Gustafson knocks Alaska fear factor

Former Exxon executive tells story behind breakthrough successes attained by Armstrong Oil & Gas in ‘difficult’ Alaska oil patch

Rose Ragsdale

For Petroleum News

Stu Gustafson says he knows what kind of consultant he isn’t.

That’s one whose motto is: “There is a whole lot of money to be made working on the problem if you are not part of the solution.”

Certainly, Gustafson’s performance during the past five years as vice president of operations for Armstrong Alaska, an affiliate of Denver-based Armstrong Oil & Gas, suggests that he’s definitely a part of the solution.

Gustafson, who worked for Exxon Exploration in Alaska for 19 years before leaving the state to work in Russia in 1996, returned to Alaska as a consultant with Armstrong to bid at a state oil and gas lease sale in 2001.

Gustafson shared his story with oil industry geologists in Anchorage last spring. Armstrong, the small independent sold all of its Alaska oil and gas assets in August 2005 to Eni Petroleum Exploration Co., the last of three new companies the independent is credited with attracting to the state. Gustafson continues to assist partners through his company Coordinators Management.

When Armstrong contracted him, Gustafson said company officials sent him 84 questions on why they couldn’t do business in Alaska and why they shouldn’t invest in the state.

“Their perception was the environment was difficult, and permitting would be very complex,” he said.

Setting a record

Armstrong’s plan of operation and all of its engineering going forward for processing 40,000 barrels per day of oil and roads, pipelines, tanks, generators and the pipeline system was approved in 91 days, Gustafson said. “The entire process for exploration operations — permitting and drilling — took 180 days.”

“If you want to make the system complicated you can,” said Gustafson. “There is nowhere that I have found, whether it’s Louisiana, or Texas or Russia, that you will find a more receptive regulatory environment to work with.

“You take your questions to the agencies and they will give you the right answers,” he explained. “It’s when you have (company) people who have the attitude that they have the answers and are going to educate the agencies that you get into trouble.”

Before Armstrong came to Alaska, company officials were told that they would need three years to learn to drill their first wildcat well here, according to Gustafson.

“We got our first leases in six months, and we drilled three offshore wells that year, taking on Pioneer (Natural Resources) as a partner.”

Armstrong’s speed was astonishing.

During the next two years, Armstrong drilled eight more wells, six offshore and two onshore.

“So, in what was supposed to take us the timeframe to learn how to drill one well, we drilled 11 wells without any … snags in the process at all,” Gustafson observed.

Armstrong also debunked myths about Alaska’s high operating costs and big companies making life miserable for small independents.

“Operational costs are high in Alaska because it costs more to drill here,” said Gustafson. But as a small independent, the risk of sitting on prospects for three years while building a new rig to save money didn’t make sense to Armstrong.

As for the majors making life miserable for Armstrong, Gustafson says the opposite is true. “The problem is getting through some of the layers down the food chain. … That first year, we had that problem.”

With the help of supportive media and regulators who seemed empowered and proactive under the Murkowski administration, Armstrong overcame early obstacles, Gustafson said.

Then Armstrong convinced Texas-based Pioneer that independents could do business in Alaska, and together they bought 22,000 acres and drilled three wells. The next year, the companies tripled their acreage and brought in Oklahoma-based Kerr McGee.

Sharing risks with bigger companies like Pioneer and Kerr McGee was critical for a small firm like Armstrong, Gustafson said.

“Alaska’s offshore bonding requirement, alone, was $200 million unless you were a publicly held company that clearly had a net value of $200 million and you were willing to expose everything for it. … We had to bring in somebody with public funding who could drill those wells because we could not,” he said.

Alaska regulators also helped out by urging the producers to give the independents access to their exploration acreage.

“The state put pressure on some of the operators that held acreage for a long time, and they farmed it into us,” Gustafson said.

But some of Armstrong’s success resulted from the company’s own practical approach. For example, Armstrong sought regulatory permits as they were needed rather than all at one time.

Why? “Because time is money,” Gustafson said. “In four years, we went from zero to more than 340,000 acres gross, and we drilled 11 wells. Does this sound like a difficult environment for an independent company to operate in?”

Good news

Armstrong also sold the rest of its assets to ENI, which took over the independent’s operations in the state.

Gustafson says he expects ENI will follow the same strategy in operating on the North Slope as those of the earlier independents.

“I think you will see the same thing when you work with them. That they will move along in a rapid fashion,” he said.

So how did Armstrong succeed where others have failed?

“Go to the (agencies’) offices and find out who got what approved the fastest with the least amount of paper,” he advises. “Change the location, and by golly, it’ll work. You don’t have to reinvent a model every time. ...”

Armstrong also embraced innovation when it led to significantly lower costs.

As an example, Gustafson cited Armstrong’s production-in-a-box technology for developing modular production facilities.

“Basically these are truckable modules about 55 feet long, 14-feet-by-15-feet. You could have six wells in each one,” Gustafson explained. “You can build these any place and truck them up there, and when the time expired and you don’t need them, you could take them off somewhere else.

“The big thing about these is that without these production modules, and without being able to prove to the (Alaska Department of Environmental Conservation), North Slope Borough and the whalers that any spill from any wellhead would be in the tank with controls built into the design of the system, we would not be talking about oil production right now on these properties. The project would not have moved forward.”

Gustafson also said the North Slope Borough proved to be easy to deal with. “They want someone standing there to explain what you want to do,” he said. “Go early and talk straight. You’re not going to get everything you want, and it’s going to cost you something, but there is a way to work it.”

What’s next?

“Trust the contractors up here. Give them your goals, your objectives and communicate with them early, and you will get it done,” Gustafson said.

And how do you survive?

“Not the biggest, not the strongest and not the smartest will survive. It is the one who figures out how to change,” he added.

—Alan Bailey contributed to this article