Sullivan touts good year at DNR

Commissioner describes Cook Inlet renaissance, strong North Slope exploration, but says tax reform is still critical

Stefan Milkowski

For Petroleum News

It’s been an exciting year for Alaska oil and gas — a renaissance in Cook Inlet, more exploration on the North Slope, new extraction techniques.

But Natural Resources Commissioner Dan Sullivan, appointed to the post last December, says tax reform remains critical to slowing the decline of North Slope oil production.

Don’t let last week’s fruitful lease sale fool you into thinking everything’s fine on the North Slope. According to Sullivan, those companies are betting Gov. Sean Parnell’s tax reforms will pass.

Petroleum News spoke with Sullivan on Dec. 12.

Petroleum News: You described the state’s Dec. 7 lease sale as a qualified success. Let’s start with the good news. What was successful?

Sullivan: Can I give a quick opening statement, given that we’re at the end of the year and Year One of the governor’s new team?

Petroleum News: Sure.

Sullivan: It doesn’t get a lot of attention, but one thing that happened was the defining (of an issue) — an absolutely critical issue not only for DNR and state government, but for the state as a whole — and that is TAPS throughput decline.

We’ve been relentlessly focusing on that. It’s probably the most important issue facing the state from an economic standpoint.

We worked hard to put the issue on the national agenda through testimony, letters, lawsuits, stories we pitched to national reporters, op-eds we wrote. You had a shift over the course of 2011 where as opposed to looking at Alaska as a place to shut down resource development, even the president and Republican presidential candidates talk about the importance of Alaska as a critical element of America’s energy security.

We’ve had some positive developments over the last year, whether it’s the Cook Inlet renaissance, or what’s shaping up to be a very solid (North Slope) exploration season this winter — perhaps one of the best in many, many years.

Petroleum News: Can you talk about the lease sale and what went well?

Sullivan: One aspect of our Secure Alaska’s Future strategy and the governor’s vision of 1 million barrels a day is promoting Alaska’s resources to national and world markets. Over the last several months, (we) have participated and led dozens of meetings with companies, policy makers, investors, private equity groups, investment banks, promoting Alaska’s resource base and responsible resource development opportunities.

I think our most immediate goal in the lease sale was to increase the number and type of investors and companies, and in that regard, we saw the lease sale as a success. We had new companies, we had small companies, we had very big companies staking out new positions.

ConocoPhillips’ new acreage — we viewed that very positively. A lot of times, incumbents will nibble around the unit edges to pick up additional acreage. This looked like a very different play here, picking up a new exploration position.

There was also a number of smaller companies. That’s always good to have them. They can be aggressive and nimble.

There was confirmation, but perhaps we were looking for more, on the potential for the new shale oil play. We saw an additional company clearly stepping into that area (Royale Energy). And with the permitting that’s moving forward with Great Bear, we think that will pick up a lot of attention.

I would say though that we’re always looking to improve. (Companies) never tell you why they’re coming, why they’re not. But there did seem to be a number of companies (with) a lot of interest, and they remained on the fence. I think we need to look hard at why.

One of the reasons, I have no doubt about it, was the tax issue and the tax reform. Some companies who are showing up here are betting that’s going to get passed, and I think others are waiting to see what the Legislature does.

Petroleum News: Did anyone tell you that directly?

Sullivan: The issue of taxes came up in almost all of my meetings. More than one company told me that directly.

Petroleum News: Can you say who those companies were?

Sullivan: No. But the issue of the fiscal regime on the production side came up — I was surprised at how often that came up. I’m talking big guys, little guys. I’m not saying that’s the only reason. There’s timing, there’s clearly the high-cost nature of doing business in Alaska, whether it’s remote, arctic conditions, whether it’s very stringent environmental regulations.

Companies only have limited capital budgets. They might have other issues they’re dealing with. It’s always hard to tell. But I’m going to reach out to some that I thought were going to show up and ask why.

Petroleum News: Did you ever feel like you were in a tricky position trying to convince companies to invest in Alaska when you and the governor are telling them the taxes are too high?

Sullivan: No. I would say, We have very competitive investment incentives (for exploration), and we think from a competitiveness standpoint, we can do more to increase investment, and that’s why the governor is seeking tax reform on the production side, particularly the high-end prices.

It wasn’t like it’s an issue that’s hidden out there. They know.

Petroleum News: Is there any evidence the polar bear listing scared companies off?

Sullivan: I think the concerns on broader federal issues and some of the regulations certainly concerned a lot of folks, (but) I don’t think I heard that.

Petroleum News: Royalty rates in the northern sub-region were higher than elsewhere. Is that new?

Sullivan: We didn’t raise any royalty rates. We did rework some of the terms — trying to increase and spur production and activity.

Petroleum News: Some of the bids were in areas targeted by the state’s Roads to Resources program. Does the state now have a moral obligation to build the road to Umiat?

Sullivan: The commitment from the state on that remains very strong. If that’s encouraging companies to look at areas that are prospective but might otherwise be stranded, that’s important to us and we’ll continue to work with all interested parties on that.

Petroleum News: Some lawmakers are interested in state direct financial investment, like what’s done in Norway. Are you open to that idea?

Sullivan: I haven’t looked hard at that.

I think that might be more of a statutory issue versus where we have the discretion to go in as an owner.

Sullivan: We would be interested in doing that. The president laid out a vision of having at least one lease sale a year in NPR-A. We think that’s great.

You actually saw a company that showed up at the NPR-A lease sale that showed up in the state lease sale, too, so there was a useful synergy there.

Petroleum News: DNR is looking to encourage development through permitting reform. Can you talk about that effort?

Sullivan: We’ve been working on that for months — really since the beginning of the last legislative session. We’ve been holding public hearings, looking at regulatory changes, looking at potential statutory changes.

We’ve been working on coordinating with the federal government. And we’re trying to anticipate new areas that might require if not statutes, internal work to make sure we’re getting ahead of potential positive developments. Two examples of that are the shale oil potential in the state — we put together a shale oil task force — and UCG, underground coal gasification.

There’s been a lot of focus on permitting reform. It sounds a bit wonky, but it’s actually a hugely important issue, and it’s something potential investors take a very, very strong interest in.

I think the state has a reputation on the federal side and to some degree on the state side as a place where the regulatory environment can delay, delay, delay getting to production. We want to work to ensure that’s not the case.

Petroleum News: Do you think you’ll propose legislation this session?

Sullivan: I don’t want to get out in front of where the governor’s office and the governor are on that.

Petroleum News: Moving to Cook Inlet, when Escopeta announced a big gas find in early November, state officials questioned whether they had enough information to support the claim. How confident are you in their announcement of finding 3.5 tcf?

Sullivan: To me, what they really underscored was that we have a pretty nice little renaissance going on in Cook Inlet. The USGS estimates (show) pretty significant volumes they believe continue to exist in terms of gas and even several hundred million barrels of oil. The lease sale results (from June 2011) are probably one of the top results in almost 30 years.

Probably the most important thing is that you have a lot of smart investors who are starting to show up. That’s everybody from Apache, Hilcorp, Armstrong, Escopeta, NordAq.

It’s a pretty interesting time there. I think a year and a half ago, the conventional wisdom would have been that it’s a dried-up basin.

That’s a great example of very aggressive exploration and production tax incentives driving a basin that looked challenged to something that looks like there’s a lot of activity there.

Petroleum News: How much risk is there to Anchorage’s gas supply this winter?

Sullivan: The more production we get in Cook Inlet, the less that’s an issue.

I call it a renaissance. It’s maybe better described as a boomlet — there’s some green sprouts there that we want to encourage, but it’s by no means happy days are here again.

Petroleum News: If Escopeta finds enough gas to supply Southcentral, how would that affect the governor’s gas line plans?

Sullivan: The governor’s been focused on two things, and they’re both very important strategic goals for the state: addressing the urgent in-state needs and being able to maximize the commercialization of North Slope gas.

Petroleum News: I ask because some lawmakers think an in-state line is more likely, and lawmakers from Fairbanks worry if there’s no pipeline, Fairbanks will be left out.

Sullivan: The way we’ve talked about the AGDC (Alaska Gasline Development Corp.) and the broader APP (Alaska Pipeline Project) is we certainly don’t see those in competition or mutually exclusive. It makes sense to look at those from an integration standpoint because there’s a lot of synergies that can come together to address both of those strategic goals.

Petroleum News: The state withheld some areas around Point Thomson from the lease sale. Why was that?

Sullivan: We actually offered a lot more than people were anticipating.

We’re working hard towards a settlement. The working interest owners are now looking at possible terms of a settlement. Because we’ve made some progress, we were actually able to put up for lease more acreage around Point Thomson than we anticipated.

Petroleum News: ExxonMobil’s EIS for Point Thomson development is out for comment. Does the state plan to comment on that?

Sullivan: Absolutely. The state has been extremely vigilant on every word in that EIS, even though it’s about 1,000 pages.

This is where it’s kind of two steps forward, two steps back with the federal government. We think some of the issues they’ve raised in the EIS are completely beyond what they have the authority to raise. They’re talking about ANWR values and somehow potentially bootstrapping ANWR issues into state land. We have enormous problems with that.

There might be some legal issues with what the feds are trying to do because previous administrations have said they don’t have the authority. We are watching that very, very closely.

Petroleum News: The state is backing Exxon in this instance.

Sullivan: I would say we’re working in partnership with Exxon on this, but this is broader than just Exxon. This is where we think the federal government is overreaching.

Petroleum News: You were recently in China. What were you doing there?

Sullivan: I’d been asked to speak at a large oil and gas conference. I was principally focused on giving Chinese government officials an update on Alaska, particularly with regard to the commercialization of our gas resources.

We laid out, Hey, if there is a shift with regard to a significant LNG commercialization project between the state and the producers, we wanted them to be aware of that. We also laid out what we saw as some of the very strong comparative advantages of Alaska LNG to some of their other LNG sources, say from Qatar or Russia.

The demand for LNG in China is on the upswing. A number of (the officials) were very aware of our resource base, and very impressed by how large it is and the fact that’s its conventional. They saw us as a potential very positive source because of our proximity, because we’re the United States and we have a very stable geopolitical climate, because we’re the only state that’s been shipping LNG to Asia for 40 years, and because we have an enormous resource base next to existing infrastructure with companies that are world-class producers of LNG in other parts of the world.

Petroleum News: Anything you’d like to add?

Sullivan: This legislative session is going to be very important. The TAPS throughput issue is critical. The governor has laid out a plan, laid out a vision; we have been implementing that plan relentlessly. It’s our view that the status quo of continued TAPS throughput decline is not acceptable.