Quote of the day: Keithley on Alaska’s oil patch

From a Brad Keithley Facebook post on where Alaska has fallen short on managing its oil patch:

There are success stories also where government owns the lands, but no disrespect intended, Alaska is not one of those and has done a horrible job at managing the lands. Basically we have lived off of the two large lighter oil discoveries at Prudhoe and Kuparuk (and a few satellites along the way) for decades and never had to do much else to manage the lands better. Now that those are producing at much lower levels, we don’t have a good strategy in place — as the owner of the lands — for further development. Given our position, the two best corollaries to look to are how the US has managed the Gulf of Mexico and Norway. The US has been successful in the GOM by only charging royalties and no severance taxes. The resulting low costs have encouraged investment and development, despite the higher cost and risk environment. Norway has gone about it differently by eliminating lease bonus payments, royalty and engaging in co-investment. As a result, even though it has imposed higher costs Norway actually has reduced risk and created alignment in a way that has enabled it to drive investment and activity in a way Alaska hasn’t….But of course …. no one wants to listen to that. The existing players on the Slope are satisfied with the current (largely non-competitive) arrangement where they set the pace of development and most of the Alaska players don’t have a clue (and don’t bother to take the time to learn about) alternative approaches, and as a result just rely on the current industry to continue to identify the terms for development.


16 thoughts on “Quote of the day: Keithley on Alaska’s oil patch

  1. Shame on you

    Hi Brad:

    I agree with you completely about Norway and other successful systems. My question to you is this: How did these oil companies as lease holders become more powerful in this game than the ones that own the leases, i.e. State of Alaska? Are the Alaskan politicians that clueless or just plain corrupt?

  2. Brad Keithley

    Both of your questions were answered during our previous discussion. As an investor and owner, Petoro earns money from production just as other producers. As I said below, Petoro then invests a portion of the cash that it has generated from those projects — not by taking money from other producers — in new projects. The current Alaska system picks winners by favoring select producers (small independents) over others and select projects (exploration beyond certain areas, or new production areas) over others. The state essentially is trying to steer the boat instead of letting market efficiency control. Petoro (I assume that is what you meant by “Pareto”) invests where most economically efficient, without artificially being directed to one prospect over another by a favored tax treatment. Over time, that sort of economic efficiency produces the biggest bang for the buck invested, instead of encouraging producers to chase after smaller deposits while existing, larger deposits continue to sit un- or under-invested.

  3. Truth Teller

    The Cook Inlet incentives worked. None of these things work overnight and they all need cooperation from all sides. What folks forget is that we are the sovereign and control the law and regulations. If things don’t work, if promises aren’t being kept, we “the state” can change those things. Will we? Of course we will. Politicians sooner or later always fall in lock step with the public. What doesn’t work is hatred and punitice action. Alaskans have a bright future ahead. Let’s not ruin it.

  4. Truth Teller

    Lynn Willis – my apologies. I evoidently was ill-informed. Appreciate you bringing the RCA filings to my attention. Thanks.

  5. Lynn Willis

    I read the paper and then went to the RCA. The RCA tariff numbers are TA-250-4 for the 19.77% increase in the first quarter of 2014, TA255-4 for the 41.18% decrease in the second quarter and TA-257-4 for the latest 72.26% increase. ENSTARS Tariff Advice Letter 257-4 dated May 15, 2014, presents the estimate of a 49% increase on an annualized basis. I too wish it weren’t so, but it is……

  6. Truth Teller

    Couple of observations: 1) Lynn Willis – you are one of the brightest and best informed people that comment on this blog site; however, there is NOT a 48% increase in ENSTAR’s rates. That would have to be approved by the RCA and there is no docket that I am aware of for this increase. Your mistake is believing in everything you read in the newspaper, especially our state’s largest paper which more and more seems to be run by a couple of 4th graders, and 2) Keithley is right in his arguments set out in the comments in thiis section. He may not always be the easiest guy to like, however, he’s pretty good with his facts.

  7. Jon K

    Brad, yes I committed the mortal sin of assuming my name remained in the comment.

    Anyway explain to me why it is Robin Hood financing to use money generated from the majors to provide credits for independents but it is okay to use that same money generated by the majors to form a state entity that would partner with companies?

    Also explain how the current system picks winners when the credits are available to all who want to explore, while the Pareto type system does not be picking winners or losers.

  8. Jon K

    Lynn, Conoco in 2009 said that Cook Inlet was a dead basin, nobody would come, and we were going to need to import LNG.

    Conoco was wrong.

    The State’s incentives attracted companies like Hilcorp who are now making the investment to develop the gas. Without these investments and all of the new competition we also would not have had all of the new gas discoveries across Cook Inlet. As a result we don’t need to import LNG and we will not have rolling blackouts.

    Getting gas storage was also key.

    Without the State’s policies your gas bill would be 4 or 5 times higher in a couple of years. Should I repeat that?

    Get over your temporary increase in your bill that was caused by a mild winter and be grateful that we don’t need to import gas – or worse need to build ASAP, or that you don’t live in Fairbanks.

    We are very fortunate that the state’s credits attracted billions in investment and companies capable of drilling and developing gas.

  9. Brad Keithley

    Oh good lord, now you have gone from “Jon K,” to “Anonymous.” And now even this conversation is starting to churn. Yep, the state can generate a lot of activity if it plays “Robin Hood” and subsidizes activity. But the result is that the state’s fiscal situation continues to decline and the Robin Hood aspect not only is not making it better, it is adding to it. My point is that there are much, much better ways to do it. If you want to continue to constrain your view to this side of the Alcan Border, have at it. The same semantic approach to what you call “investment” allows some also to rationalize back-to-back record deficits and savings drains as “fiscally responsible.” But they aren’t and neither is the state’s current approach to oil and gas development on state lands “good policy.” I am not sure where you go after “Anonymous,” but good luck wherever it is.

  10. Anonymous

    Brad, you continue to make factual errors and fail to comprehend my point. I never said the system was perfect or not in need of reform. My point is the state does invest and it is workin to attract activity and production. Moreover there has been a huge increase in competition. This is all undeniable. Without the added investments and incentives in Cook inlet we would be importing LnG at $18. The incentives worked. We have seen a huge uptick in drilling and exploration that Unocal and Marathon were not doing.

    There is a sea change happening and you don’t see it. Call it churn. But the churn means billions of dollars in additional spending with companies going after projects and plays that the super majors ignored – Repsol, Caelus, Linc, Brooks Range, ASRC, Miller, Hilcorp, Great Bear, Royale, Rampart, Nordaq all have money and all are pursuing various sized projects in the Slope.

    As you know if a small guy is able to find a large field, they will farm in a large producer. Same thing will likely happen if Great Bear can prove that the shale play is commercial. That is how it works. Small guys risk the capital, prove up the concept, and then bring in larger players. Or large guys leave aging fields and companies like Hilcorp come in and spend a ton of money squeezing a lot more out of the fields. They did it in Cook Inlet and they will do it on the Slope.

    We have seen an explosion of activity in Cook inlet and it is now turning to the north slope. It is undeniable that we can attribute this to the state’s decision to co-invest with anyone willing to risk capital exploring and developing in the state.

    Here are more factual errors: the state does get something in return for the credits: wells drilled, data, and discoveries that move into production generating oil, gas, jobs, and revenue.

    Look at Furie. The incentives enabled them to raise capital to drill at Kitchen’s Light. They made a huge gas discovery and will apparently be producing up to 30 McF a day by the fall with the potenti to produce up to 100. So the state’s incentives paved the way for a massivr discovery that is moving into production and alleviating the gas shortfall that every one was freaking about. So othrr than proviiding us with energy security, knowledge of the resource, jobs, and revenue, the state’s credits did absolutely nothing for Alaskans. The same process has worked at Cosmo, mustang, Ooogurak, etc etc. and yes of course there are duds. That is how it works

    Another error: Apache has indeed shot a ton of seismic, which is great, but it also drilled a well.

    Again I’m not saying the system is perfect or doesn’t need reforms. But I do take issue with the assertion that the state doesn’t co Invest and we are not seeing competition.

  11. Lynn Willis

    I thank you Mr. Keithley. Might I add that the “success” in Cook Inlet coupled with dysfunctional government oversight has resulted now in an annualized increase in natural gas cost to ENSTAR consumers of 49% and a whipsawing of consumer prices every three months. For example, based on RCA data, in 2014 gas price changed in the first quarter from $6.3235 per Mcf to 7.5736 (up 19.77%), then next quarter down 41.18% ($7.5736 to $4.4547) and finally the third quarter ($4.4547 to $7.6738 per Mcf – a 72.26% increase. I can hardly wait for the “October Surprise”. To add insult to injury and demonstrate the absolute absence of a viable state energy plan, yesterday on the radio Mr. Simms from ENSTAR leaked the truth that energy conservation is not at all in the best interest of ENSTAR because the more gas they deliver the more money they make.

  12. Brad Keithley

    Hahaha, maybe your problem is I understand the Alaska tax system too well and see behind the curtain. Alaska has adopted what some in the world refer to as a “Robin Hood” system; it takes from the producers with income, in order to give credits to some other producers and projects without. Yes, when the favored producers and projects don’t generate enough taxable income to cover the credits they can go to a window in the state treasury and receive cash for their projects. But the cash the state is giving out is cash it has received from the other producers by (at least in the opinion of some) charging higher than competitive rates in order to have an excess to subsidize the remainder. And how is that not “co-investing”? Good lord. Investing is a process where you exchange cash for rights. In Norway, Petoro invests cash (that it has generated from its own projects, not by taking money from other producers) and, in return, becomes a co-owner with the right to data, participate in meetings, propose and work on the development of projects and vote. Alaska gives favored producers and projects cash generated through the Robin Hood system and receives … what, thank you’s? At least in some cases, the recipient hasn’t even drilled a productive well.

    As I would have expected you tried to take one of my points and stretch it. Yep, I have heard of Apache — they are a mid-major company active throughout the globe (but not so much yet here, I might mention — they have not yet advanced beyond the seismic stage). Because they are global companies, I had heard, of course, also of Repsol and ENI before they entered Alaska. To be honest, however, I had not heard of Hilcorp before they entered the Cook Inlet, but that’s ok, because neither had many of their now employees. Even now their operations, according to their own website, are limited to the gulf coast of Texas and Louisiana, Northeast US and Alaska. Its great to have them invest in Alaska, but on the whole Alaska lost with the departure of Chevron and Marathon. It would have been much better if Hilcorp had been additive, rather than a successor. And Caelus? So far its a one-trick pony focused entirely on Alaska. Again, the investment is nice to have, but on the whole Alaska lost in that transaction with the departure of an experienced player like Pioneer. My point is that we are not really adding players, in large part we simply are replacing (and from a global perspective, severely downgrading) from what he had at one time. Elsewhere in the globe they call that “churning,” not progress.

    Finally, you need to sleep a little before you try to defend your point again using the Cook Inlet. While there is an increased buzz on the Kenai, its not doing much for the state treasury — which is where the discussion that Amanda quotes above started. The state charges virtually no production tax on Cook Inlet production, in some instances takes less than full royalties and, when that did not work, added on tax “credits” (i.e., state subsidies) to boot. Yep, we finally found a level of cash we could throw at the problem that produces results for the Kenai work force and the Southcentral gas situation, but in terms of being additive to the state treasury … not so much. Oh, and by the way, for all the cash we have thrown at the problem, we still haven’t taken even a hint of an equity share (which would enable the state to see a return on its cash, help direct the projects to ensure they go forward or stop the cash drain if they don’t make economic sense), other than for the odd peripheral jack up rig that AIDEA invested in, which is now going to spend some time wandering around bankruptcy court due to the demise of one of the companies (Buccaneer) you inexplicably continue to tout as a success story.

    You’re a hoot, “Jon K,” but actually help put the finger on the Alaska problem. You see a bunch of cash going out the state’s door — all of it due to a “Robin Hood” tax system — and a bunch of recycling of players and call it “progress.” Maybe it is if your world view stops at the Alcan Border. Viewed from a global oil perspective, however, at best Alaska is running in place, and more likely going backwards, as the remainder of the world progresses at a fairly rapid pace. There are success models out there that Alaska could learn from and possibly, even improve upon. To this day, for example, Norway credits the Alaska Permanent Fund as the model for their highly successful version. Even though theirs started later in time they took Alaska’s as a model, improved on it and now, theirs is about 18 times larger than our’s ($900 billion v. $50 billion). Personally I believe Alaska could return the favor by taking the best of the Norwegian (and other) oil systems and improving on them. But that’s not possible if your world view stops at the Alcan Border and you confuse a Robin Hood tax system and producer churning with success. That’s sort of the equivalent of a Governor and legislature claiming that a record of two years of back-to-back record deficits and a loss of $6 billion (35%) from the state’s savings accounts in two short years is “fiscally responsible.” But that’s another column ….

  13. Jon K

    Brad for someone who claims to be an expert on oil and gas matters you apparently don’t understand how the Alaska’s credit program works. Companies that do not have tax liabilities get cold hard cash from the state – up to 85 percent of the costs of an exploratory well are reimbursed. In Cook inlet we cover 50 percent of the costs of development. In cash. How is that not co investing?

    It’s odd that you have never heard of Hilcorp or Apache? How about Apollo? Have You heard of them? They’ve committed $1 billion in funding to Caelus. How about them apples?

    Finally you made the point that there is little competition. That was certainly true seven years ago. Not so much anymore. These companies are active, they are drilling, making discoveries and moving into production.

    And a big reason why is because of the state’s credit program.

    Big things are happening on the Slope for anyone who cares to one their eyes – Caelus has dramatically increase production, Linc at Umiat, rampart and Royale shooting 3D seismic and moving to drill next year, Brooks Range at mustang, Hilcorp and Miller entering the fray – both with stellar track records in Cook Inlet. Nordaq at Smith Bay. All of these companies, and others, are adding competition and pursuing programs in large part because of the state’s credit program. That’s my point.

    I’m thrilled that a company like Hilcorp is in the state finally investing in assets that Unocal and marathon were harvesting. Have you been on be Kenai and heard the buzz? Are you wondering why the utilities are no longer talking about importing gas? Have you heard about the discoveries that Furie and buccaneer made with jack up rigs? Did you know that a new platform is on its way? Are you aware of what Cook inlet Energy has done? It’s all pretty impressive – and none of it would have happened without the incentives provided by the state.

    How else would you explain the Cook Inlet turn around? Answer that maestro.

  14. Brad Keithley

    I’m not sure who “Jon K” is — I use my full name when posting on here and elsewhere — but he may want to check some of his own “facts.” Providing tax credits is not “co-investing;” its simply reducing (in economics terms, subsidizing) the amounts certain producers and projects otherwise owe for taxes. Through Petoro (a state owned corporation similar in some respects to Alaska’s Permanent Fund Corporation), Norway invests cold hard cash for its share of production and a consequence, has access to data, a seat at the ownership table and a vote on — and with that, the right to propose, and work with other owners to develop — new oil and gas projects to develop state owned resources. Alaska’s approach to so-called “investment” gives it none of those rights, and, as a consequence, none of the ability to help drive investment in the way that has proven successful in Norway. Instead, through “credits” Alaska’s approach simply subsidizes some players over others, and some types of projects over others, in an effort to “encourage” and “induce” activity, but continues throughout to out-source the decisions regarding the pace and location of development entirely to third parties. Through participation, Norway helps drive those decisions.

    Moreover, what “Jon K” argues is a “changed world” about the number of companies participating in Alaska is a minor blip on the screen when viewed from a global perspective. While some new companies have entered Alaska mostly to pursue marginal — and in many instances, state subsidized — projects, they are not the equivalent of those operating in Norway. While “Jon K” touts names that, with a couple of exceptions, one has to Google (or in the case of Buccaneer, refer to bankruptcy court filings) to find who they are — and sometimes even that doesn’t work well — Norway boasts a list of participants that reads like the who’s who of the oil industry. The difference is not only in the size of the company. With size comes financial, technical and operating capability and expertise that translates into success and scale. What “Jon K” also fails to mention is that as Alaska has been adding some additional names to its roster in recent years, it has lost the Chevron’s and Marathon’s, and despite extended efforts has been unable to reattract the Shell’s or the Statoil’s to the development of state lands. Norway not only has retained those companies as participants, it has added to them. Despite “Jon K’s” claim to the contrary, the world indeed is changing globally, and Alaska increasingly is falling behind as a backwater.

    Finally, AIDEA and AGIA/SB 138 are nowhere comparable to what has occurred in Norway, and other countries. Both involve investment in activities peripheral to the direct development of the state’s oil and gas resources. Drilling rigs, roads, pads, facilities, and pipelines (the subject of SB 138) are all peripheral to the heart of the oil and gas endeavor — exploring for, developing and producing oil and gas. Recognizing that is where the value is, through Petoro and other similar efforts Norway has put its money, time and expertise directly into participating in and helping to drive the development of the state’s oil and gas resources. Alaska’s efforts at playing around the edges of that core effort in no way is comparable.

    I may make errors from time to time (I’ve been known on occasion to have to tweak Excel spreadsheet formulas), but none of those suggested by “Jon K” are among them. As I said in the piece quoted above by Amanda Coyne, “[t]here are success stories … where government owns the lands, but no disrespect intended, Alaska is not one of those ….”

  15. Lynn Willis

    I am curious about how we got ourselves into the position of allowing the lease holders to absolutely define production levels for purposes of holding the leases over time. Pt. Thompson was held for how many years until the issue of production was finally forced by the State? Maybe the fact that we kept paying Transcanada for planning the AGIA gas line to Alberta long after shale gas development rendered that project untenable provides insight into our ability to define ‘viable progress’ for purposes of maintaining an agreement with the State.
    Looks like between available fracking technology and the Bakan field discovery we in Alaska are now being forced into the “please stay at any cost to the state” program of inducement. I am still waiting to hear from the AOGCC on allowable gas volumes that could at this time be released from the slope for the AKLNG/AGDC-ASAP projects and still waiting to hear if our “partnering” with Buccaneer via Kenai Offshore Development might cost us in the Buccaneer bankruptcy. We have retained a bankruptcy attorney in Texas so we must have something at risk.

  16. Jon K

    Putting aside Keithley’s value judgement on whether AK has done a good job managing the north slope, his post contains errors. Alaska is, and has been for years, co-investing with the companies by providing very generous credits for seismic, drilling and development activities. SB 21 removed some of the credits for the legacy producers but kept them in place for the independents. Moreover all companies are eligible for exploration credits. These credits are largely responsible for the infusion of independents now operating in the Cook Inlet and on the north slope: Apache, Armstrong, ASRC, Brooks Range, BlueCrest, Buccaneer, Caelus, Cook Inlet Energy / Miller, Doyon, ENI, Great Bear, Hilcorp, NordAq, Rampart, Repsol, Royale, and Savant. More are coming – a Singapore entity announced yesterday that it was taking an equity stake in a north slope field.

    All of these companies have drilled wells within the last couple of years or will do so next year – these guys arent the speculators, flippers and corner shooters – they have all raised hundreds of millions of dollars for their programs. Many are in production. We are seeing the evolution of both basins. As more companies succeed – Hilcorp, Caelus, etc – even more entrants will arrive. So the idea that we aren’t seeing competition is no longer true. The world has changed and Keithly hasn’t noticed.

    Alaska, through AIDEA, has also invested in roads, pads, facilities, and a jack up rig which was used to make a massive oil and gas discovery last year. And of course Alaska has invested and partnered with industry on the gas commercialization efforts through AGiA and now through SB 138.

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