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Meyers says fiscal regime hurting AK ConocoPhillips executive says that reduced government take would trigger a rebound in Alaska exploration drilling and land leasing Alan Bailey Petroleum News
The continuing, steady decline of oil production from Alaska’s North Slope may appear to signal the sunset of the North Slope oil industry, but with ample oil reserves remaining in established oil fields and the possibility of finding and developing new oil resources, the current situation could be turned into a sunrise, said Kevin Meyers, ConocoPhillips senior vice president for exploration and production, Americas, during a Sept. 8 speech to the World Trade Center Alaska about ConocoPhillips’ global operations.
Meyers is no stranger to Alaska.
At the end of 1998 he became president of ARCO Alaska and remained at the helm of the company through 2004, by which time the company had become part of ConocoPhillips. And, reflecting on what has happened in Alaska in recent years, he said that in his view an unfriendly fiscal regime is hurting the industry and, ultimately, the state.
Continuing decline The oil industry did stem the drop-off in North Slope production for a couple of years around 2002, but since then the decline has continued apace, threatening the possibility of technical problems with low flow rates through the trans-Alaska oil pipeline within the next 10 to 15 years, Meyers said. And with the long lead time required to bring new North Slope oil resources on line, it is critical to move forward with new exploration and development as soon as possible, he said.
“The time to be drilling new wells is now,” he said. “… This is our fiscal ticking time bomb we’ve got to do something about.”
With a mutual interest in a successful oil industry, the state needs to work in partnership with industry, to promote oil development, he said.
Meyers said that Alaska has seen three changes in fiscal regime in the past three to four years, with the current ACES oil production tax being highly progressive, meaning that the state takes an increasing proportion of the profits as oil prices rise.
“The problem with progressive taxes is that they leave you no upside,” Meyers said. “If they leave you no money … to invest then it’s not going to prompt new investment.”
The number of exploration wells drilled in northern Alaska has been declining and ConocoPhillips has been relinquishing significant amounts of its leased exploration acreage, he said.
“Fundamentally we can’t make the math work. We can’t make the economics work,” Meyers said.
Alberta comparison Meyers compared Alaska with the Canadian province of Alberta, where he said “lease sales and development fell off the charts” following a government initiative for a major increase in the province’s oil and gas royalties, as oil prices peaked in 2008 and then subsequently dropped. In 2009 the province rethought its fiscal policy, he said.
“It’s probably one of the few fiscal regimes in the world that actually went back and responded to commodity prices,” Meyers said. “… They substantially dropped their take and a funny thing happened. Lease sales are going up. Rig rates are going up. The number of rigs is twice what it was a year ago.”
The North Slope oil producers have so far extracted less than half the oil that originally existed in the established oil fields, thus leaving perhaps 30 billion to 40 billion of already discovered resource to develop, Meyers said.
“All we’ve got to figure out is a way to make it economic, how to develop it economically, and I think with the right kind of fiscal regime we could do that,” he said.
And, presumably in part reflecting ConocoPhillips’s current strategy of planning for future exploration in the Chukchi Sea while continuing to develop oil pools relatively close to existing North Slope infrastructure, Meyers said that he feels optimistic that people will find a way to ensure viable development of known North Slope resources as a bridge to the development of future oil discoveries on the Alaska outer continental shelf.
“I think we’ll do the right thing and hopefully we’ll get more barrels down the pipeline and we can bridge the gap until we have OCS discoveries,” Meyers said.
Global perspective From a more global perspective, Alaska represents about 15 percent of ConocoPhillips’ worldwide oil and gas production, Meyers said. The state also holds about 15 percent of the company’s resource base.
Canada, the biggest supplier of foreign oil to the United States, also represents about 15 percent of ConocoPhillips’ current production portfolio but seems set to become a major ConocoPhillips growth area, especially from the development of oil sands.
Australia is also a major growth region for the company, mainly through new LNG projects, Meyers said. As well as offshore natural gas in the region, ConocoPhillips has a substantial onshore position in coalbed methane — the company plans to export Australian coalbed methane to the Pacific Rim as LNG, he said. And, also on the Pacific Rim, ConocoPhillips is starting a major LNG project in Qatar.
On the other hand, the Lower 48 continues to be the company’s largest production region, while the Norwegian and UK sectors of the North Sea also figure large in the company’s portfolio.
Importance of Russia With Russia vying with Saudi Arabia as the world’s largest oil producer, ConocoPhillips has been an active player in the former communist country for several years. The company established a successful joint venture with Lukoil but sold its ownership position in Lukoil this year, Meyers said. Russia has become an especially challenging place for oil companies to do business in recent years — high oil prices have reduced Russia’s need for foreign capital, while the Russian government has recognized oil and gas as strategic resources, he said.
Speaking from his own personal experience of working in Russia, Meyers said that with Russians being especially proud of their country and preferring to do business with other Russians, it is critically important for foreign business people to establish strong relationships with their Russian counterparts.
And Meyers countered views held by some in the West that Russia is not a democratic country.
“They are a democratic country,” Meyers said. “They just have different priorities and you’ve got to understand and respect that.”
Rising energy demand But what of overall global energy demand, and the place of oil and gas in meeting that demand?
“We’re in a … economic downturn right now. We believe that’s not going to persist forever,” Meyers said. “… We are going to see an increasing demand for hydrocarbons as the economy recovers.”
At the same time, concerns about climate change could alter the supply and demand dynamics for natural gas, a fuel that is recognized as a clean-burning hydrocarbon — in the Lower 48, new technologies for developing shale gas have dramatically increased the estimates of U.S. natural gas resources.
“Right now we have a lot of gas in the Lower 48 and the big question’s how long is that surplus going to last and what the ultimate price curve will look like,” Meyers said. “We think there’s a strong demand ultimately in North America as well as the world for gas, but … there’s a lot of gas in shale out there and we’re just beginning to tap the tip of the iceberg.”
But the oil and gas industry in general will remain a critical part of the world economy for decades to come, Meyers said.
“Frankly when you look at the world population and how it’s growing, and how the Chinese and the Indians and the Brazilians and just about everybody else you can name that’s a non-OECD country wants to emulate our lifestyle, you have a growing population and a growing per capita demand for fuel, for energy,” Meyers said. “We need renewables. We need all carbon fuels. We need just about everything we can get our hands on.”
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