RDC’s 23rd Annual Conference Presentations
Ken Boyd, former Director of the Alaska Division of Oil and Gas
Because Kay Cashman and the folks at Petroleum News did such a comprehensive job describing the new players in their just-published “Independents” magazine (everyone has copies on their table) I’m going to switch my focus from the players to the game itself.
The number of major companies exploring in Alaska continues to shrink, but the numbers don’t tell the whole story. Exxon, Chevron, ARCO, Phillips, Texaco, BP, Sohio, Mobil, Total, Conoco, Amoco, Elf and Petrofina are the names of 13 companies that have worked in Alaska. As a result of mergers and acquisitions today they are 5 very large companies. These are some of the companies that created the oil industry in Alaska and continue to play a major role today. As the North Slope reaches maturity new players are beginning to arrive. Look in your copy of “Independents” magazine and you will see the names of companies not here ten years ago, or two years ago and in one case two months ago. These are the Independents.
Independents are companies with only upstream operations. These are the pure explorers. They explore for oil and gas to sell as a commodity. There are no Anadarko or EnCana gasoline stations.
Independents are, have been, and will continue to be the backbone of exploration in the lower 48. Their low overhead and nimbleness allows them to drill prospects the big companies can’t afford to drill. To a large extent, but on a different scale, that is part of the reason we see more independents in Alaska today. In the lower 48 Independents have played a relatively more important role than in Alaska. The Independents share of lower 48 onshore production exceeds 60% and that number will probably increase.
Independents, partly because they work only upstream and sometimes because of their size are more susceptible to shifts in oil prices than the large major producers. Since time is money they are also more affected by project delays.
While a huge 150 billion dollar vertically integrated, multi-national oil company may seem a very different sort of beast than a 20 billion dollar (or much smaller) Independent many of their needs are surprisingly similar. As the players start to change we must be sure that our oil and gas programs are competitive, and meet the need of all companies – big and small.
All companies, no matter their size or type, need three things, some need a fourth. The three that all the companies need are:
Access to land.
A stable tax regime.
Consistent and fair permitting.
For some companies, and not just Independents, facilities access on reasonable terms is also needed.
Access to land is probably the most important item on the list. Access comes in several forms, the two most important being the ability to lease the land and the second is the ability to get to the land to explore and develop once leases are issued.
All state lands onshore on the North Slope, the Foothills, the Beaufort Sea and Cook Inlet are now subject to Areawide leasing. Created about six years ago with a 60 – 0 vote of the Legislature it allows all available state lands in those area to be offered for lease every year. This program has been extremely successful and the number of leases sold has increased dramatically when compared to the earlier nomination sales. A lot of these big numbers are a result of adding the Foothills province into the leasing program. The Foothills are South of the oil-rich coastal area of the North Slope. It is a region of rolling hills that abuts the Brooks range and is an area of complex geology that has been relatively poorly explored. Conventional wisdom says the Foothills are gas prone. Only recently have companies, mostly Independents, ventured into the Foothills. Hundreds of leases have been sold in the last few years and seismic exploration has begun.
In my opinion the number of leases sold in future onshore state lease sale cannot continue at the pace of the last few years. We’re running out of prospective rocks on state lands onshore. Just because land is available to lease does not mean that it is prospective for oil or gas. Absent some new geologic trend being discovered (like Alpine) we may be reaching a saturation point for new leases onshore. I would be pleased to be proven wrong about this. In any case, we have a lot of land under lease and that land needs to be drilled.
There are two other oil and gas land acquisition programs available to explorers. Lands outside the Areawide leasing tracts are available for Exploration Licensing. Some form of Licensing is used in most countries around the world other than the U.S. Licensing allows companies to bid for exploration rights in terms of the dollar amount of the proposed exploration work. Unlike conventional leasing there is no bonus bid. Several large areas are under license now, all by Independents.
The third program, the Shallow Gas Leasing program, is designed for the exploration of shallow gas including coal bed methane. This relatively new program has proved to be quite popular because it has simplified and favorable lease terms. A number of Shallow Gas leases are in effect today and Independents hold most of them.
Once a huge stumbling block, access to state lands for oil and gas leasing is no longer a problem. The problem that remains, however, as I said before, may be the rocks themselves. The hard question to answer on some state lands is “are we running out of good rocks”?
Exploration in NPR-A occurred in two great pulses in the 1950’s and in the mid 1970’s. Early drilling results were disappointing and for many years the area was largely ignored. After the 1994 discovery of the Alpine Field by ARCO and its partners, it became clear that the rocks in Alpine lay on a trend that went into NPR-A. Then Secretary of the Interior Bruce Babbitt, after some major prodding by the state, agreed to a new round of leasing in the Northeast part of NPR-A. The 1999 sale attracted over $100 million in bids. Exploration has been taking place for the last few years and several discoveries have been announced. A second sale brought in over $50 million dollars last year. Exploration is gradually pushing Westward and more wells will be drilled this winter.
A nearly 10 million acre chunk of western NPR-A is being prepared for leasing now. The DEIS is expected out early next year. BLM is the lead agency for NPR-A and Henri Bisson will no doubt have more to say about this.
The USGS estimates that, at a 50% probability, NPR-A could contain about 10 billion barrels of oil and 60 TCF of gas. This is an important new province for Alaska’s future. Alaska gets 50% of all revenues from NPR-A.
The Federal offshore waters, from 3 miles out, is under the control of the Minerals Management Service (MMS). The OCS has been only lightly explored and remains a frontier in many ways. A number of wells were drilled in the 1970’s and 80’s with very little success. Northstar, the field with the first undersea arctic oil pipeline, is a joint state – federal Unit that is currently producing. Liberty, a BP prospect in the OCS seems to have stalled. EnCana and its partners ConocoPhillps and ChevronTexaco will begin drilling the McCovey prospect very soon. McCovey is another joint state – federal Unit located more than 10 miles offshore. The first well will be drilled in Federal waters from a MODU called the SDC.
I believe the OCS holds great promise for the future. The complications of operations and permitting are multiplied several fold when working offshore. The harsh environment, the logistics and the very emotional issue of whaling work to complicate an already difficult task. But the rewards may be great. I have interpreted seismic data from the Chukchi Basin Northwest of Barrow. It is a huge, immensely complicated, basin that might as well be on the moon. But once, not so long ago, Prudhoe Bay could have been described the same way. Technology, ingenuity and perhaps necessity will drive our efforts farther and farther from existing infrastructure.
And then there is ANWR, the Arctic National Wildlife Refuge. Actually, just a small part of ANWR, the so-called 1002 area or the Coastal Plain, about 8% of ANWR. Set aside by congress in 1980, it was supposed to be evaluated for its oil and gas potential. Two, 2D seismic surveys have been recorded. These data are now 17 years old. This wholly inadequate survey tells us much of what little we really know about the Coastal Plain.
What we do know is that the Coastal Plain of ANWR is the best onshore prospect in the US for oil. We don’t know how much oil the 1002 might contain but the best public domain assessment by the USGS in 1998 says it has a 50 – 50 chance of containing 10 billion barrels of recoverable oil. That’s about as much oil as Prudhoe has supplied over the last 25 years.
The recent elections have changed the Congress of the United States in ways that make opening ANWR more likely than any time in the recent past. We will know more early next year when Congress reconvenes. I urge the Legislature to continue to fund Arctic Power down the home stretch. Arctic Power, whose only mission is to open the 1002 area, is an organization that WANTS to go away.
Besides being able to lease lands there is another “access” issue. How do we get to the lands once we have leased them. Ice roads have been the transportation mode of choice on the North Slope for a long time. For relatively short distances ice roads work well and they melt away without a trace in the Spring. But as exploration moves farther from infrastructure, and into terrain that is very different from the flat Arctic plain we must look to other solutions. Ice roads are expensive to create and last only one season. A large amount of land has been leased in the Foothills, an area that is an important part of our future for new gas exploration and development. The terrain in the Foothills is not flat like the Arctic Plain, it is hilly and ice roads simply may not work. We must consider the judicious use of gravel roads for specific projects.
A related issue is tundra travel. Each year decisions are made on when companies can have access to the tundra. This travel window continues to shrink, affecting exploration projects across the North Slope. These decisions are made as much on the basis of policy as science. Studies are underway to find ways to increase the tundra travel window, this needs to continue.
Stable taxes. Everybody hates taxes (well, almost everybody). Alaska has had a stable tax regime for more than a dozen years, To encourage future exploration and production this tax regime needs to remain stable for industry to continue to invest in Alaska. The fiscal problems our state may face in the future are well known to everyone here. Our new Governor has pledged no new taxes to the oil industry. This is the right approach since industry pays more than its fair share of taxes already.
But the uncertainty of the state’s fiscal future creates uncertainty for industry. Oil and gas remains Alaska’s financial future. Not mining, not fish, not trees, not tourism. While all resource development is important in terms of jobs and local economies nothing comes close to oil and gas revenues for funding the state treasury. There have been many attempts to diversify our economy. While some have had modest success, oil and gas is not going to be unseated as our number one resource anytime soon.
If you understood anything about my resume you will know that I’m an exploration guy and a royalty guy. I’m not a tax guy. Our new Governor has said no new taxes on the oil industry. That’s good enough for me.
But remember where the deep pockets are. If hard times come there will certainly be a temptation to look to oil to give even more. This temptation must be resisted.
The processing facilities that remove the sand and water and other things from oil, and the pipelines that transport the oil, are a vital part of our oil and gas infrastructure. In general these facilities were built by the major producers at great cost. They continue to cost money to be operated and maintained.
For many Independents and other companies without their own facilities having the ability to access these facilities is vital. Exploration is a futile exercise if the oil or gas cannot be cleaned-up and transported to market.
In my experience I have seen many disagreements over the cost of this facility access. Naturally the facility owners want to be fairly compensated for use of their facilities. It is not just the cost of the facility and its continuing maintenance that determine the cost, but also the potential for new oil to “displace” existing oil. This also has a cost.
My only point is that facility access, particularly access to facilities with excess capacity, needs to be available to all players at a reasonable cost. This will help attract new companies to Alaska and encourage new exploration and production.
A reliable, sensible and efficient permit program comprised of capable, qualified, proficient and skilled permitters is essential to the continued viability of the oil and gas industry here.
Once upon a time, not so long ago, the main risk that companies had to deal with was geologic risk. Where were the good rocks? How do we find them? The rocks were pretty hard to find given the technology available at the time. In the last ten years, especially in the last five, technology has improved to the point where geologic risk continues to decrease. Companies today drill fewer “bad” wells. Success rates have improved and fewer wells means less impact on the environment. Make no mistake that the earth is any less forgiving of bad science than it ever was. It’s just that the science has gotten better. Nobody, no company no matter how large or how smart, can predict how much oil or gas may be present in the subsurface. But 3D seismic has become the explorer’s tool of choice in Alaska, both in the Arctic and in Cook Inlet. In my opinion, 3D seismic and its associated technologies saved Alaska’s oil and gas future.
OK, technology has helped the companies drill better wells. Their costs are down a little maybe. What’s the problem? The problem is that permitting risk is fast replacing geologic risk. We can’t make better rocks, but we can make a better permit process.
Benjamin Franklin said insanity is doing exactly the same thing over and over and expecting different results. So it WAS with leasing, so it IS with permitting.
The permitting process has only become longer and longer and outcomes are less certain. Industry has been drilling for oil on the North Slope for over 25 years and much longer in Cook Inlet. Drilling has inevitably been safer and performed with a heightened awareness of the environment. Yet the list of rules continues to grow. Government seems to be saying it will not assume any risk. So what can be done?
I don’t think the answer lies in thousands of hours of meetings, task-forces, blue ribbon panels or whatever. I have participated in dozens of these and they only serve to spawn more and more meetings. Thousands of permits have been issued for hundreds of different projects on the Slope and in Cook Inlet. Hundreds of exploration wells have been drilled. For most projects permits start from scratch each and every time, no matter that an identical project had been permitted a dozen times before. I think there is a fairly simple solution to some of this.
Let’s consider a winter exploration well on the North Slope. Hundreds have been drilled over the years. It would be a fairly simple process to review these previously permitted and successfully drilled wells. Make a list of the characteristics of these projects and create a “standard winter well”. This can be the standard for future projects. If a new well is proposed, and it fits all the parameters of previous projects, THEN ISSUE THE PERMIT. If the new project differs in some substantial way from the standard then these differences can be noted and dealt with through additional mitigation. But the CORE permit should be approved and ONLY the substantial differences should warrant additional discussion or delay.
In principle, this is similar to the way Areawide Leasing was constructed. For years the state essentially assumed it knew nothing before each lease sale. Each sale was created from scratch and this led to a slow and uncertain Lease Sale program. Finally, after many Lease Sales had been held, the state concluded it had a “core” knowledge of its sale areas (Cook Inlet, North Slope, Beaufort Sea and the Foothills). This core knowledge then went into the Best Interest Finding (the states version of an EIS). Instead of a fractured and uncertain program the state was able to have sales of ALL its lands in ALL the sale areas every year. Prior to each sale every year a call is made to determine if there is any “substantial new information” in the sale area. If not, the sale proceeds. If there is substantial new information then this is incorporated into the sale process as a supplement to the core finding. Every ten years the core finding will be updated to include the supplements and the cycle begins anew.
This process is something like publishing an encyclopedia. The core of the encyclopedia is not rewritten every year since most of the information remains the same from one year to the next. If some things change over a year they are issued as a supplement. In time these supplements are incorporated into the body of the encyclopedia and a new set of books is issued. Much like Areawide Best Interest Findings. I suggest this process could be applied to permitting and other parts of our oil and gas business.
The state must reexamine the permit process. It must stop looking through the wrong end of the telescope. Don’t start with the details, fix the process first. No amount of mere word-smithing, no matter how clever or well-intentioned, is going to solve the problem. As a start, permit reform must focus on three critical areas that have been recognized by AOGA and others.
Simply stated the Air Permitting program is broken and needs to be fixed. The state needs to set reasonable timelines for permit review and issuance and then needs to stick to those timelines. Permit terms need to be clear, predictable and consistent with regulations. The program should focus on those areas that have real environmental impact. Reshaping this program will allow industry to conduct its activities without delay and within compliance.
The state requires all operators of oil terminals, pipelines, tank vessel and exploration and production facilities to prepare Oil Spill Discharge and Contingency Plans. Commonly called "C-Plans", these plans must be renewed every three years. Currently the effort associated with these renewals is significant both for industry and the state and yet does not result in meaningful improvements in environmental protection. At a bare minimum the renewal cycle should be extended to five years.
Clarifying the regulations will help facilitate the preparation of C-Plans and will reduce the likelihood of legal challenges. This benefits all parties. In addition, actual changes to the agency C-Plan review and approval process are necessary and can be achieved without lowering environmental or personnel safety standards.
The Alaska Coastal Management Program needs to provide a streamlined review relevant to exploration, development and operational activities and provide a predictable scope of review. The ACMP needs to establish and enforce predictable schedules and provide a time-certain determination of compliance. Recent regulatory changes, which have not yet been adopted, help solve some, but not all, of the ACMP’s shortcomings.
In each of these three critical areas the state needs to step back and fix the process FIRST. Having a streamlined, predictable and sensible permitting program is simply in everyone’s best interest.
I will conclude with the gasline. Obviously whole conferences can, and have, been held on this subject. Most of you know the issues. Clearly this a complex project with difficult and hard to quantify economics. I want to make just one point.
The state must develop a very high competency for reviewing and negotiating gas related projects. Alaska has a long history of oil development and, over the years, has become somewhat expert regarding oil issues. The same cannot be said for gas. Gas, as a commodity, has a whole new set of issues. The state must work to protect its interests, but it must also be aware of the real needs of the producers and explorers. It must work to get the existing 35 trillion cubic feet of gas to market, but it must also look beyond that to the future gas, the gas we have yet to find. This requires a very difficult and delicate balance. I’m confident the state can face this challenge.
While we have made great strides in access to leases, and enhanced technologies have created more opportunities, we still have areas that need to improve. They need to improve for companies of all shapes and sizes; not just the Independents and not just the majors. They need to change because Alaska is competing in a worldwide market and we must remain competitive no matter who the players are. The Independents may be the new kids on the block, but make no mistake they are a big part of Alaska’s future in oil and gas. We need to welcome them, understand their needs and help them to be successful.
Working together, Independent and major alike, and with capable and knowledgeable leadership at all levels of government, I am sure that Alaska’s oil and gas future can be bright indeed.
