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Vol. 15, No. 46 Week of November 14, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

The Explorers 2010: The need to drill to pay the bill

Tom Maloney

Alaska Area Manager, CH2M Hill, and Board Pre

Alaska has been a great domestic oil source, including 33 years from Prudhoe Bay made possible by the trans-Alaska pipeline system. This production has benefited the State of Alaska by approximately $96 billion through 2009.

How are current production levels? What will the next decade bring? Will TAPS have enough oil to continue running? Will our kids and grandkids have a future in Alaska? Will state and federal governments take positive action, in time? What can we do to get our economy moving again? These are just a few questions that our leaders need to address. The clock is ticking. We all need to acknowledge the risk to our economy from declining oil production.

Cook Inlet oil production declined 95 percent from its 1970 peak of 230,000 barrels per day to 12,000 bpd in 2010. Meanwhile, production from state lands across the prolific North Slope has declined to under 650,000 bpd, down 70 percent from a 1988 peak of more than two million bpd.

Wayne Gretzky, The Great One, said, “You miss 100 percent of the shots that you don’t take.” The same is true with hydrocarbons. Without drilling, you get no new production. Without new production, the only question is when will the oil run out?

Industry recognizes production is drying up. However, many Alaskans don’t know TAPS has declined 70 percent over 20 years. Oil represents one-third of Alaska’s economic drivers.

What can we do?

Tax policy must change in a way that reflects the important role drilling has in Alaska’s economy. Investors take 100 percent of the risk to lease, explore and develop a resource. At high prices, government can take more than 90 percent of the income stream of a barrel of oil. What is the incentive for an investor to take risk? Would anyone with their real estate, stock, or other investments give the government all the upside while taking nearly all the downside?

In 2007, Alaska had 188 wells drilled, including 22 exploration wells. The 2010 forecast calls for 150 wells and only five exploratory wells. We need to encourage industry and government dialogue to reverse this steep decline.

Drilling credits are a fast way to stimulate investment, leading to a positive economic impact and employment opportunity for Alaskans. Drilling benefits multiple employment sectors, including those captured in the diagram featured in this commentary.

Gov. Sean Parnell proposed drilling credit legislation last year. Legislators did not vote on this 2010 proposal.

Challenged (heavy) oil is abundant, with more than 20 billion barrels of reserves. Recovery rates are currently low and production costs are high. Research, combined with better tax policy, is needed to increase challenged oil investment. While the existing fields are in a fairly predictable state of decline, challenged oil presents an opportunity for incremental production to increase flow in TAPS.

The gas pipeline has been a long-time dream. Opportunities stemming from a positive Open Season would accelerate gas and oil developments. In other words, “drill baby, drill.” The outcome may surprise you. We should consider tax changes for shippers willing to commit resources to a gas pipeline. Introducing tax incentives in exchange for pipeline progress commitment, including development costs, would curb investor concerns.

These ideas should help in the short run. We need positive change in 2011, or we may not have a long-term future as an oil and gas state. We need to encourage production. One hundred percent of nothing is still nothing.

The feds and North Slope development

The U.S. Geological Survey, funded by taxpayer dollars, estimates reserves on federal lands. The three largest potential reserves on the North Slope are nine billion barrels in the National Petroleum Reserve-Alaska, 27 billion in the Outer Continental Shelf in the Chukchi and Beaufort seas, and 10 billion in ANWR. At current prices, this would be worth roughly $3.7 TRILLION, excluding gas sales.

The North Slope to date has surpassed 16 billion barrels of production. Federal areas in the Arctic have three times the reserves of what has been produced on state lands in the region.

National Petroleum Reserve-Alaska

From 2000 to 2009, 29 exploratory wells were drilled in NPR-A by five firms that invested billions to lease, explore and drill over the 10-year period. How many barrels of oil have been produced? Zero. Billions of dollars out the door, and nothing in — partly due to multi-year delays in permitting and other regulatory issues.

ConocoPhillips has suspended development plans, not only at CD-5, but at multiple other NPR-A sites. These delays cost Alaskans dearly in high-paying jobs like drilling, engineering, fabrication, installation, etc.

2010 was the first year in decades that ConocoPhillips did not drill any exploratory wells in Alaska. NPR-A will not have any exploratory wells drilled in 2011. When will the federally controlled petroleum reserve finally produce petroleum?

Outer Continental Shelf

The abundant oil and gas resources in Alaska’s OCS, typically in less than 150 feet of water, attracted $2.7 billion in lease sales from Shell Exploration & Production and ConocoPhillips in 2008. Federal delays impeded Shell’s 2010 plans and cost about 600 jobs. It is estimated oil and gas development will create 35,000 Alaskan jobs. The oil alone, valued at over $2 trillion, would stimulate federal and state coffers, and keep TAPS operating for decades to come.

Arctic National Wildlife Refuge

Polling reveals 78 percent of Alaskans favor developing ANWR’s 10 billion barrels. A majority of Americans believe Alaskans oppose opening the 1002 area of ANWR. Let’s clear this up, once and for all and put it on a ballot.

Alaska possesses oil on the North Slope and the right to develop it could lead to a positive future. The need for fiscal policy and a streamlined permitting process that supports looking for this challenged and costly oil will greatly influence Alaska’s future in oil.

Alaska has the opportunity to stem the rapid decline of North Slope and Cook Inlet production. We must educate Americans that Alaska’s natural resources can be responsibly developed. RDC will continue to work with interested parties to ensure we have a bright future by growing Alaska through responsible resource development.

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