Geology is King

Recently there have been several proposals from the legislature and others suggesting the State of Alaska should get in the oil and gas exploration business in Cook Inlet and possibly other areas of the State.

Although the idea has a good sounding ring to it, there are some basic assumptions behind the idea that are flawed. The most important assumption is that if the state gets in the exploration business it will find economic reserves of oil and gas for its dollars. The problem is that the most common sounding ring from an exploration well is hollow – a dry hole. The people of the State of Alaska are not prepared to spend millions of dollars exploring for gas merely to find out the state drilled a dry hole.

The reason companies are not spending money on exploration in Cook Inlet is the area is a mature basin from an exploration standpoint. Most of the major structures have already been explored. Normally this is the time when smaller independent companies come into a basin and explore the smaller structures. The difficulty in Alaska is that the cost of drilling the smaller structures is still too expensive for most independents. So Cook Inlet is caught in a position that the structures that are left aren’t worth the time for the large companies and they are still too expensive for the smaller companies.

The legislature has tried credits, lower taxes, and other incentives to encourage exploration in Cook Inlet, but no amount of incentives, short of providing actual cash, (not recommended) will encourage a company to do something that is not economically and geologically logical. Maybe someday, if an explorer can get a better price for their gas or if additional markets open up, we might see an active exploration program in Cook Inlet, but not before.

A response should do more than just throw water on someone else’s idea. A response should also provide guidance and direction, an alternative to the ideas it believes won’t work. So here is my recommended alternative.

1) Work with state regulatory agencies to approve contracts that allow gas to be sold to the utilities at a more economic (higher) price. Higher gas sales prices might stimulate additional exploration in the Cook Inlet basin.

2) Make sure Cook Inlet is prepared to participate in the large gas line open seasons. Fund ANGDA to hold an open season on a spur line so that Cook Inlet gas purchasers can participate in the large gas line open season. If Cook Inlet gas users do not participate in the large gas line open season, then Cook Inlet will still not get gas from the North Slope even if the large gas line is successful.

3) Encourage the legislature to deal with the two remaining issues that stand in the way of a successful large gas line open season: review the current gas tax and make appropriate changes if necessary and provide fiscal stability through developing a rational long term fiscal plan and budget process. I have addressed both of these issues in previous blogs.

4) Solve the Point Thomson issue so that Point Thomson development can move forward. I have talked about this in previous blogs as well.

5) The administration should meet with the North Slope Borough and the Alaska Eskimo Whaling Commission to understand and address their concerns regarding offshore development. If consensus can be reached, approach Congress for Alaska’s fair share of OCS revenue. If consensus can’t be reached, keep trying. Alaska should only approach Congress for Alaska’s fair share as a unified voice that both supports offshore development and requests Alaska share of that revenue.

6) Ditto Bristol Bay. Sit down with the commercial fishermen, native leaders, and other interested residents and understand their concerns. See if there are options available that would lead to offshore development with their support.

7) Review the economics of heavy oil on the North Slope to make sure the current tax structure is not stifling development.

8) Review exploration on the North Slope to see if exploration is properly incentivized. Oil exploration on state lands has the same problem on the North Slope as it does in Cook Inlet. It is a mature basin from an oil exploration standpoint and exploration will gradually shift to the independents. NPRA and the state and federal offshore are a different matter. They still hold great potential, and given the right incentives and support the state could see more exploration in these areas.

9) Dream big but plan rationally. Always leave the door open for discovery of new large deposits of economically recoverable oil and gas reserves, but don’t plan your budgets around that success.

The alternatives I recommend will not change the viability of Alaska's natural resource development overnight, but they will increase the likelihood of a strong oil and gas exploration and development industry in the future.