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Many questions about Norwegian model Legislators hear views on what might be involved in converting Alaska’s leasing system to give the state ownership in oil fields Alan Bailey Petroleum News
It’s a fascinating debate. But could it be done?
Participants in a visit to Norway last year by legislators and other stakeholders in the Alaska oil and gas industry have been enthusing about Norway’s oil and gas licensing system, a system that some say encourages higher levels of oil and gas investment than Alaska has been experiencing. Could or should Alaska convert its current approach to oil and gas to leasing to something similar to the Norwegian model?
During a review of the “Norway tour experience” in a meeting of the Alaska House Economic Development, Trade and Tourism Special Committee on Jan. 26 there was a discussion about what might be involved in implementing the Norwegian model in Alaska.
The Norwegian system In Norway, oil and gas licenses (equivalent to Alaska leases) are offered on the basis of competing exploration and development plans, rather than on the basis of competitive bonus bids. A company, or company consortium, judged by the government to offer the best plan for a licensing area is awarded the license, with the proviso that the plan must be carried out without delay.
And the government takes a working interest of around 20 percent in each license, paying its share of the exploration and development costs and earning its share of any profits from resulting oil and gas fields. The government does not levy royalties on oil and gas production, instead earning revenues from the field profits.
Proponents of this system say that the result is a strong alignment between the government and the oil companies, with that alignment generating a climate that encourages further investment by both industry and government, driving optimum levels of exploration and development activity.
An Alaska option? Bradford Keithley, attorney with Perkins Coie LLP and a tour participant, told the committee that he thinks that the Norwegian approach could become an option for future Alaska lease sales. However, that would not address Alaska’s most urgent issue: the need for investment in heavy oil, viscous oil and other economically challenged resources in Alaska’s existing oil and gas units, Keithley said.
Keithley suggested that there would need to be some form of option for converting existing leases, with the state exchanging its royalty interest for some specified field ownership percentage.
Whatever approach Alaska might adopt, a key to success would be the establishment of a non-political entity, rather like the board of the Alaska Permanent Fund, to operate the state’s field involvement, Keithley said. Norway has a government owned business called Petoro that manages the government’s oil and gas license investments, paying for those investments from government funds and passing field revenues back to the Norwegian treasury.
“That’s a critical piece … because you can have state participation and it can go really bad,” he said.
Asked about potential downsides to the Norwegian approach, Keithley said that a big concern in the early days of the Norway venture was the possibility of lack of financial success in licenses that the government invested in. It is vital to have expert managers who can make appropriate investment decisions, he said.
“You have to have good managers making these decisions,” Keithley said. “That’s the primary concern going forward.”
However, the application of government investment across all Norwegian fields coupled with the co-investment with industry has very successfully spread the investment risk from the government’s perspective, he said.
Caution needed Bill Barron, director of Alaska’s Division of Oil and Gas, told the committee that the Norwegian model works well for Norway, but that caution is needed in trying to apply that model elsewhere. Barron particularly warned about the dangers of trying to use one piece of a complex fiscal system, without considering the interactions between that piece and other components of the system.
From the perspective of Alaska there needs first to be a dialogue, addressing the many questions that would arise from making such a fundamental change in Alaska, he said.
“What really needs to happen is … dialogue and more investigation of questions,” Barron said. “Trying to convert from a tax and royalty system to a system where you are taking a working interest in a property is quite a conundrum.”
Among a multitude of question raised would be the challenge of some component of the state becoming a regulated entity, rather than simply a regulator, and becoming subject to a fiscal regime established by the state Legislature. As a working interest owner, the state would be responsible for its share of field abandonment liabilities, and for its share of any liabilities arising from a major environmental disaster. Would the state be willing to take on these responsibilities, Barron asked.
Barron also pointed out that, under the Norwegian system, the government carries out a 2-D seismic survey of each new licensing area, making the seismic data publicly available prior to inviting companies to bid for licenses. In an area such as the North Slope foothills, a seismic survey of this type would cost the state $1.6 billion to $1.8 billion, take four to five years to shoot, and take another three to four years for initial data analysis, he said.
“It’s just a cascade of questions,” Barron said. “Very few of these are technical question. Most of these are policy questions … Most of these are philosophical questions that then, once resolved, become technical questions and administrative questions.”
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