A new Alaska paradigm
State officials welcome new oil companies but face new oversight challenges
An influx of relatively small companies to the Alaska oil and gas industry in recent years has diluted the erstwhile dominance of major oil companies in the state, bringing new thinking to the industry and new sources of oil and gas investment. But, while state agencies welcome this flurry of new blood and the new exploration and development that has resulted, the agencies also worry about how to ensure that the state’s interests are adequately protected in what is becoming a new Alaska oil industry paradigm, state officials told the Law Seminars International’s Energy in Alaska conference on Dec. 6.
“The state is in this really unusual position that we really need to think longer term, in terms of who is coming in, how to handle and manage new kinds of companies, and how the state can protect itself and yet still develop oil and gas resources,” Bill Barron, director of Alaska’s Division of Oil and Gas, told the conference.
Barron said that, while super-major oil companies still dominate the oil scene on the North Slope, small companies such as Great Bear Petroleum, Armstrong and Nordaq have become active. And Cook Inlet has seen a complete upheaval, with Chevron and Marathon gone, replaced by companies such as Hilcorp, Apache, Nordaq, Furie and Buccaneer, Barron said.
Public landSmaller companies, new to Alaska and more used to working in land that is privately owned, have to adjust to operating in public land, owned by the state, Barron said. And the state, to protect its long-term interests, oversees a land-lease process involving phased decisions, headed by a best interest finding that sets stipulations that become part of the terms of oil and gas leases. Moreover, in managing leases, the state requires work commitments from its leaseholders.
“Some of these players have never worked in Alaska,” Barron said. “They want to know what is needed as we go through each one of these phases.”
And a small producer may struggle, for example, with the concept of public comment periods being required components of state decision making, he said.
Limited liability corporationsAs part of the influx of relatively small companies, the state has seen a surge of companies structured as limited liability corporations, or LLCs, Barron said, commenting that state statutes and regulations are not designed for the oversight of companies structured in this manner. Unlike a traditional oil major, with worldwide assets and a worldwide reputation, an LLC can involve a complex network of business relationships and asset ownership linkages, with the literal possibility of being disbanded overnight, he explained.
“They die as fast as they’re born,” he said.
In that situation, how will an LLC manage its assets and, in particular, how can the state ensure that someone retains responsibility for the eventual dismantling of oil and gas facilities and the restoration of state lands? The state does not want to be saddled with the eventual abandonment work, Barron said.
“Our goal is to protect the state,” he said.
Faced with this type of issue, the Division of Oil and Gas is paying heightened attention to company finances while also closely scrutinizing plans of operation and rehabilitation plans. This can elevate tensions between the state and the companies, with accusations that the state is not open for business, Barron said.
New opportunitiesOn the other hand, the new companies, unburdened by traditional thinking and working under different economic parameters from an oil major, are aggressive and excited in seeking new opportunities in Alaska, unafraid to try new technologies and persuasive in obtaining investment funds. Barron particularly cited Hilcorp, whose efforts in Cook Inlet have already made big inroads into re-invigorating oil and gas fields.
But LLCs, with low capital and continuing needs for funding from the investment community, have to compete for international capital. And some have limited operational experience, a limited presence in Alaska and a limited ability for outreach to the local communities, Barron said.
AOGCC: new life, new challengesCathy Foerster, chair of the Alaska Oil and Gas Conservation Commission, or AOGCC, commented on the way in which companies new to Alaska are bringing much needed new life to the oil and gas industry while also presenting some new challenges for her agency. AOGCC is the state agency that oversees the safety of oil and gas operations within Alaska while also assuring the optimum development of oil and gas resources, preventing waste and protecting resource ownership rights.
“The AOGCC has been involved in ensuring that this new activity is done using good oilfield practices, so that nobody gets hurt and so that the maximum hydrocarbon recovery is achieved,” Foerster said.
Foerster particularly highlighted Hilcorp’s efforts to revitalize the Cook Inlet assets that the company has purchased from Marathon and Chevron. Instead of the typical oilfield annual decline rate of 5 to 6 percent, the Cook Inlet fields that Hilcorp operates have seen twofold to threefold production increases, Foerster said. And, despite the fact that Cook Inlet production presents only a small proportion of overall Alaska oil production, AOGCC’s most recent determination of the Alaska annual production decline rate has shown a drop from 6 percent to 3 percent, Foerster said.
“A lot of that is because of Hilcorp,” she said.
Regulatory challengesBut the newcomers to Alaska have also found compliance with Alaska safety regulations to be challenging, an issue that has in turn created challenges for a somewhat under-staffed AOGCC, she said.
For example, Hilcorp has brought in some new drilling rigs and drilling crews: The rigs require inspections before they can be used and the crews need training and oversight, to ensure regulatory compliance. In fact, Hilcorp asked Foerster to talk to the company’s operations managers, to bring the managers up to speed on AOGCC requirements, Foerster said.
And AOGCC now has regulatory oversight of the two jack-up drilling rigs that are operating offshore in Cook Inlet. The agency has been busy working with the operators of both of the rigs, with both operators finding regulatory compliance to be challenging, Foerster said.
Positive for the state
Foerster and Barron both emphasized, that despite the new issues that new companies bring, new oil and gas development is positive for the state.
The resurgence of interest in Cook Inlet “has been very exciting and the results have been extremely encouraging,” Foerster said.
And Barron characterized the new issues that have arisen as challenges rather than obstacles, with a need for the state and the industry to work together in everyone’s interests.
It is important to understand the differences between the new companies and the super-majors, he said.
“We’ve got to … work through to really get this thing moving,” Barron said. “These are the companies that we’re going to be dealing with in the future. We’ve got to get it understood now, so that we can move forward faster.”
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