells will reestablish production from gas zones not
produced in five
to 10 years
• Two wells could be drilled from existing pads
• An additional third well could be drilled from
a new pad
1:39:47 PM
MR. NASH turned to slide 13, which showed scenario modeling for
end of field life with the royalty modification versus no
royalty modification. Scenario 1a, "Royalty Modification No
Development Drilling," would extend the end of field life from
September 2026 to September 2027; however, total revenue to the
state would decrease significantly and both production tax and
property tax would rise. He reiterated that the goal is to get
an additional 80 million standard cubic feet (MMscf) of gas in
the Cook Inlet system and extended time to get drilling
sanctioned and funded.
1:41:02 PM
REPRESENTATIVE EDGMON sought to confirm that the benefit of the
royalty modification is to produce more gas, more revenue to the
state, and most importantly, more development opportunities.
MR. NASH clarified that total revenue would decline, but the
tradeoff for a deduction in revenue is more gas and opportunity.
1:42:55 PM
MR. NASH continued the presentation on slides 15-16, which
showed more scenario modeling for development drilling at
different production levels with two different price paths:
Amaroq and DNR Utility. For Amaroq, the total revenue to the
state ranges from a low of $650,800 to a high of $1,696,500 with
2,773.1 MMscf of additional gas in the high case scenario.
1:45:07 PM
VICE CHAIR FIELDS asked how 2,773.1 MMscf compares to daily Cook
Inlet field production and consumption.
MR. NASH said it remains at .2 percent of production.
MR. CROWTHER noted that although the cumulative volume of the
additional gas projected between 1.2 Bcf and 2.7 Bcf is not
large, even a single Bcf going into storage helps at this stage.
He estimated that the annual usage in the Cook Inlet is around
70-72 [Bcf].
1:46:25 PM
MR. NASH continued the presentation on slide 16, which showed
the scenario modeling for the DNR Utility Price Path. He
pointed out that both price paths are extremely similar with a
difference of only $0.25 to $0.30. Scenario 3c is the expected
case, which makes up high and medium production and an expected
end of field life of August 2030 with an additional 1,902 MMscf
over a four-year period. This scenario would yield just under
$900,000 in revenue to the state. He turned to slide 17,
"Quantified Impacts of Royalty Modification," which read as
follows [original punctuation provided]:
• The initial extension of field life yields the
following:
• One year of additional field life
• ($154,000) in total state revenue (NPV 12.5)
• 79.7 MMscf (0.08 Bcf) in additional gas
• Development drilling, Scenario 3c, yields:
• Four years of additional field life, beyond
September 2026
• $894,000 total state revenue (NPV 12.5)
• $523,000 Royalty
• $267,000 Production tax
• $104,000 Property tax
• 1,902 MMscf (1.9 Bcf) in additional gas
MR. NASH moved to slide 18, "Unquantified Benefits," which read
as follows [original punctuation provided]:
• Continued local gas production
• Cook Inlet utilities face natural gas
deliverability and supply issues in coming
years
• Continued production at NCU is potentially a
lower-cost alternative to liquified
natural gas imports or other energy sources
• Maintains demand for energy services and
associated jobs in the region
• Diversity in producers in the Cook Inlet basin
• Environmental, social, and cultural impacts
• Leases contain stipulations to protect the
environment
• Amaroq employs three staff with additional
contractors
1:52:25 PM
REPRESENTATIVE EDGMON asked whether these exercises would become
more frequent as fields age. Further, in terms of qualitative
and quantitative considerations, he questioned whether there is
a precedent setting aspect that might apply to future decision
making.
MR. CROWTHER said ultimately, the decision to apply rests with
the operator in consideration of its economics, DNR's
evaluation, and field economics all within the context of the
overall market. He said the decisions are "informative but not
controlling in the precedential sense." The decisions, while
made by the commissioner, are based on statutory criteria that
balances the best interest of the state. He said this is viewed
as something that would inform the department without
constraining it and referenced the success of the prior KLU
royalty modification.
1:56:41 PM
MR. NASH advanced to slide 19, "DNR Royalty Modification
Mechanism," which read as follows [original punctuation
provided]:
• Three percent royalty rate per month until gross
revenue generated from NCU beginning September 1,
2024, reaches a cumulative amount of $25.3 million
(Gross Revenue Target)
• Accounts for both production and price
• After the Gross Revenue Target is reached, the
royalty rate returns to 12.5 percent and royalty
modification will expire
• Depending on price and production levels, DNR
estimates royalty modification should lapse in
the early 2030s
• Gross Revenue Target was generated from total
monthly cost and expense estimates for continued
development drilling at NCU
MR. NASH moved to slide 20, "DNR Royalty Modification
Mechanism," which read as follows [original punctuation
provided]:
• Minimum royalty rate is three percent
• Subject to routine DNR royalty audit
• DNR has the right to obtain expense invoices and
financial/accounting records from Amaroq every six
months
• DNR shall have the right, upon notice to Amaroq, to
terminate the royalty modification in whole or in
part:
• If criteria of AS 38.05.180(j)(1)(B) or
38.05.180(j)(2) are no longer met
• If DNR finds NCU operator to be in default per
11 AAC 83.374 (failure to comply with terms of
an approved plan of development), and the default
is not cured, royalty modification will terminate
• Royalty modification can only be assigned upon
written approval of the Commissioner
• Royalty modification applied retroactively to
September 1, 2024
2:01:02 PM
REPRESENTATIVE JOSEPHSON questioned whether this informational
hearing is a statutory requirement.
MR. CROWTHER stated that AS 38.05.180(j)(9) describes the offer
to appear before the Legislative Budget and Audit Committee to
inform the public and receive public comment. He added that
public comment would be reviewed and may be incorporated into
the final decision. Certainly, he said it's the legislature's
prerogative to take additional action, but there is no statutory
requirements other than holding this hearing.
2:02:56 PM
MR. NASH concluded on slide 21, "Summary," which read as follows
[original punctuation provided]:
• Royalty modification is in the best interest of the
State per AS 38.05.180(j)(2)
• Three percent royalty rate per month until gross
revenue generated from NCU beginning September 1,
2024, reaches a cumulative amount of $25.3 million
• At least ~ one year of field life extension and 0.08
Bcf of incremental gas
• With additional drilling, estimated incremental
direct revenue to the State of $0.9 million (NPV 12.5)
and ~2 Bcf of additional gas
2:04:56 PM
SENATOR GIESSEL emphasized that the gas situation in Cook Inlet
matters to Alaskans. In a sense, she said, rather than creating
its own oil and gas company, the state is partnering with
existing companies that are taking on the risk of developing
these resources. She thanked DNR for considering the importance
of producing more gas despite the cost. She said the message to
Alaskans is that this royalty relief is the state subsidizing
and encouraging this critical piece.
2:06:40 PM
CHAIR GRAY-JACKSON thanked the testifiers and reminded the
public that DNR's findings are published on the online public
notice system and the Division of Oil and Gas's website.
Preliminary findings are open to public comment until Friday
September 5, 2025.
2:07:21 PM
REPRESENTATIVE EDGMON asked for an update on SB 183.
CHAIR GRAY-JACKSON shared her understanding that the Department
of Revenue (DOR) would be directed to cooperate with the state
auditor and provide the necessary information in the correct
format.
2:09:46 PM
ADJOURNMENT
There being no further business before the committee, the
Legislative Budget and Audit Committee meeting was adjourned at
2:09 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| LBAC Agenda 08.21.25 FINAL.pdf |
JBUD 8/21/2025 1:00:00 PM |
|
| 2025-08-05_Nicolai Creek Unit Royalty Modification Preliminary BIF.pdf |
JBUD 8/21/2025 1:00:00 PM |
|
| DNR presentation Nicolai Creek Unit Royalty Modification 8-21-2025.pdf |
JBUD 8/21/2025 1:00:00 PM |