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Optimism in Oil

How Alaska’s policies work against, but could work for, its largest industry


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PromoRepublic

There’s been positive news coming out of Alaska’s onshore and offshore Arctic oil operations. ConocoPhillips Alaska’s Greater Mooses Tooth 1 (GMT1) produced first oil on October 5—ahead of schedule, according to the company. GMT1 is the first drill site on federal leases within NPR-A, with an approximate cost of $725 million and an estimated peak monthly production of 25,000 to 30,000 barrels of oil per day.

ConocoPhillips Alaska also released positive news about Greater Mooses Tooth 2 (GMT2) in northeast NPR-A. On October 17, BLM and US Army Corps of Engaineers released a joint Record of Decision for GMT2, which is anticipated to produce approximately 40,000 barrels of oil per day for an estimated thirty years. ConocoPhillips Alaska approved GMT2 for funding October 25 and is beginning construction in the 2018-2019 winter season, planning for first oil in “late 2021.” The company anticipates investing just under $1 billion on the development. According to ConocoPhillips Alaska, “Both GMT1 and GMT2 will generate new revenue for federal government, the State of Alaska, Native corporations, and the North Slope Borough.”

Offshore, Alaska welcomed the long-awaited news in late October that the Bureau of Ocean Energy Management issued conditional approval to Hilcorp Alaska for its Liberty Project development and production plan. The proposed oil and gas project would entail the construction of a nine-acre artificial gravel island in the Beaufort Sea approximately five miles off the coast.

It’s been a long time coming. The first Liberty exploration well was drilled in 1997 by BP; Hilcorp acquired 50 percent ownership of the Liberty project in 2014; and the companies (with third partner ASRC Exploration) released a draft EIS in August 2017, with the final EIS published in August 2018. It’s anticipated that Liberty could produce 60,000 barrels of oil per day.

In a Hilcorp release about the approval, US Secretary of the Interior Ryan Zinke said, “The Hilcorp Liberty Project, if completed, will be the first production facility ever located in federal waters off Alaska… American energy dominance is good for the economy, the environment, and our national security. Responsibly developing our resources, in Alaska especially, will allow us to use our energy diplomatically to aid our allies and check our adversaries.”

 

New Talent at NANA

There’s a general atmosphere of cautious optimism around oil and gas development in the Last Frontier for 2019 as oil prices remain steady and projects like these move forward. While the projects themselves are exciting, the opportunities they create in Alaska for employment through support services contracts, fabrication and manufacturing, transportation and logistics, and other general and specialized services have positive repercussions that ripple throughout the economy.

“Right now what we want to do is provide support to the oil and gas industry so they can efficiently develop [and produce] oil and gas,” says John Hendrix, president of NANA’s Commercial Group, which includes NANA Construction (fabrication, installation, maintenance), Kuna Engineering, Tuuq (exploration drilling), NANA WorleyParsons (capital projects and program management), NMS (facility and camp services), NANA Lynden Logistics, and Paa River Construction, all of which have experience in the Arctic, in the oilfield, in the mining industry, or in all three. “With the diversity of expertise and capabilities, NANA has proven to be a strong resource development support company to the extraction industry. Additionally, as the development challenges grow, NANA continues to evaluate internal capabilities to ensure our service delivery is operationally excellent in terms of safety and meeting client expectations.”

Hendrix is fairly new to NANA, joining the corporation’s Commercial Group team in May, but he has a long history—almost four decades—in the energy industry in Alaska, the Lower 48, and internationally.

Right out of college, Hendrix was hired by Schlumberger to work in Prudhoe Bay, and he interned for a summer for Alyeska Pipeline Service Co. Over the course of his career, he’s held positions with Apache and BP and has consulted for private and government entities. Previous to joining NANA, Hendrix was on the governor’s cabinet as chief oil and gas advisor to Governor Bill Walker, where he worked to facilitate growth with Alaska’s oil and gas companies. Hendrix says he was drawn to NANA because of the company’s values and integrity, and, being a life-long Alaskan, because of the company’s presence and commitment to the state. “It’s nice to be with an Alaskan company and trying to give something back,” he says.

As president, his responsibility is to make sound investment decisions and move the Commercial Group’s companies forward responsibly. Resource development support is a natural fit for NANA, which has a long history in Arctic oilfields and a personal stake in the mining industry through Red Dog Mine, which is located on NANA lands. “We do a lot of different things… but people need to look at NANA as a company that can do everything that’s needed to help resource development in Alaska, from providing catering services to industrial fabrication and design to engineering and installation.”

 

Royalties and Taxes

To Hendrix, when NANA supports responsible development in the oil and gas industry, the company supports Alaska as a whole, believing that oil development benefits every Alaskan. “We need to continue to be thoughtful in how we, as Alaskans, stand together regarding industry and be truthful about the oil industry… Oil prices are right, but there are still a lot of issues that we have to solve when it comes to getting access for oil companies to their oil and gas reserves. There are a couple plays up [on the North Slope] right now that, every year they are delayed, cost Alaskans $200 million a year in royalties.”

Royalties, he clarifies, are separate from taxes. “Royalties come right off the top, and then we tax [oil companies] on the net.” To illustrate his point, in July 2018 Alaska oil production was 13.4 million barrels, according to data from the Alaska DNR Division of Oil & Gas. Of that, the state’s royalty was 1.63 million barrels, or 12 percent, which translates to a value of approximately $128 million. In fact, in July 2018, just one month, total funds received from oil from rents and bonus bids, net profit share leases, royalties, federal shared royalties, and interest was $153 million. Year-to-date as of August 2018: $943 million. And then add taxes.

Royalties, combined with production taxes, property taxes, and corporate income taxes from the oil and gas industry, have traditionally funded 90 percent of the state’s general fund, which is the state’s primary operating fund and provides for basic government services. The fund is flexible, which allows Alaska’s legislatures to determine how it should be best used or saved, depending on current circumstances.

 

Decline in a Difficult Environment

But since its peak in the late 1980s, Alaska’s oilfield production has been in decline, seeing relatively small upward movement only in recent years, which some North Slope operators attribute to a specific effort to encourage investment. According to ConocoPhillips, “The positive investment climate created by SB21 was an important factor in ConocoPhillips Alaska’s decision to invest in and develop GMT1.”

Kara Moriarty, president and CEO of the Alaska Oil and Gas Association (AOGA), has consistently expressed concern that Alaska’s lawmakers have created an unstable tax policy environment—in which taxes are generally increased—that makes responsible, long-term planning in the oilfield difficult at best and impossible at times.

SB21, passed in 2014, was the most recent piece of oil tax legislation that made any effort to attract investment. HB247 (2016), HB111 (2017), and this year’s proposed HB288 all called for tax increases on the oil industry. Overall, there have been eight tax policy changes (six of which AOGA opposed) in thirteen years in an industry where a project—like Liberty—can span more than twenty years from the initial exploration well to conditional approval and still not be in operation. It’s hard to believe Alaska’s oil and gas companies find that encouraging. Hendrix says, “Unless you have a pathway of where the future may lie, you can’t start putting risk analysis and probabilities on it.”

 

Make a Plan

Hendrix advocates for Alaska, as a state entity, to look at its oil and gas resources and make a plan for development. “We have no master plan,” he says. “We need an economic plan because that’s why we always have one-off permitting issues… we wait for one-off projects and then we have NGOs [non-government organizations] protest this and protest that.” Instead, if there were a master plan for the state or even for individual regions, all key parties, including local and subsistence users, could participate in a streamlined conversation about what and how development takes place, including a long view of a consistent tax structure that allows oil and gas companies to function productively while appropriately supporting the state through royalties and taxes.

He also envisions the state being more proactive in development: as part of tax credit incentives, the state routinely receives seismic data that are held in trust for ten years and then released to the public. Hendrix says the state does not process or interpret these data. “If we spend a billion dollars in tax credits, shouldn’t we know what’s under the ground instead of just locking [that data] up? … Let’s pre-permit an exploration well and sell it to the highest bidder… And if we see a lot of these potential places [for development], maybe we could justify building a road versus an ice road every year.”

 

New Dollars

Hendrix sees a lot of wasteful and repetitive activity going on as part of oil development that discourages actual projects from moving forward: “There’s more people making money off permitting nowadays than engineering, and that’s a problem.” He continues, “Every Alaskan needs to understand that, if you can make the state a place where [oil and gas explorers and producers] can invest capital dollars, capital dollars drill new oil and gas wells; the big bucks are in attracting new dollars here for major projects. That’s what gives big jobs and new royalty payments to the state.”

One project in which Hendrix sees potential, for NANA and Alaskans in general, is AK LNG. In fact, NANA President and CEO Wayne Westlake was one of a group of Alaskans that traveled to China this year and met with President Xi Jinping, government officials, and other economic development representatives about the gasline. “They’re serious about taking care of their air emissions, and they need natural gas,” Hendrix says. Plus, there’s a lot of gas stranded on the North Slope: according to Hendrix, the amount of oil injected back into the ground every day on a BLE basis is more than the amount of oil produced in North Dakota every day. “If the gas pipeline goes in, Point Thomson could probably make another 60,000 barrels of oil a day because of oil condensate,” he says.

He doesn’t see a downside to the AK LNG project, just potential. Locations along the route of the line would be able to “tap into” it, reducing the cost of energy in Interior and other rural areas of Alaska, with the effect that “mines aren’t burning diesel, houses aren’t burning diesel, and the air quality in Fairbanks goes up.”

Hendrix is also bullish on Alaska transitioning from being a state in which raw resources are extracted and shipped out to becoming a state in which value is added locally, saying, “The state must go from being a raw product producer to manufacturing products and then by-products.” He thinks a major step that will allow Alaska businesses to move forward in this way is addressing the significant cost of energy across the state. “A low cost of energy will drive a lot of things: can you imagine if the heating bill went down by 50 percent, especially for a business?”

According to the Alaska LNG site, the pipeline could create up to 10,000 jobs during design and construction followed by about 1,000 operational jobs. “The gasline could significantly reduce barriers to further exploration on the North Slope and provide reliable, reasonably priced fuel for domestic projects. It will also provide Alaskan residential consumers with long-term affordable gas supply for power generation,” the organization states.

 

Local Labor, Local Value

NANA has taken steps to produce items like this, specifically through its 80,000-square-foot fabrication building located in Big Lake, the largest fabrication facility in Alaska, according to Hendrix. The shop is capable of making everything from a pump house to a separation facility to a medical building. Items shipped to the North Slope or Red Dog Mine are generally limited in size by the roads they travel on, but the building’s location in Big Lake has a strategic advantage: from the building, there aren’t any major bridge crossings when hauling modules north.

The facility currently employs about 150 people, but Hendrix says NANA would love to double that amount, which the facility can support. It’s this ability to scale up quickly that allows NANA to be responsive to the needs of the oil and gas or mining industries. “We just shipped out 146 modules for Red Dog about a month ago, and we’re building stuff for BP, ConocoPhillips, and Hilcorp now,” Hendrix says. “The place is humming, and there’s a sense of pride when you go to our fabrication facility in Big Lake because you see Alaskan workers.”

Hendrix shares NANA’s dedication to employing shareholders, their descendants, and local Alaskans whenever possible. The company proudly reports that 60 percent-plus of the workers at Red Dog Mine are shareholders, and Tuuq, NANA’s exploration drilling company, boasts nearly 80 percent shareholder hire.

Tuuq is one of the Commercial Group companies for which Hendrix has a vision to move forward. Primarily Tuuq conducts drilling services within the NANA region, but “we’re doing everything we can to get them out of our region,” and into work in other parts of the state, Hendrix says. “We don’t need drill rigs coming from Canada, coming from the Lower 48, or coming from Paris, France, to drill when we have rigs here. We’re pro-Alaskan. We have the tools and the expertise and the people, and we’re showing up.”

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