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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: Advice on coming to Alaska from Gustafson

Ask the permitting agency before permitting a project; copy strategies that have already been proven successful; work with majors

Eric Lidji

Petroleum News

Armstrong Alaska, like other companies, initially worried about Alaska, and before they came to the state, they sent 84 questions about it to Stu Gustafson.

Gustafson worked with Exxon from 1979 until the company closed its Alaska exploration office in 1995. After nearly seven years working in Russia, he returned to Alaska in 2001 to help Armstrong through a lease sale and subsequent exploration.

Gustafson believes the permitting agencies in Alaska became more efficient between the 1970s and the 2000s.

In April 2005, he told Petroleum News, “When I first started doing permitting up here for Exxon in the ‘70s, I would have said that half the problems, the holdups, were the fault of the agencies and half the part of the companies. Today, I’d say 95 percent were the fault of the companies.”

Upon returning to Alaska in 2001, he said, “The feeling you get around the regulators has changed. They seem to both feel more empowered and at the same time they know they are subject to accountability with the current Murkowski administration. I don’t remember them being so proactive with applicants,” Gustafson said.

The 2000s saw the introduction of independents in Alaska.

Over the course of the decade, a group of smaller companies, focused on upstream operations, came to the North Slope to try to commercialize passed-over prospects.

Those efforts culminated, in a sense, with Pioneer Natural Resources bringing the Oooguruk unit into production in June 2008, making the company the first independent operator on the North Slope since the discovery of Prudhoe Bay in 1968.

If the 2000s brought independent exploration to Alaska, then the 2010s promise to be the decade of independent development, or so hopes several independent companies.

Whether those promises materialize depends in some measure on how well those smaller companies, and any other newcomers eyeing Alaska, navigate the layers of jurisdiction and permitting authorities governing resource development in the state. That process can get expensive and time consuming quickly, making life hard for companies that depend on credit or investors because they don’t have the deep pockets of majors.

Armstrong’s proven record

Even though Armstrong Oil and Gas didn’t produce a drop of marketable oil in Alaska in the 2000s, the Denver-based independent is seen as a model locally for how an independent company can operate smoothly in the state.

Over the course of the decade, the company proved up several North Slope prospects, and then enticed other independents to come north, eventually handing over their prospects and using the money to fund new exploration.

Those efforts from the middle of last decade are now bearing fruit.

Pioneer came into Oooguruk through a partnership with Armstrong, delineating and finally sanctioning an expensive development effort to bring the offshore prospect into production. Just to the east, Italian major Eni Petroleum is currently working to bring the offshore Nikaitchuq unit into development, a prospect it picked up in part from Denver-independent Kerr McGee Oil & Gas, who in turn came to work with Armstrong.

What convinced those companies to take a risk on Alaska — where the resources are universally known to be great, but the potential obstacles often seen as being insurmountable — was the speed and efficiency with which Armstrong operated.

Over a three-year period, Armstrong permitted a standalone production facility and four exploration projects with 11 wells on Alaska’s North Slope.

Armstrong is now focused on the North Fork prospect, an onshore natural gas play on the Kenai Peninsula. Recently, the company announced a find large enough to convince Enstar Natural Gas to sign a supply contract with the independent.

Faster can become cheaper

In 2005, Gustafson said that for newcomers to Alaska, “it’s more important to know who not to talk to than to know who to talk to,” he said. “A lot of consultants set themselves up as experts. Talk to more than one. And talk to the lead agencies. … Look at their files and see who generates the least paperwork, the ones that make it look easy.”

In 2006, he said companies needed to listen to regulators, and then respond.

“If you want to make the system complicated, you can,” Gustafson said, around the time Armstrong sold the last of its major North Slope assets. “There is nowhere that I have found, whether it’s Louisiana, or Texas or Russia, that you will find a more receptive regulatory environment to work with.

“You take your questions to the agencies, and they will give you the right answers,” he added. “It’s when you have (company) people who have the attitude that they have the answers and are going to educate the agencies that you get into trouble.”

Gustafson’s words hold weight because of Armstrong’s record.

Before Armstrong came to Alaska, company officials heard they would need three years to learn to drill their first wildcat well here, according to Gustafson.

“We got our first leases in six months, and we drilled three offshore wells that year, taking on Pioneer (Natural Resources) as a partner,” Gustafson said.

Armstrong drilled eight more wells, six offshore and two onshore, over the following two years.

“So, in what was supposed to take us the timeframe to learn how to drill one well, we drilled 11 wells without any … snags in the process at all,” Gustafson said.

The end result is savings, Gustafson said in 2004.

“When you find a way to do something smoother, faster and better, it becomes cheaper,” he said.

Copying strategies that work

Following Armstrong, Pioneer also promoted faster “cycle times” for development. From the creation of the unit in July 2003 to production this summer, the company brought Oooguruk online in just less than five years, among the fastest timelines of any unit in northern Alaska.

Duplicating strategies, Gustafson said, is another key.

“Why should the regulatory process be re-invented every time? The operations for our offshore wells were pretty much the same, well to well,” he said in 2005. “The same is true for other areas onshore. … The only things that generally change are, say, the length of an ice road or subsistence activity might be different and you have to address those things. But in most cases you can essentially re-use an application package that has been permitted before, change the things that are different, including the names and locations, and use it. There is no reason to re-invent the process each time; and why rewrite the whole short story?”

Any independent seeking success in Alaska must work with two colossal institutions, not only the government that owns the land, but also the major oil producers that own the infrastructure, including the trans-Alaska oil pipeline.

In 2002, Gustafson helped Armstrong get on Greater Kuparuk Area Ballot No. 260A with ConocoPhillips, giving Armstrong access to Kuparuk’s roads, mobile and nonmobile equipment, emergency and spill response services, waste management infrastructure and camp services.

“I think Phillips and the other owners — BP, Chevron, ExxonMobil and Unocal — should be commended for what they’ve done with Ballot 260A. It shortens the permitting process and reduces our environmental footprint,” Gustafson said at the time.

“The state also wins,” he added. “The ballot reduces its administrative work load, avoids duplicative environmental process and facilitates and promotes the open-for-business strategy established by this administration. All of this enhances the evaluation process of the state’s resources, maximizes potential revenues while minimizing impacts on the environment and subsistence activities.”

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