Energy bills intended to address Cook Inlet gas shortage in doubt as end of legislative session approaches

May 5—JUNEAU — Several measures intended to address a looming shortfall of Cook Inlet gas are being rushed through committees as the end of the Alaska Legislature's regular session fast approaches.

Lawmakers have broadly said that passing energy bills this year is a top priority. But the Legislature did not have an oil and gas consultant under contract until April, which could threaten some bills from passing into law.

Legislators say that Gov. Mike Dunleavy wants four energy measures to pass this year: Royalty reductions to incentivize new gas production in Cook Inlet; a state green bank to invest in renewable energy; a new organization to manage a modernized Railbelt electrical grid, and a framework so carbon dioxide can be stored deep underground.

Key senators, in particular, have said scant evidence has been presented to show that reducing state royalties paid by oil and gas companies will see more gas produced in Cook Inlet. There has also been some concern that carbon sequestration could end up costing the state treasury.

Rep. George Rauscher, a Sutton Republican and chair of the House Energy Committee, said House Republicans have been more closely aligned with Dunleavy. He said energy measures should pass now, or potentially in a special session in the summer. And he added that the four energy measures proposed are a priority for House Republicans and the governor.

"I think the House majority considers the governor — as a Republican — part of the caucus. So he carries a lot of weight, as far as the way we perceive things," Rauscher said.

Dunleavy proposed last year to cut royalties paid to the state on new gas production. Department of Natural Resources Commissioner John Boyle said in April that could help "squeeze out" more gas from Cook Inlet to help avoid or delay importing natural gas.

Several royalty reduction proposals have advanced in the House, but it's unclear if they have enough support to pass either legislative chamber.

"I would like to see something passed on royalty relief, because anything would help," said Rep. Tom McKay, an Anchorage Republican and chair of the House Resources Committee. But he acknowledged there are no guarantees that would produce more gas.

"I think it would, you never know," he said.

Since Hilcorp told utilities in 2022 that its contracts would not automatically be extended, utility managers have discussed importing natural gas as likely the best available alternative. Power and heating prices would be expected to increase substantially.

The House recently passed a bill to regulate gas storage that included a provision to block utilities from investing in a gas importation facility. Rauscher said the idea behind that provision was to force new natural gas to be produced from Cook Inlet, and not to be imported from Outside.

"Whether that was a good idea, we're going to find out in the future when it gets over to the Senate side," he said.

There has been skepticism that smaller independent gas producers will be able to fill a supply shortfall and that reducing royalties will substantially boost new production. A December royalty-free Cook Inlet lease sale on new fields drew a lackluster response from the industry. Producers can also already apply to the state to reduce their royalty payments.

A second set of proposals from Dunleavy would allow the state to lease depleted gas reservoirs in Cook Inlet for carbon sequestration. Once pitched as a revenue raising tool for the state, carbon storage has now been supported as a way to attract oil and gas investment.

The carbon storage bill was amended in the Senate Resources Committee on Friday, with the intention of preventing oil and gas companies from deducting carbon sequestration expenses from their oil production tax obligations. Sen. Bill Wielechowski, D-Anchorage, said Thursday that those deductions could "blow an enormous hole in our state budget."

Another provision added Friday would require Hilcorp to pay more state tax revenue. The privately-owned operator of Prudhoe Bay does not pay corporate income tax. Wielechowski estimated that closing that "loophole" would net the state well over $100 million per year. But some in the Legislature say if that provision remains, the bill would be unlikely to pass.

Some legislators have expressed concern that there has not been independent modeling provided to the Legislature about the impacts of carbon storage and royalty relief. The Legislature did not have an oil and gas consultant under contract for almost eight months.

"I don't think it's worth just giving our state dollars away and not knowing if it's going to have any impact at all," said Wielechowski on Tuesday.

"What we would really like to have is some modeling," said Anchorage Republican Sen. Cathy Giessel, chair of the Senate Resource Committee, on Tuesday. "It has economic implications. And normally we have consultants on board."

Consultant delays

The Legislature usually hires GaffneyCline to work as its oil and gas consultant. The firm provides modeling about the financial impacts of amending the state's oil and gas tax statutes. The firm could also give advice on what impacts those tax changes could realistically make to produce more gas.

GaffneyCline's contract ended with the Legislature on June 30 last year. Legislators did not have an oil and gas consultant under contract until April 4.

Nikiski Republican Rep. Ben Carpenter, a first-time chair of the Legislative Budget and Audit Committee, was in charge of hiring an oil and gas consultant. But the process to hire one was long and protracted.

Kris Curtis, the Legislature's auditor, has long managed those contracts. Carpenter said he found that dual role strange. He said the auditor could end up auditing contracts that they themselves wrote. Another concern was over a dispute with the governor.

The Legislature filed a lawsuit in 2022 against the Dunleavy administration over where billions of dollars of oil royalties should be deposited. Legislators agreed with Curtis' interpretation that those funds should be placed into the state's main savings account that requires approval from three-quarters of lawmakers to spend from. The Dunleavy administration said the funds should be deposited directly into the more-easily spendable general fund in the state treasury.

The Alaska Beacon reported last year that the Dunleavy administration prevailed in Superior Court, but the case had been appealed to the state Supreme Court. In light of the dispute last year, Carpenter said he was aware that Dunleavy considered Curtis to be "too political."

"I need to be sensitive to that. I don't think she is, but I'm going to be sensitive to that," he said in an interview Thursday.

Instead of using Curtis, a state employee, Carpenter looked for outside help to write contracts for the committee. As chairman, Carpenter has the authority to issue contracts up to $40,000. The Nikiski Republican issued a contract of up to $40,000 to a retired state contract writer in November.

The contractor wrote out a request for proposals that was put out for bid in January. The only respondent was the Legislature's normal oil and gas consultant, GaffneyCline. The Legislative Budget and Audit Committee approved a two-year, $200,000 contract with the firm on April 4.

But there was a problem. Since GaffneyCline's contract ended with the Legislature last year, the governor's office had hired the firm to work as its consultant on carbon sequestration policies. That means GaffneyCline has a conflict of interest on that issue and cannot provide the same independent guidance to the Legislature.

Carpenter said he didn't want to be "pejorative" to Dunleavy, but he said the governor's decision to hire GaffneyCline for carbon sequestration issues had "handcuffed" the Legislature.

There are few consultants available who are as well-versed in Alaska's oil and gas structure as GaffneyCline, said Sitka Republican Sen. Bert Stedman. In retrospect, he said, "It would have been nice to have the contract extended."

A 'wrinkle'

Sen. Cathy Giessel said she filed a request with GaffneyCline for modeling on the impacts of reducing royalties earlier in the week. But it's unclear if that modeling will be available before the end of the legislative session.

The House has advanced royalty reduction bills through the committee process without independent guidance.

"We didn't realize that certain senators were going to demand modeling," said McKay, a former petroleum engineer. He said that was "a wrinkle," but also acknowledged that "it would have been better to have GaffneyCline on board way, way earlier."

Longtime lawmakers said it was perhaps unprecedented for legislators to consider substantive changes to the state's tax code without impartial advice. Rep. Zack Fields, D-Anchorage, said House members have effectively been "shooting blind."

"It's a huge deal. Are we representing the state's interest in these things?" he said.

The carbon sequestration bill proposed by Dunleavy has advanced to the Senate Finance Committee for a first hearing next week. The committee will not have an independent consultant to offer guidance on its fiscal impacts. Stedman said the Senate Finance Committee would be very careful before making any adjustments to the state's tax code.

"It's more important to have it correct than have it fast," he said. "If we make a mistake, it's very hard to back up and fix it."

For now, the Senate Finance Committee is waiting to see modeling from GaffneyCline on whether reducing royalties on Cook Inlet producers would see new gas produced for Southcentral and Interior Alaska. Stedman, a fiscal conservative, remains skeptical.

"My personal opinion? I'd be more surprised if the consultants tell us it's going to make a difference," he said.

In an interview Thursday, Carpenter suggested that it was "politics" that was causing senators to be wary of passing royalty reduction bills without modeling from an outside consultant.

"I guess the senators aren't comfortable with it. And I would just ask, 'Why?'" he said.

'Not finished'

Another measure would create an integrated transmission system for the Railbelt electrical grid. The intention is allow for the lowest-cost energy to be distributed across the grid, and to better integrate renewable energy production.

But one version of the bill has attracted concerns from the Alaska Public Interest Research Group of insufficient oversight from state regulators.

The one energy bill that is broadly expected to pass this year would establish a green bank to be administered by the Alaska Housing Finance Corp. The measure proposed by Dunleavy would allow the corporation to invest in renewable energy projects and give more opportunities to collect federal revenue for clean energy.

Some in the Legislature are skeptical that a substantial number of energy bills will pass this year. Other lawmakers think that unresolved concerns with the energy bills can be addressed now or potentially later in the year during a special session.

"We're not there yet," Rauscher said. "We're not finished."

The regular legislative session must end by midnight on May 15.