Alaska’s rocks keep drawing explorers searching for oil, gas: Fuel for Thought

These are bleak times across much of the nation’s “oil patch.” Layoffs are spreading and rigs are being laid up. One state – Alaska – is defying the trend, at least for now. Industry employment in Alaska remains near-record numbers, according to state data. Producers are pressuring contractors and suppliers to slash rates, but explorers keep lining up in search of black gold.

What keeps the industry interested, and busy, is that really the rocks are great. State geologists say the North Slope has one of the largest oil-generating systems of the world. “The rocks are fundamental,” said Ken Boyd, a former state oil and gas director. “If you don’t have good rocks you don’t have anything.”

Jim Musselman, CEO of Caelus Energy, agrees with this. “We believe the North Slope is the oiliest place on earth,” Musselman said in an interview. Caelus is one independent busy on the North Slope, and this winter the company will be drilling a prospect Musselman thinks could be an equal to the Kosmos field off West Africa, which Musselman also helped develop.

Bill Armstrong, head of Denver-based Armstrong Oil and Gas, is equally bullish about the slope and his company is taking a larger piece, and will likely operate, what could be a major discovery made with Repsol, who remains a partner.

Armstrong has a long track record on the slope having led the exploration of two now-producing fields, Caelus’ Oooguruk and Nikaitchuk, now owned by Eni, as well as the discovery with Repsol.

A jobs slowdown will eventually hit the North Slope because part of what’s keeping things busy are projects started before oil prices plunged, like the big ExxonMobil-led Point Thomson gas cycling project and CD-5, ConocoPhillips’ new oil project near the Alpine field. But CD-5 is now finished and Point Thomson soon will be.

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The dip may not be all that pronounced, however. Last week ConocoPhillips announced a $900 million new project in the National Petroleum Reserve–Alaska. Caelus Energy, headed by Musselman, is pressing ahead with Nuna, a $1.2 billion new oil project near that company’s Oooguruk offshore field.

There’s other new exploration, too. South of Prudhoe Bay two small independents, 88 Energy and Great Bear Petroleum, are exploring shale formations that are the source of oil now being produced in the slope’s large conventional fields.

88 Energy is currently drilling a test well and is reported to have found, so far, substantial quantities of liquids-rich gas, a good sign. Great Bear drilled an exploration well last year and plans to return for more testing.

Tax incentives help small companies take bigger risks

What’s surprising for Alaska is that two largest North Slope producers, BP and ExxonMobil, have turned their backs on new North Slope exploration, leaving only ConocoPhillips and the independents to explore. This isn’t totally fair, because the big producers are now focused on commercializing the known gas reserves in the known fields, and BP points to potential for heavy oil in the producing Prudhoe and Kuparuk fields.

Still, why the seeming contradiction in new exploration? Big oil is unenthused and yet little oil, and medium-sized oil, is bullish? The explanation, Alaska state officials say, is that the North Slope just doesn’t offer targets big enough to interest the super majors, except for the heavy oil and natural gas. However, there are plenty of medium-to-smaller prospects in outlying areas that are suitable for ConocoPhillips and quite enticing for small newcomers.

There’s one more thing, however — money. Alaska has something else – a generous state incentive system. Through a combination of tax credits (negotiated royalty reductions are possible, too) the state of Alaska can pay up to 60% to 70% of the cost of exploration wells and up to 40% of development costs in some cases if discoveries are made. This is huge for small independents, who use tax credit certificates issued by the state to raise financing.

There’s trouble brewing, however. The program’s escalating costs, over $500 million last year and headed to $700 million this year, has become unaffordable for the state, which has been hit hard by low oil prices.

Earlier this year Gov. Bill Walker slammed a $500 million ceiling on tax credit expenditures, while promising to pay $200 million in additional credit applications for credits later. — Tim Bradner