THE EXPLORERS 2004: AOGA president: Alaska’s challenges

Chuck Pierce

AOGA President

Alaska in four words: Good rocks — high cost

Alaska’s challenges: Lower costs; attract more investment; drill more wells; maximize production.

For explorers, old and new, and for the state of Alaska, the economic future is as simple and as complicated as meeting this challenge.

Alaska’s geology — its good rocks — are a natural gift that has given the state a strong economy and jobs with the possibility of more of both in the future.

It is the good rocks, the possibility of additional oil and gas resources in Cook Inlet basin and on the North Slope that have kept the pioneer companies investing billions of dollars in Alaska since the l950s and l960s — companies like ConocoPhillips, Unocal, Marathon, ExxonMobil, BP. These are the companies that have been part and parcel of the statehood story in Cook Inlet and the great economic boom story of Prudhoe Bay and the North Slope. Their investments and production are the bread and butter of Alaska’s economy and could be far into the future.

It is the good rocks, the tremendous gas reserves on the North Slope that hold out such strong hope for a gas pipeline.

It is the good rocks that keep joint venture partner companies here who have had long time interests in Alaska, like ChevronTexaco, Shell Western and Total. These are large international companies who have been active in Alaska and who continue to keep an economic eye on the state though partnership interests. They may well be active players in Alaska’s future.

It is the good rocks in Cook Inlet, on the North Slope and in unexplored basins across Alaska that attract companies newer to Alaska like Anadarko, EnCana, Armstrong, Pioneer, Forest, Kerr-McGee, Talisman, XTO, Devon and others. If successful, these companies will be an important component of Alaska’s future.

Good rocks – high cost

The high cost might not matter so much if Alaska did not have to compete globally for oil and gas investment; or if Alaska was also thought to have the largest potential reserve base in the world. It does not have that reputation. Alaska has a reserve base strong enough to make it a player among the 60 or so oil and gas provinces in the world, especially in gas. But we are competing for investment dollars with areas believed to have similar reserves, especially in oil — reserves that can be produced in less time and at less cost. Even at high oil prices, Alaska remains high cost; if prices are high for North Slope crude, they are also high for every other producing area worldwide.

One new company manager spoke for all companies in a speech to the Alliance: “We like the possibilities in Alaska. We intend to invest here. But if we can’t beat the costs, we can’t stay here.”

How can Alaska become more competitive for oil and gas investment dollars? Bottom line: How can we drill more wells and get more production?

We should be asking ourselves these questions. Both company management and government policy choices can influence production by lowering costs. For companies the toolbox includes technology and efficient management. For government the toolbox includes wise use of fiscal systems and efficient regulatory management.

The hypothesis is simple: There are exploration and development wells that are not being drilled in Alaska due to cost and regulatory constraints. The challenge is to identify practical solutions, and implement those that will make the most difference. The cost factors are as varied as lifting of viscous oil, tundra travel, seasonal restrictions, no available jack-up rig in the Cook Inlet, tight gas formations and the risks associated with the commercialization of North Slope gas.

There is not one silver bullet. Alaska’s oil and gas basins each have their own peculiarities, which mean they will each have their own problems and solutions.

To address these problems the state has started working solutions on a project by project basis for issues as varied as tundra travel and North Slope gas pipeline. This is absolutely the right approach.

Some have suggested increasing taxes on the industry. This will just drive the costs higher and reduce incentive to invest.

In order to increase drilling, create jobs and increase production we (the oil and gas industry and the state) need to work on a portfolio of unique initiatives to solve the unique problems impeding the drilling of oil and gas wells across the state.

Alaska can be thankful for our good rocks — and use our fiscal and regulatory tools to lower the high costs.

We need to position ourselves so that when oil and gas company board members are reviewing their portfolios someone says: “What about Alaska? That’s a good place to invest.”