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Week of August 26, 2012
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Fortune Hunt Alaska 2012: Alaska at the tipping point

Dan Sullivan

Commissioner of the Alaska Department of Natural Resources

The State of Alaska is on the cusp of a promising new era of oil and gas development.

Governor Sean Parnell has outlined ambitious goals to increase the flow of oil through the Trans Alaska Pipeline System to one million barrels per day within a decade and commercialize the North Slope’s enormous gas resources.

These two goals cannot be achieved without billions of dollars of additional private-sector investment. It’s clear that the significant exploration incentives enacted by the State in recent years have attracted new exploration activity, particularly in the Cook Inlet region. If Alaska is going to realize its full potential, we must move from exploration to production. We are committed to attract the capital necessary to achieve our goals.

Oil and gas investors should look to Alaska for three primary reasons. First and foremost, the state possesses world-class hydrocarbon resources; second, state government has taken action to boost oil and gas sector investment, particularly in Cook Inlet; and third, positive momentum has been created by a diverse mix of companies and the wide variety of resource plays — onshore and offshore, conventional and unconventional — they are pursuing.

World-class hydrocarbon base

By any measure, Alaska has an enormous endowment of oil and gas resources.

In addition to the 16-plus billion barrels of oil produced from North Slope oil fields, which still hold roughly four billion barrels in reserves, federal agencies estimate that 40 billion barrels of undiscovered, technically recoverable oil and more than 200 trillion cubic feet of natural gas remain untapped in state and federal lands and waters off the northern coast. 

Those numbers do not include the North Slope’s vast unconventional resources, such as heavy and viscous oil, shale oil, shale gas, tight gas and gas hydrates. These unconventional resources likely add tens of billions of barrels of oil and hundreds of trillions of cubic feet of gas to the resource base.

How does Alaska stack up against its neighbors? According to the U.S. Geological Survey, Alaska’s Arctic contains more undiscovered oil than any other comparable region of the Arctic, including northern Russia.

However, not all of Alaska’s world-class hydrocarbons are in the Arctic. Cook Inlet — Alaska’s first major oil field — has been producing onshore since the 1950s and offshore since the 1960s. Recently, the USGS studied the Cook Inlet region and found it still has enormous undiscovered, technically recoverable hydrocarbon resources, including an estimated 19 trillion cubic feet of natural gas, 600 million barrels of oil and 46 million barrels of natural gas liquids.

Beyond the established resource plays, the state is also reviewing the potential for hydrocarbons in regions that have not seen much exploration yet, with an eye toward developing cheaper energy supplies for local or regional use. The information developed will help explorers and communities hone in on areas that could be developed to reduce local reliance on expensive diesel imports.

That brings us to a critical point: Alaska remains relatively unexplored compared to other states.  Alaska’s North Slope has 500 exploration wells. Wyoming — a smaller area — has 19,000 exploration wells. When it comes to unconventional oil and gas resources, in particular, companies operating in Alaska have barely scratched the surface.

Government Action

In the past few years, the two main branches of state government — the executive branch and the Legislature — have worked to improve the state’s oil and gas investment climate, particularly in Cook Inlet.

For example, the State has enacted tax and investment incentives to spur increased production from Cook Inlet onshore and offshore fields. These incentives are some of the most competitive in the nation and are leading to a renaissance in oil and gas exploration in the region.  This illustrates how tax reform can lead to new investment in our oil fields.

The state Legislature and Gov. Parnell recently agreed to extend incentives similar to those offered in Cook Inlet into six less-explored, lesser known energy basins throughout Alaska. The so-called “Frontier Basin” legislation will encourage exploration for oil and gas near Fairbanks, Kotzebue, the Bethel region, Glennallen and villages along the Alaska Peninsula.

On the North Slope, the State offers very competitive credits for exploration drilling, but the Parnell Administration recognizes that the state needs to do more to incentivize production. The Parnell Administration and many legislators are still seeking to make the taxes levied on North Slope production more competitive with other jurisdictions. Our ultimate goal is to grow Alaska’s economy through more oil and gas investment in production.

Finally, the state recently resolved its longstanding dispute with major North Slope producers over Point Thomson, the state’s largest undeveloped oil and gas field. The companies committed to begin production from Point Thomson within the next four years — or lose significant acreage. In the short-term, Exxon and its partners will spend billions of dollars to develop infrastructure to transport liquids to the Trans Alaska Pipeline System, including a new 70,000-barrel-per-day common-carrier pipeline from Point Thomson to Badami. This pipeline will open up opportunities for companies interested in exploring on the eastern North Slope, between Prudhoe and the Arctic National Wildlife Refuge — one of the state’s highly prospective areas.

Positive Momentum 

Alaska’s world-class hydrocarbon resources and the government actions described above have helped boost interest in Alaska from a diverse set of companies exploring different kinds of resources in a variety of geographic settings.

It’s worth recapping a few of the positive developments from the past year.

On the North Slope

Shell Oil is posed to drill exploration wells in the Chukchi and Beaufort seas this summer, and it also has leased acreage for exploration in state waters. 

Significant progress has been made in the State’s ongoing effort to commercialize North Slope gas. The major North Slope producers and TransCanada Corp. are working together on a potential LNG export project from an Alaska port, the state has resolved the Point Thomson dispute that had created a significant roadblock for developing North Slope gas, and state and federal agencies are completing the environmental impact statement needed to develop an in-state gas pipeline. Commercializing North Slope gas isn’t just an end to itself — we expect it will spur offshoot opportunities for the state and private sector, including additional oil exploration and production.

Progress has been made with unconventional resources. BP is continuing its heavy oil production tests at Milne Point. These tests have gone well. Also, Great Bear is drilling the state’s first shale oil exploration wells on the North Slope this summer.

Repsol has drilled three exploration wells on its acreage west of Prudhoe Bay.

Last year’s North Slope lease sale netted more than $21 million and was one of the most successful lease sales of its kind in recent Alaska history. Long-time player ConocoPhillips and a variety of new players, such as Royale Energy, have staked out new positions on state land. Royale intends to pursue conventional oil and a potential shale oil play.

In Cook Inlet

In Cook Inlet, we expect as many as 10 to 15 new oil and gas exploration wells to be drilled this year. Other new activities include one geothermal exploration well, one or two jack-up rigs, and 3-D seismic surveys throughout the region. This is significant, as the conventional wisdom two years ago held that Cook Inlet oil and gas exploration was basically dead.

In 2011 and 2012, Cook Inlet recorded some of its best oil and gas lease sales in decades.

Apache and Hilcorp are advancing ambitious new programs for developing the Cook Inlet basin — they are extremely bullish about its hydrocarbon potential.

Additional companies such as Linc Energy, NordAq, Cook Inlet Energy and Armstrong are investing in exploration, development and production in the basin.

Small companies are taking advantage of state tax incentives to bring jack-up rigs to drill on their leases in Cook Inlet.

This diversity of investment is welcome and we see it as critical to the state’s future. New players will strengthen the oil and gas sector in Alaska and will help secure the future production needed to sustain our natural resource-based economy.

On that note, we strongly encourage investors to participate in our upcoming oil and gas lease sale for state lands on the North Slope, and in the Foothills and Beaufort Sea. The lease sale is tentatively scheduled for the fall and more details on the sale’s lease terms are forthcoming.

The State of Alaska is diligently working to market Alaska’s hydrocarbon potential and will continue its efforts to stimulate additional private sector investment. With more constructive government action and private investment, we see a bright future. We encourage you to join us.

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