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Wildcatter warns oil tax increase will retard future investment Natural evolution of North Slope oilfields leads to smaller players, without clout to fight onerous taxes and regulations, says Fred James Steve Sutherlin PNA Managing Editor
Higher oil taxes and tougher permitting practices are a recipe for economic collapse in Alaska because smaller companies will simply stay away, says wildcatter and independent geologist Fred James. If the history of other oil producing regions is any indication, those smaller companies are the future of the industry in the state.
James said the mega-majors such as BP and ExxonMobil must look to find mammoth reservoirs, while smaller firms such as Phillips can deal profitably with smaller pools. Independents, with their small business cost structure, are delighted to find pools that the majors would find marginal, or worse.
“Huge companies such as Exxon or BP survive by finding the Prudhoes and Kuparuks. We independents, we’re looking for smaller fields. There are no more Prudhoe Bays,” James said.
But James said the state must take care to craft a tax and regulatory structure that will encourage investment by smaller companies. Typically the smaller companies don’t have the staff to lobby for their needs, or to deal with excess bureaucratic hoops set in the way of development. It is important for the state to retain tax policies such as the economic limit factor, which are designed to encourage investment in smaller fields.
“The key is, you don’t tax away profits,” James said. “The one reason we drill is the anticipation of profit. That expectation leads us to drill in your state, or someplace else.”
James, who is based in Kansas, said he understands Alaskans don’t want to be told how to run their state by outsiders. He feels the same way about his state.
But given a single industry supports state government and the lion’s share of economic activity in the state, Alaska must consider the long-term health of that industry if it wishes to continue to rely on the benefits, he said.
“We geologists can look for oil anyplace. Where we look is where the economics are best,” he said.
The future for smaller companies operating in Alaska is bright, given the right investment climate. In states like Kansas, smaller companies have picked over most of the prospects, and the ones that are left are marginal, even for tiny companies. Small fields that look good to the Phillips-sized companies “look marvelous to us,” James said.
Big oil companies are looking where very big finds are possible, he said, in places like offshore Africa, Angola and the Caspian Sea.
“They are looking for billions of barrels, not millions.” Welcome competition James said that he attends industry functions around the country, and based on comments he hears at those meetings, interest in Alaska has never been higher. In addition to benefiting the state, the entry of varied players into Alaska will benefit other independent oil companies in a variety of ways.
“Once you get the small companies involved, a lot starts to happen,” he said. “Every time someone drills a wildcat, I learn something.”
As small companies reach out, the transportation infrastructure is extended bit by bit, and this in turn allows the next company to reach a bit farther. In most cases the smaller company doesn’t have the resources to build long pipelines from scratch, so that makes leases close to existing infrastructure attractive.
“Small companies have got to have a rapid pay out,” James said. “In most cases they are spending current income and they can’t tie up money waiting for a pipeline.”
As the transportation system branches out, more branches grow.
“The acreage grows, sort of like an amoebae,” James said.
Small companies will have to wait until lines are extended to consider areas such as the eastern North Slope beyond Badami and the National Petroleum Reserve-Alaska, James said.
The good news is there is plenty of opportunity on the North Slope, and the varied structures tend to ensure that companies don’t trip over each other to bid up the prices of properties.
“The slope is all oil country,” James said. “Rare is the hole that’s been drilled that doesn’t have a showing of oil — things are going to happen.”
“The structures that are left now are not so obvious as Prudhoe Bay and Kuparuk. The obvious fields were very obvious, everybody had knowledge of them,” James said.
Today a great deal of excellent seismic data is available to help geologists spot less obvious deposits.
“The North Slope shoots like a charm, mother nature provided the ideal setup for seismic,” James said, adding that there are few features in the area that cloud seismic results, unlike other regions. However the seismic data is subject to interpretation, therefore companies are less likely to be clamoring for the same leases.
“No two geologists have the same opinion,” he said.
James is working with Kansas-based independent Alaska Venture Capital Group LLC, which is primarily focused on the Colville River area south of the Alpine field. AVCG also has a working interest in the Sakonowyak River unit on the North Slope in the vicinity of Gwydyr Bay, with BP Exploration (Alaska) Inc. BP is the operator of the prospect’s exploration well. (See story in Oct. 21 issue of PNA.)
“We’re looking for stratigraphic traps — they are definable on seismic, but subject to interpretation,” he said. “It’s a riskier play with a smaller payoff.”
That is an inevitable pattern for an oil producing area, James said. First the large, obvious plays are exploited, and then there is development of less obvious and more risky prospects. In all, however, James thinks the North Slope has a great deal of promise.
“There are probably a whole lot of Alpines, Fiords and Tarns; together they may hold more oil than Prudhoe,” he said. Investment must be nurtured Independents are often dependent on investors to put up money for drilling. James is concerned because investors have been hearing stories about permitting delays in Alaska, and such concerns could affect the flow of money to deals in the state.
But for now, interest is high.
“The level of interest in Alaska is going up exponentially,” James said. “The rest of the industry is coming in. But it’s a delicate thing, you can kill that goose if people get too greedy.”
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