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Little independents, others speak out Small oil and gas companies, individual investors, would-be developers, tell Alaska legislators they need structural changes Kristen Nelson Petroleum News Editor-in-Chief
Smoothing permitting and access tangles and providing incentives would help independents in Alaska, the House Special Committee on Oil and Gas was told by large independents, a long-time Alaska geological consultant, former state officials and a Cook Inlet gas producer Nov. 21. (See that story in the Nov. 27 issue of Petroleum News.)
But the testimony the committee heard from smaller companies and individuals, primarily holders of state oil and gas leases still trying to get into production, was different.
Alaska blocks independents
What the Legislature needs to do is find a way to get Alaskans back into oil exploration, Jim White, president of Alaskan Crude Corp., told the committee in prepared testimony.
“Being an oil and gas operator is not rocket science. Ordinary Alaskans have done it many times prior to 1989. They can do it again,” he said. Average Alaskans drilled in the state before 1992, White said, but primarily before 1989 when, following the Exxon Valdez oil spill, the state kicked up oil-spill prevention bonding requirements:
“Exxon’s tanker runs into a rock, spills a million barrels of oil, as a result, with faculty advice, the legislature writes laws that continue to this day to really kill incentive for a risk venture capital investor to look for something less than a 1,000 barrel/day oil well on land.”
Oil drilling for targets expected to produce 500 barrels per day of oil or less needs to be treated the same as natural gas drilling, with no oil-spill contingency plan or bonding required, White said. The state shouldn’t be helping the oil industry, he said, it should be helping average Alaskans get into the oil and gas producing and selling business.
“Little independent oil operators are good for any state. They look for little oil pools,” he said, and home-grown operators generally stay in the location they operate in and “they keep reinvesting in their home area.” Alaska bonding highest Paul Craig, an Anchorage neuropsychologist, and owner of Trading Bay Energy Corp. and Trading Bay Oil & Gas LLC, called the state’s bonding requirements for drilling “the great wall of Alaska.” He told the committee that in 1996 when he was preparing budgets for onshore Cook Inlet wells he needed $1.11 million bonding for one well, and said he could find no bonding company in Alaska that sold the required bonds.
He then compared bonding requirements in other states for comparable 10,000-foot vertical exploration wells and found a range from zero bonding requirements (in Louisiana, Kansas and Mississippi) to a maximum of $55,000 in Oklahoma, an average he told the committee, of $13,950.
“If Alaska is serious about ‘attracting and encouraging’ independent oil and gas companies to invest in the development of its hydrocarbon resources,” he said in written testimony, “it is imperative that the state establish bonding requirements consistent with the state’s governmental competitors.” And, he told the committee, international oil spill records show that spills occur from production and transportation, not from “exploratory wells properly equipped with (blow out preventers) and related safety equipment.”
He also told the committee it cost $100,000 or more over several months to permit a well in the state.
Citing figures from World Oil magazine, Craig said that in May 2005 Texas had 600 rotary rigs drilling in the state, while in that same month Alaska reported eight rigs. “In other words, for every one rig drilling in Alaska, there are 75 rigs creating jobs, discovering taxable oil and gas resources, and otherwise pumping revenue into the local economy in Texas.” Man-made issues Dave Lappi, president of Lapp Resources Inc., who has held both regular state oil and gas leases and shallow gas leases, and has done coalbed methane drilling in the Matanuska-Susitna Borough, told the committee that man-made issues make it difficult for small companies to operate in Alaska. In written testimony Lappi said access to land is the first hurdle. “The unexplored nature, lack of reasonably priced drilling and completion services and remoteness of many areas means” land will attract lower prices than more developed areas of the Lower 48 states, he said.
Lappi suggested that the minimum bonus bid be lowered, “possibly in exchange for a shorter lease term.” In the Cook Inlet area, he said, $5 per acre could be the minimum for a seven-year lease, $4 an acre for a five-year lease or $3 an acre for a three-year lease. The state could make more in bonus bids by leasing areas more frequently, and smaller explorers “who think they have a good exploration concept” could lease the land for a shorter time to test their ideas. Alaska should equal Texas Dan Donkel has held Alaska oil and gas leases for a number of years and assembled and sold to Forcenergy (since acquired by Forest Oil) the leases at Cook Inlet’s Redoubt Shoal field. In prepared testimony for the committee Donkel said the Alaska Legislature has taken a number of steps to make the state more attractive to independent exploration and production companies, steps such as tax credits to encourage oil and gas development, areawide lease sales and discovery royalties in Cook Inlet.
He encouraged the legislators to advertise Alaska to independents.
Donkel compared rig activity in Alaska, seven rigs active he said, with 700 rigs active in Texas, and said Alaska is “dead last” of U.S. producing states in average daily rig count.
He recommended that Alaska follow the Kansas model and allow operators to self-insure for drilling liability. Alaska should also, he said, allow a trial de novo, a new trial, in any appeal from a decision by an oil and gas agency, and recommended making the state’s conservation commission an elected body, similar to the Texas Railroad Commission.
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