Alignment is neededHendrix says Alaskans need a common vision; argues for North Slope plan ALAN BAILEY Petroleum News
All Alaskans need to come together with a common vision to ensure the future prosperity of the state, John Hendrix, chief oil and gas advisor to the governor, told the Alaska Resource Development Council on Sept. 15. Hendrix argued for a more integrated approach to oil and gas permitting, using a master plan for development planning. He also urged close coordination between different regulatory agencies, and alignment between the various stakeholders.
And, especially given that Alaska is a resource state, the administration wants to push education for Alaskans and Alaska’s youth about natural resource issues.
“Any high school graduate in this state needs to know the basics of economics, and how that underpins our state,” Hendrix said. “Without that our future is going to be very, very difficult.”
Reserves replacement Hendrix questioned the level of the state’s reserve-replacement ratio, an index that oil companies use to assess the health of their oil portfolios. Essentially, if the ratio of new oil reserves added to a company’s portfolio to the amount of oil a company has produced is less than one, a company will ultimately go out of business. What is Alaska doing to increase its reserve-replacement ratio, considering natural resources from fisheries, timber and mining, as well as oil and gas resources, Hendrix asked.
While Alaska’s oil wealth, as represented by its oil reserves, has steadily declined over the years, as oil has flowed to market from oil fields in the state, some of that wealth has been cycled back into savings such as the Permanent Fund. Of the $140 billion in oil wealth that existed, unproduced, in 1971, the state has saved about $80 billion. But that $80 billion is set to decline, given the current rate of state spending, Hendrix said.
At the same time, the state should not tie its spending to the vagaries of the global oil price, Hendrix commented, citing the peak in oil revenues between 2002 and 2015, as exceptionally high oil prices masked the decline in Alaska oil production.
Become more competitive But, while the state cannot control oil prices, the state can apply levers to control oil exploration, development and production, and to move stranded production to market. So, how can people make the state more competitive in global markets, Hendrix asked. In particular, the North Slope needs to continue to be the state’s economic engine, he said. Currently, Alaskans are not aligned, nor is Alaska aligned with the federal government, he commented.
“We need to have a pro-industry government and residents; … we need to have residents that are aligned with government; … we all need to come together as one and get this solved as soon as possible,” Hendrix said.
Areawide plan Hendrix argued for an areawide development plan for the North Slope, considering the carrying capacity of the region in terms of industrial, cultural, subsistence and environmental components. That could lead to the batch permitting of areas all the way from seismic surveying to production, thus enabling explorers and developers to move ahead without the current start and stop cycle, and without also burdening the environment, he suggested. The overall objective should be to minimize the elapsed time between exploration and production.
Citing the example of Alaska’s Office of Project Management and Permitting, a state agency that coordinates the permitting of large projects, Hendrix said that there needs to be a single coordinator for all federal permits. He said that he had been talking to agency people in Washington, D.C., and in Alaska about how to work the state’s resources in a long-term plan. He had recently talked to the director of the U.S. Fish and Wildlife Service about the master plan concept and the director had been receptive to the idea. However, the development of a plan would require great care, he cautioned.
And, as part of an overall plan, opportunities need to be sought for the sharing of oil and gas infrastructure, to minimize the environmental footprint while also encouraging the development of new fields.
Hendrix also commented that the state needs to take control of the environmental mitigation process, so that people will know how much the mitigation will cost, to enable them to understand what will need to be done in terms of mitigation before proceeding too far into a project.
Development predictability Ultimately, the mantra should be one of knowing that, if a company leases land from the state, then the company has assurance of going all the way to production, albeit with steps along the route.
“It’s going to take a lot to do that, but this thing would add value to our state of Alaska and increase our wealth,” Hendrix said.
Moreover, with a long-term development plan, the skilled Alaska workforce can be put to work, he said.
Hendrix also commented on the importance of maximizing the ultimate recovery from the oil fields, saying that the oil companies have been doing a great job of bringing new technologies to Alaska for this purpose.
North Slope gas In terms of stranded North Slope resources, Hendrix focused on the Alaska liquefied natural gas project.
“One of our biggest stranded resources that we have today is the North Slope gas,” he said. “We need to be in the game for that, and we need to do it economically.”
Hendrix said that state ownership of the LNG project coupled with a third-party tolling model for the system operation can make the economics of the project work - essentially, there would be a gas transportation link stretching all the way from the North Slope to Nikiski on Cook Inlet, with a tolling fee for use of the system. That arrangement knocks the price of Alaska LNG down from about $12 per thousand cubic feet to around $6 or $7, he said. And, if some federal tax exemptions are available for the project funding, that could take the LNG price below $6, he said.
The state needs to be ready to help fill an LNG supply gap, projected to appear around 2021 or 2022, or perhaps earlier. The state could fill about 25 million metric tons of a total supply gap of around 100 million tons.
“So do we want to be a player in this (shortfall) wedge that’s going away, or do we not?” Hendrix asked. “We have stranded gas on the Slope. That’s what the administration is wanting to do.”
The cost of inaction Failure to try for this long-term opportunity could end up costing the state billions of dollars, he said, adding that ExxonMobil did not spend $5 billion to develop the Point Thomson field just to sit on the gas. Alaska enjoys some advantages in the market, given the relatively short sea route to Japan and the relative efficiency in the state’s cold climate of compressing the gas.
“Do you want to be in the game, or do you not want to be in the game?” Hendrix asked.
Questioned about the manner in which some of Gov. Walker’s actions have created confusion and a level of mistrust among Alaska legislators, Hendrix commented that this message had been taken on board and that more communication is needed. And asked about the administration’s views on potential changes to the state’s oil tax system, Hendrix said that it is important to evaluate what tax arrangements, including the state tax credits, have worked, and what have not worked. With an objective of encouraging companies to invest in Alaska, the crucial question is how to make Alaska competitive, he suggested.
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