THE EXPLORERS 2005: Alaska: Best new ‘old’ place to invest?

Judy Brady

AOGA Executive Director

There’s increased humming of an old song in the board rooms of oil and gas companies around the world — “North to Alaska” — but always with a cautionary question mark — “North to Alaska?”

Alaska is starting to look hot right now, and it’s not related to global warming trends. For several reasons this “old” oil and gas province is being seen as deserving a new look.

• Alaska has the largest onshore oil and gas reserves in North America with the probability of huge offshore reserves.

• The federal government is opening, or is expected to open, new oil and gas frontier areas for leasing, both onshore and offshore.

• The largest gas pipeline system in the world ($20 billion), which will open the tremendous North Slope gas reserves to commercialization, is under active negotiation.

• The State of Alaska operates an efficient, predictable annual oil and gas leasing program on state lands.

• The trans-Alaska oil pipeline is operating at about half of its capacity; the state is encouraging new investment for new production.

• The state’s goal is to streamline its regulatory system.

• The state’s oil and gas tax system is stable at the present time.

The combination adds up to potential high impact opportunities for investors and explorers that cannot be ignored. The opening of new federal high reserve areas and the probability of a gas pipeline places Alaska in the once-in-a lifetime opportunity category for new investment. Any company that does not take a serious look at Alaska’s new potential will have a hard time explaining the lapse to its board of directors five years from now.

In terms of location, good rocks and real opportunities for new and continued investors, “North to Alaska” is the right song for these times of high oil and gas prices, national energy demand for both oil and gas, and the competitive challenge for new reserves for company growth.

Why the question mark?

There are general questions that apply to all oil and gas provinces. Representatives of companies “just visiting” about Alaska want to know how the tax system works. They want to know if the taxing and fiscal system is stable. Is there a serious threat of higher taxes? They want to know about regulatory costs and delays. Is it typical to have cost overruns or project delays because of permitting inefficiencies or lawsuits? They want to know if the state, and the communities nearest their potential base of operations, welcome or oppose oil and gas development.

Every company who already operates in Alaska will have their own version of answers to these questions. As a snapshot:

Costs per Barrel: Among the highest in the world, related in part to distance from market, high environmental standards, arctic-related technical challenges.

Permitting: Complicated but doable. Almost all oil and gas activity is on state or federal land. State goal is to streamline. Core Alaska coastal management permitting program in transition until 2007. Jury still out on end result. North Slope Borough is re-writing its land management regulations. Local residents highly concerned about subsistence issues. State and federal land managers highly concerned about jurisdiction issues. Industry highly concerned about the new permitting uncertainties. Jury still out on end result.

Returns: Based on public disclosures: possibility of good returns for the risk at high prices, moderate returns at mid-range prices, and tanked returns at low prices.

Economy: Alaska is the only state in the union whose private sector economy is so completely dependent on oil revenues. Eighty-seven percent of the state’s unrestricted general fund revenues come from oil and gas taxes and royalties. The industry pays 88 percent of the corporate income tax in the state and is the only industry subject to a statewide property tax. There is no personal income tax or statewide sales tax in Alaska.

Future: Declining North Slope oil production jeopardizes the state’s ability to support government services unless prices are high. Declining gas production in Cook Inlet jeopardizes ability to provide low cost heat and power to half the state’s population. The state is counting on the gas pipeline, new leasing on federal lands, heavy oil, continued investment in the mature North Slope super giant fields, new investment in Cook Inlet and opening of new basins like Bristol Bay. The state estimates it must attract more than $30 billion in new investments over the next six years to hold North Slope oil production at 1 million bpd and up to another $20 billion to build a gas pipeline to commercialize North Slope gas.

Tax stability: Increase in oil taxes is threatened whether prices remain high and the state wants a larger share or prices fall and the state needs more revenue to support services. Increase in production taxes would affect investment differently for each type of production (wildcat, satellite, heavy oil, and infield).

Bottom line: The resource base here is healthy enough to be attractive on a worldwide basis. There is a successful history of Arctic oil and gas operations. New technologies in seismic, drilling and development, mean lower costs and lower risk. Questions of tax stability and permit streamlining are on the table and will continue to be the subject of public discussions with the State of Alaska.

If the state and the industry continue to work together, “North to Alaska” will be the best bet any company could make.