November 29, 2004 --- Vol. 10, No. 107November 2004

Alaska needs $60B to bridge gap to gas pipeline

The president of the Alaska Oil and Gas Association says Alaska needs $30 billion in new investment in the next 10 years to keep North Slope oil production flat until a natural gas pipeline comes online. This is in addition to the $20-$30 billion North Slope producers will have to spend in the 2005-2015 period to operate the fields currently in production, including the trans-Alaska oil pipeline.

“… a significant fixed infrastructure is being underutilized (on the North Slope). You’ve got infrastructure to produce 2 million barrels a day and a little bit more, but we’re only producing 1 million. And those costs don’t go away,” AOGA President Chuck Pierce told the Resource Development Council for Alaska Nov. 18.

Without the $30 billion in new investment Alaska Department of Revenue projections show that North Slope production could drop from its current level of about 1 million barrels of oil per day to less than 200 million barrels by 2015, he said.

“DOR estimated industry would have to double their investments each year to 2008 and have geologic and permitting and project execution success” to keep oil production between about 825,000 to 1 million barrels per day, Pierce said.

“To put that in perspective,” $30 billion in new investment is “like spending the Permanent Fund three times in the next 10 years in an effort to keep production flat to moderately declining,” he said.

“If we can make this happen, it would be the least amount of production loss on the North Slope in any time period since the decline started in 1989. By any standards this is very progressive; some may say optimistic. But it’s very aggressive. We have to be very aggressive just to stay level. … We’re not going to cost-cut our way to the goal line here. The fixed costs are too high. … So we need more new discoveries. … three or four more Alpines to keep us in the game. … That’s why it’s so important we focus on new investment now. Get that ball rolling and keep it rolling.”

Pierce, who has headed up Unocal in Alaska since 1999, said Alaska is “not well positioned” to compete globally for capital investment funds, pointing to a 2002 Wood Mackenzie study that ranked Alaska 55 out of 61 oil provinces when it came to profitability.

Alaska came in “dead last” in the total cost of doing business and it ranked 36 out of 61 in terms of taxes and royalties, which put it at 55 for overall profitability per barrel of oil as compared to its competitors for investment.

“We have got to move up,” Pierce said. “The next 10 years represents our challenge to bridge to the future. It’s a $60 billion challenge for investment. And we’re competing on a global playing field for that money.”

So what do AOGA’s members recommend the state do to pull in the massive amount of investment Alaska needs to maintain its current oil production levels?

Pierce said the answer is the same as it has been since 2001: a stable fiscal regime, regulatory reform and investment incentives. Under the Murkowski and Bush administrations the state and federal governments, he said, have already begun the process.

The only thing that has changed is that there is “a new urgency,” Pierce said: “It’s not just that it would be nice to do these things. We have to do these things and we have to do more and we have to do it now. …

“Some significant new incentives can be put on the table to change the equation in Alaska,” he said, specifically recommending “bringing a jack-up rig into the Cook Inlet to tap into known resource” and “investment credits for step-out drilling for heavy oil” on the North Slope.

Pierce reminded Alaskans that without any new investment to date the state’s oil production “would be down below half a million barrels of oil production per day today from the North Slope. If that were true we wouldn’t be just talking about a fiscal crisis, we’d be living one.”

The big difference from the last 15 years, he said, is a lot less of the oil production in the future will come from what he called the base line or mature fields — Prudhoe Bay, Kuparuk and Endicott. The future will demand “a lot more new investment and a lot more risk, a lot more reliance on new investment.”

Not increasing the tax burden on the oil industry in Alaska is a key element in attracting investment, Pierce said.

Government already takes a big chunk of each barrel of oil pumped from Alaska’s wells, he said. According to the 2002 Wood Mackenzie study, “Alaska state, municipal and federal take is about 64 percent” per barrel. That’s when oil is $17.77 per barrel, which is close to the average ANS price for the last 15 years.

At $40 per barrel the total government take in Alaska drops to “about 53 percent,” Pierce said.

“I hear some statements about the price of oil going up and companies making all this money and government not getting its share,” he said, producing some “interesting, ‘gee whiz’ numbers. … At a million barrels of oil per day state of Alaska income increases by about $70 million per year for every $1 of oil price increase. And $10 million of that $70 goes directly into the Permanent Fund. So the state and we Alaskans do participate when the price rises.”

Pierce also said that $40 oil prices aren’t the answer to attracting the huge amount of capital investment Alaska needs to keep its oil production flat until a gas pipeline comes online.

When people ask him why there isn’t more new capital being invested in Alaska at $40 oil prices, he said he tells them, “In the context of global competitiveness … high prices tend to float all boats — like a rising tide.

“So our competitive position is relative. So an investment in the Caspian Sea or in Russia looks a heck of a lot better when oil is $40, as well as an investment in Alaska,” Pierce said.

“High oil prices do not let us off the hook. We have to stay vigilant on costs; we’ve got to stay vigilant on taxes and on regulatory reform” to compete for international investment, he said.

“We can’t do anything about our remoteness from the Lower 48. We can’t do anything about our high fixed cost structure. … So I believe we should pursue a course of aggressive initiatives … using the tools that we have, which are … fiscal regime and regulatory reform.”

The state “is out there and following through” on its promises to the industry, Pierce said, congratulating the Murkowski administration’s team, in particular Alaska Department of Natural Resources Commissioner Tom Irwin who had met with AOGA board members the day before Pierce’s speech to RDC.

“It was a very positive meeting. … The state wants to partner (with industry). That’s what they’re telling us and … we’re seeing that happen. We’re seeing it happen on the gas pipeline; we’re seeing it happen on infrastructure development,” he said.

“We need individual incentives to increase drilling and that’s what the state is doing. The state is looking at tundra travel to increase access to remote locations, and heavy oil incentives,” Pierce said.

Does Alaska offer opportunities for investment? Are there new prospects to be drilled?

“Absolutely,” Pierce said.

Are there companies interested in investing in Alaska?

“Yes, there are. Should this room be twice this size next year? Absolutely,” he said.

“But we’ve got to find a way to take those opportunities and turn them into reality. We’re going to have to attract more capital investment, more entrepreneurs.”

Referring to the new oil and gas companies Alaska has attracted in the last few years, Pierce said, “We need to build on those good news stories. But we can’t ignore the facts and the facts are this is a very high cost place to do business. It is a very complicated and challenging regulatory regime.”

The bottom line: “Alaska’s fiscal regime is about middle of the road. The cost to do business in Alaska in oil and gas is dead last. And when you put those together it puts us in the bottom quartile. And when we need to attract $60 billion of investment in the next 10 years, we can’t stay in the bottom quartile. We have got to move up, commit ourselves to moving up,” he said.

Pierce said a new Wood Mackenzie study was due out at the end of November.

Editor’s note: This story will appear in the Dec. 5 print edition of Petroleum News.

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