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Vol. 15, No. 7 Week of February 14, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Big Risk, Bigger Rewards: Alaska is where the oil is

Escopeta sees Cook Inlet as best place to explore for and produce large quantities of oil and gas in U.S.

Danny Davis

President, Escopeta Oil and Gas

Why is your company looking for oil and gas in Alaska?” What do you find most attractive about the state, in terms of oil and gas development?

When asked by a reporter why he robbed banks, depression-era gangster John Dillinger famously answered, “Because that’s where the money is.”

Escopeta Oil and Gas LLC was asked by Big Risks, Bigger Rewards, “Why is your company looking for oil and gas in Alaska?” To paraphrase Dillinger, it would have to be said, “Because that’s where the oil is.”

America needs domestic sources of energy. Going forward, Alaska can and will continue to be a major piece to the puzzle of America’s energy security.

Alaska today presents an opportunity for small oil companies to grow and prosper.

As the world’s largest oil companies now have set their sights on giant prospects in the Arctic seas and in foreign countries, the stage is set for smaller companies to extend the success story of oil and gas exploration and production on state lands in Alaska. Smaller companies have the low overhead and agility to fill in the margins around the major pools of petroleum that have been exploited by the majors. As in other mature oil provinces — Texas, for example — smaller firms will be the future. The investments and ingenuity of these small companies will allow future generations of Alaskans and Americans to benefit from Alaska’s oil bounty.

Revitalizing Cook Inlet

Escopeta is a successful exploration and production company based in Houston, Texas. Today Escopeta is the largest unit holder in Alaska’s Cook Inlet. Cook Inlet represents to Escopeta a chance to find one of the largest pools of oil and gas in the United States.

Cook Inlet is the birthplace of the modern oil and gas industry in Alaska.

Cook Inlet oil fields have been in production since 1958. Offshore wells have been producing oil and gas since the early 1960s.

Cook Inlet has existing infrastructure, a highly trained and skilled local workforce, and experienced mariners with operating experience and the right watercraft for sailing Cook Inlet’s challenging waters.

In Escopeta’s opinion, Cook Inlet is the best place to explore for and produce large quantities of oil and gas in the United States.

Benefits to Alaskans

Citizens of Alaska will benefit from the investment by Escopeta and its partners in many ways, over and above the royalty income the state will receive from Escopeta’s Cook Inlet production.

Anchorage and other Railbelt cities have been lit and heated for decades with natural gas deposits that were discovered in the ’50s and ’60s. These fields are now in decline.

When oil was discovered at Prudhoe Bay, many companies abandoned Cook Inlet and followed the oil rush to the North Slope. The pace of exploration in Cook Inlet has slowed to a trickle, and so has the oil output. Escopeta is positioned to reverse this decline.

The Tesoro refinery on the Kenai Peninsula was designed to handle 72,000 barrels a day of sweet Cook Inlet crude. Due to low Cook Inlet crude production, it operates below capacity. It now must import about 30,000 barrels per day from foreign sources. The Nikiski refinery provides roughly 70 percent of Alaska’s motor fuel, and 40 percent of jet fuel to Anchorage’s international airport.

It is ironic, and little known, that most Alaskans are burning gasoline refined from imported oil in their cars every day.

New crude output from Escopeta’s offshore production platforms would actually reduce environmental hazards to the productive fisheries of Cook Inlet by reducing tanker traffic. Imported oil is transported to Cook Inlet in single-hull foreign-flagged tankers. Tankers also carry away heavy residues from North Slope oil, which the Nikiski plant was not designed to refine.

Likewise, natural gas output is in serious decline. According to Enstar, gas output will plummet steeply in just a few years, with major shortages occurring as early as 2011. Using even the most optimistic of projections, North Slope gas will not reach the area in time to avert a severe shortage.

These looming shortages have national security implications as well. Anchorage’s military installations are dependent upon Cook Inlet natural gas for heat and electricity.

All parties will benefit from the low cost of transportation involved with serving the local market, while consumers will see lower prices and increased energy security once oil and gas begin to flow from new Cook Inlet production platforms of Escopeta and its partners.

Cook Inlet opportunity

Fortunately the story of the Cook Inlet oil fields is far from over. The U.S. Department of Energy said in a 2004 report that according to their research, only 5 percent of the potential oil and gas reserves in Cook Inlet have been found.

So a bright future is possible, but only with oil company investment and regulatory cooperation from the State of Alaska.

Several companies are drilling a few low-cost gas wells in Cook Inlet which may result in a moderate increase in natural gas supplies — but the most promising structures lie offshore in Escopeta’s Kitchen Lights unit.

Offshore prospects require the use of a jack-up drilling rig — an expensive proposition that substantially increases the financial risk of exploration.

Escopeta and its partners are working hard to overcome the financial hurdles so that the jobs and economic stimulus of a multibillion-dollar exploration and production effort can accrue to the citizens of Alaska, while Alaska energy is delivered to the citizens of the United States.

Fortunately, the state has said it wants to level the playing field to allow smaller oil and gas companies to explore and thrive all over Alaska.

As Revenue Commissioner Pat Galvin told Petroleum News in December: “We’ve got companies that have never been on the North Slope drilling wells.” As is typical of mature oil provinces that lose the interest of the majors, smaller companies move in, he said.

The state has set the stage for profitability with its Alaska’s Clear and Equitable Share tax structure, discovery royalty program, and with the cooperation and assistance it has provided to Escopeta and other independents.

Smaller companies have economies of scale that will allow them to profitably find and develop smaller fields that just don’t pencil out for the majors.

As the state, small energy companies, and the people of Alaska continue to work together, the future will be bright.

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