Arctic to the market: Alaskan oil and gas landscape (Ep 185)

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Sam Humphreys:

You're listening to EnergyCents, an S&P Global Commodity Insight podcast where we discuss all things on the intercept of energy and finance. My name is Sam Humphreys and I'm here as ever with Hill Vaden. How's it going, Hill?

Hill Vaden:

It's going well, Sam, how are you doing?

Sam Humphreys:

I'm all right, thank you. Well, we just recorded a really interesting episode with Cody Schulter, who is one of our upstream exploration researchers based over in the US and we were talking about Alaska in light of Donald Trump's executive orders that came out on day one and for exploration in Sevskate. Have you got anything that you want people to be listening out for?

Hill Vaden:

Yeah, sure. Cody does a good job putting Alaska in perspective in US oil production. We focus most of our conversation around oil, but Alaska is not a huge contributor today to daily oil production from the US. There's a lot of oil underground in the state. And some of the things that I think Cody does a good job describing are some of these resources are held by state lands where the policy, the federal policy is not quite so impactful. Others are held by federal land, which is more of the executive order target.

One of the things to think about with executive orders is they come and go every four years with whoever happens to be in the White House, and it is hard to make long-term investment decisions if things change every four years. So there's some noise in the system that people want to pay attention to. And then the other thing that he talks about is the opportunity for exploration, which I think was more toward the state side, but for some of the smaller players, that might create opportunity for larger players to come in at a later date and bring any potential discoveries to market. So a couple things to listen to. Anything from your side?

Sam Humphreys:

Oh, I think it was interesting the discussion on how to sort of monetize some of those assets that are a little bit more remote on the federal side and what that's going to look like going forward. But you say it's all kind of long-term plans with a fairly short turnaround in terms of government tenure. So excellent one to listen to. I hope you all enjoyed it. All right. Hey, Cody Hill, how's it going?

Cody Schulter:

Doing great.

Hill Vaden:

It's going all right.

Sam Humphreys:

All right, thanks.

Cody Schulter:

Doing great here in Dallas.

Sam Humphreys:

Not too cold, I hope. Well, it's great to have you. So we are here today to talk about Alaska, which I think even with my [inaudible 00:02:31] I know is a little bit chillier. So we are talking about Alaska today in light of some new executive orders that Donald Trump has issued and the upstream industry there. So when we talk about upstream and oil gas within the US, we've talked a lot about shale, so Texas, That area. But for people listening, can you take us back and tell us about Alaska's oil and gas current status? How much is it producing in terms of US output at the moment?

Cody Schulter:

Sure. So on the current status, and just to give some framework for the trends that we're seeing right now, you can effectively separate Alaska's history in terms of oil and gas. And it's a state that actually owes its statehood to the oil and gas industry because of discoveries made in the Cook Inlet. But on the North Slope especially, which is the hot topic and the main hydrocarbon producing area in Alaska today, it didn't get discovered around the same time as the Cook Inlet. It took a while for some exploration to be done out there. And so if you're looking at the North Slope, you have a point at which you have 1969 or 1968, 1969 is the before and after. And that's when Prudhoe Bay and Kuparuk River, which are the two biggest oil fields in North America, were encountered, just individual fields. And after that, it touched off this big oil boom in Alaska in the 1980's during a time where you mentioned Texas. Alaska was actually producing more than Texas.

And then after the 1980's we actually saw Texas, especially by virtue of the shale revolution surging, whereas Alaska's been kind of starting to peter out specifically in the North Slope, which is where the bulk of the oil comes out of for Alaska. So as of right now, the North Slope is seeing a slow, steady decrease in oil production and in the Cook Inlet, which I had mentioned earlier, that is predominantly a gas dominant basin and they're starting to see a lot of the production is petering out. It's a very mature basin. And so we're in the end game for the Cook Inlet. But the North Slope, even though it's showing a decrease in production, especially on the oil volumes, there's still activity going on to reverse that trend. There's actually been a number of discoveries that in the not too distant future we're actually going to see will result in a reversal of that production decline.

The two main examples being Santos's Discovery called Pikka. Then they have, ConocoPhillips has their Willow project, and those are going to be kind of the foundation for that reversal trend in production. There are other oil pools within larger fields that are going to be entering, have entered production up there in the North Slope. They're kind of these satellite fields to the giants that I mentioned earlier, like Prudhoe Bay and Kuparuk, and they have individual pools that are going to contribute to that trend at a smaller scale. But Pikka and Willow are really kind of the main reason why we're going to see a shift, an increase in production rates for Alaska.

Hill Vaden:

Great overview and thank you. Before we get into some of the future expectations, can we talk a little bit more of some of the numbers with Alaska today? So if the US is making, what about 13 million barrels a day and Permian Basin accounts for six or so of that, how much is coming out of Alaska today? And you mentioned some of the operators, Santos and Conoco. Can you talk a little bit more about the landscape?

Cody Schulter:

Yeah, so the average daily production rates as at the close of 2024 and taking that entire year into account, we're seeing at about 410,000 plus barrels of oil per day. And that's just for the North Slope, by the way. For gas from the North Slope they don't have existing infrastructure to be able to produce it. It's mainly being reinjected. Some of the operators will use some of that gas to fuel their infield infrastructure. So the numbers are far lower given the fact that there is a substantial amount of gas up there to be produced. So right now, if we were just looking strictly at what comes out of the ground and isn't reinjected back in, we're looking at around 4,000 plus standard cubic feet per day. So really low, but there is the potential for that number to substantially increase once projects like Alaska LNG, which came out in the executive orders as being a priority for the federal and the state governments to bring online and actually build that out, that should change the game for natural gas on the North Slope.

In Alaska they also report natural gas liquids, which are separate from LNG, and they produce at around 52,000 plus barrels per day, and that is produced along with the oil out there. But those are what we're seeing at the close of 2024 for what the annual rate is looking like. And even this early into 2025, it's looking like those are broadly contiguous.

Sam Humphreys:

So I was just going to jump in there, so we'll get into the executive orders in a minute, but can you explain the potential, because you talked about reversing that decline, how much has been discovered that's sitting there ready to be developed? Or is this looking at just prospects at the moment that we're hoping will have lots of reserves?

Cody Schulter:

Right. So using Willow and Pikka that I mentioned earlier as my examples for that, Willow, they're looking at a production rate of 160,000 barrels of oil per day. And that's accounting for over 30 years they're looking at 590 million barrels of oil. And then in Pikka's case, it's not as large as Willow. They're looking at 80,000 barrels of oil per day, and that could account for 350 to 400 million barrels of oil overall. They're in active development and these numbers are a bit more concrete rather than being abstract because both of these fields have been appraised and there have been production tests and everything like that over an extended period of time because permitting in Alaska, especially on the North Slope, is six to eight years to get properly permitted before you can even begin spudding. So in that six to eight year period, you have to do permitting for all activity on the North Slope.

These kind of numbers are predicated on a substantial amount of appraisal work and everything like that. When a project like Willow reached FID at the close of 2023, it was significant on a couple of levels because the cost to develop a project on the North Slope is higher than it would be in the lower 48. You have to have special equipment, you're dealing with really difficult environmental conditions and everything. And so you need the reserves or the resource potential in those discoveries to justify the cost of actually reaching FID.

So when ConocoPhillips is looking at the Willow project and they were in it for the long haul for six to eight years worth of permitting to get development off the ground, that was because they saw a significant value to justify those costs. And same with Pikka in the case of Santos also was one where those operators have committed a significant amount of time and resource and investment to bringing those to production. And so they're looking at it for the long haul and what they can produce out of that.

Hill Vaden:

And so both of those are federal lands, right? So there's a big, I guess that's first a question, but the Alaskan opportunity is split between state and federal, which also changes, it is a little different from the lower 48 where most of the production growth is coming from private lands rather than federal lands. And so am I right that the opportunity and the interest from the Trump administration is there's oil that the federal government has more control over?

Cody Schulter:

So to expand on your initial question on there, so the North Slope, if we're looking at that specifically, but you can extend this across the state of Alaska. There's federal land, there's state land, and then I would also add that there's indigenous tribal lands as well. And that's important because there's other parts of Alaska where they're hoping to do some exploration and they're having to work directly with the indigenous tribal lands that have jurisdiction over any kind of exploration on that land. In the case of the North Slope where Willow and Pikka are related, Willow is located on federal land. It's located in an area on the western part of the basin called the NPRA, which stands for the National Petroleum Reserve of Alaska. And then you have Pikka, which is in the state lands, actually quite close to the boundary line between federal and state land.

And in general, regardless of administration, if you're operating on federal land, you're going to have more regulation to deal with. You're going to be going through more permitting process, you're submitting permits to multiple departments, not just the Department of the Interior, which is I think what a lot of people immediately come to mind when they're thinking of federal land in the United States. That also includes the US Army Corps of Engineers and the Department of Energy.

In Pikka's case, because it's on state land, you're dealing with the Alaska Department of Natural Resources and specifically their division of oil and gas. And so there's comparatively less regulation or it's still regulated, but they don't have as many hoops to jump through to get something to actually reach development. And another important facet of this is when you're looking at a development project on the North Slope, you have to also bear in mind where you are in relation to the most important piece of infrastructure up there, which is the TAPS, Trans Alaska Pipeline System.

And so if you're too far out, your development costs are going to be much, much higher because you're having to build your pipeline network to connect up with TAPS. Whereas if you are in state land, which is where the TAPS starts in the North Slope, it's at Prudhoe Bay, and that's on state land. If you're drilling on state land, there is a favorable economic conditions there by virtue of the fact that you're drilling close to the TAPS. And so it's going to reduce your cost because you don't have to build as much pipeline to connect up there.

Sam Humphreys:

Good to know. Let's get into this executive order that Donald Trump signed a few weeks ago now. So is this focused on federal reserves, potential federal reserves, or is this the wider reserves within Alaska? And can you just explain some of the background around it for those that may not have seen it outside of the US?

Cody Schulter:

Yeah, so the executive order is titled Unleashing Alaska's Extraordinary Resource Potential. It was signed.

Sam Humphreys:

Title.

Cody Schulter:

Yeah, signed day one, January 20th, and it singles out Alaska. And because it's a federal executive order, the inclination would be that this is going to be specifically focused on just federal land, but it actually involves a little bit more than that because it's also about cultivating the conditions for the state of Alaska to be able to do some of the work that they want to do, even though it's in state lands. For example, the Alaska LNG project is one of the parts of that executive order was about promoting the Alaska LNG project. Now, the Alaska LNG project, if you look at the map that the operator Alaska gas line has for the project, it hasn't broken ground yet. They're still in the funding and permitting stage of the project.

It's going to be on state land. It's not going into the National Petroleum Reserve, but the federal government is trying to create the conditions to help that project along. And some of that is going to be if we can reduce some of the regulatory restrictions on the federal lands, then you can potentially bring the value of the hydrocarbon potential, especially the natural gas out there in the NPRA, and be able to supply that to the Alaska LNG project, which historically was very much reliant on the state lands and what the state production could bring to bear. And so if you can help on that side, it has downstream effects on the state government.

It also has an important part on importing and exporting because part of that project is the idea of exporting LNG to markets specifically in say, Japan. So President Trump actually went to Japan and the Alaska LNG project was discussed, but the ultimate overarching goal would be to supply LNG to Japanese LNG markets. And so from that sense, you do have a international trade element built into the Alaska LNG project.

Hill Vaden:

So one of the challenges of executive orders is they're not very durable. That they come and go with each administration. LNG projects take a long time, and frontier oil and gas projects take a long time. Obviously we don't know who will be president of the US in four years. And I'm not going to ask you for that prediction, but from what we know of Alaska development or an operational side, how much can things accelerate? And if you are the players up there, were you waiting on this decision that allows you to operate within the next four years with some level of confidence, or are you going to be rolling into that fifth year which possibly blows you up?

Cody Schulter:

That's a concern that all operators on the North Slope have to deal with. You can create the most positive federal political climate possible when looking at the North Slope. You can make it as drill baby, drill as you want it to be, but Mother Nature has her own climate and has her own plan. And when humans make plans, Mother Nature laughs at them. So what the operators on the North Slope, and they're very pragmatic about this, is politics comes and goes, but the winters in Alaska are always there. And the challenges that come with operating on the North Slope, because you're dealing with unbelievably freezing temperatures, you're dealing with the fact that the North Slope has a whole bunch of environmental fluctuations that occur even in one year. One moment you're in the wintertime and it's solid because of the permafrost. Next minute, it's the summer and you're in a boggy marsh that could swallow up your entire drill rig, and it's inoperable at that point.

And so you can't plan for year-round development activity with any level of consistency like you do in the lower 48, for instance. And so development cycles, plus with cost and permitting and everything that comes with that, you can't plan for developing a project in four years. It's inevitable that you will hit that five years, fifth year, and the political climate might change for or against that, but it's not going to change all the other challenges that you have to face. So operators just they up on the North slope have to operate in a more than four year time span. They have to bivert the nature of business to do business up there. Yeah.

Sam Humphreys:

This is going to sound like a really silly question, but it's coming from someone as [inaudible 00:18:57]. My picture of Alaska is something where somewhere very beautiful with a lot of natural nature reserves. Are there any environmental constraints at the moment that would inhibit further exploration within that area?

Cody Schulter:

So yeah, the environmental regulations on the North Slope are some of the most stringent in the United States. They're very carefully tracked to absolutely minimize environmental impact. In the NPRA those are heightened because you have federal restrictions, sitting on top of the state restrictions, which are already pretty significant in Alaska. There's also another federal area to the east of the state lands that's close to the US Canada border with the province, the Canadian territory Yukon called the ANWR, which is the Arctic National Wildlife Reserve or refuge rather. And the ANWR, there's no drilling allowed. Now to tie that in with the executive order, they went to resurrect a leasing program for the coastal waters of the ANWR. In 2017, Trump opened it up for two lease sales in the coastal waters. But by the time those lease sales happened, it was a different administration and it didn't pan out.

There was no significant results from those bid rounds. As a matter of fact, last one happened at the end of 2024, and that one resulted in no bids. But this executive order is trying to resurrect that under the idea that over the next four years maybe there can be reversal in that trend and have a successful bid round. But just because an executive order is signed, it has to go to the Secretary of the Interior, it has to go to the Department of Energy, the US Army Corps of Engineers to actually implement that. And that doesn't happen with just one stroke of a pen in effect.

Hill Vaden:

Sure. So if we're thinking, and I'm watching time here, so if we're kind of thinking about what to pay attention to in Alaska over the next year or so, it sounds like there's a lot of noise in the system. What do you think we should pay attention to in terms of significant change in reality on the ground? Are there projects that we should watch that take that 400,000 barrels to 500,000 or make up a number? Are there commitments from operators or is it really just a lot kind of happening on the sidelines, but things are going to be steady as she goes regardless of the press release?

Cody Schulter:

I would kind of organize my answer to that in terms of exploration and development. On the exploration front, the current trend is exploration is being driven by small operators and they will drill one or two wells, test a couple of prospects, and if they're successful discoveries, they then turn around and start a farm then to try to get investment to develop those discoveries. And so that is the trend that we're seeing on the exploration front. Exploration seems to be heading eastward in the state lands because they can move faster than they would be if they headed west into the NPRA. And so we're seeing operators like Pantheon and Adeate Energy, and Armstrong Oil and Gas has a subsidiary out there called Lanyard. They have exploration plans in place. Pantheon in particular had some significant discoveries in their acreage in the eastern part of the North Slope basin.

And they're going through an appraisal process. So in the long term, especially once they get a farm in agreements on each of those operator's respective lands, or if they opt to do it to develop it themselves, we could see additional hydrocarbon production in those areas that could add to the long-term production volumes that you had alluded to. And so we'll see with the exploration plans that they have in the works for 2025, if they have more discoveries and if those become ones that can be commercially viable, then we might see even more discoveries that add to that future production reversal trend that we mentioned at the start.

On the development side, that is predominantly being driven by the large guys like ConocoPhillips, Hilcorp. Hilcorp, as a matter of fact, has been quite active in some of the aged fields like Park River. So Hilcorp is doing a lot in Prudhoe Bay, whereas ConocoPhillips has been doing a lot for their aged fields in the state lands as well. So if I'm using two operators, for instance, I would use ConocoPhillips and Hilcorp because they hold the bulk of the acreage around a lot of the aged fields and their satellites. And so they're trying to maximize production in all those mature fields to try to extract every last bit out of those reservoirs.

At the same time, they're also bringing in newly discovered pools within those fields that could add to that reversal trend. So the big guys are going to try to maximize development and recovery and the fields that we already have. And then on the exploration front, it's the small operators that are really driving the future added hydrocarbon resources that could be developed in the future that we haven't proven yet out there.

Sam Humphreys:

All right. Well, thank you very much for joining us, Cody. I think it's always fascinating to learn about this area, and I think it sounds like there's going to be hopefully a lot to watch in the next four, five years.

Cody Schulter:

Oh, yeah.

Sam Humphreys:

And we will see. But yeah, thank you very much for joining.

Cody Schulter:

Thank you.

Hill Vaden:

Thanks so much.