ALASKA SEEKS WAYS TO BOOST INDUSTRY ACTIVITY IN STATE

Kevin R. Banks, Pamela L. Rogers
Department of Natural Resources
Anchorage

As U.S. oil companies look abroad for new investment opportunities, Alaska is looking at ways to keep industry active in the state.

Alaska's reliance on the oil industry is well documented. The discovery and subsequent development of enormous reserves of oil and gas in arctic Alaska changed the economy of the state forever.

Those discoveries were brought into production in 1977 when the TransAlaska Pipeline System was completed. Between 1975 and 1982 state revenues rose from $793 million/year to more than $5.7 billion/year (1991 dollars).

Fully 85% of the money that funds state government today is derived from royalties and taxes on oil, Virtually no sector of the state's economy can claim that it does not somehow benefit from the contribution of the oil industry, either directly or through the expenditures of state government.

But like everyone else's in the oil patch, Alaska's fortunes fell precipitously after world oil prices collapsed in the mid-1980s. While revenues this year have fallen to $2.1 billion, things might have been worse.'

Even as prices fell, North Slope production continued to rise, softening what may have been a very hard landing indeed. By 1988, North Slope production began to decline (Fig. 1).2 State revenues have also paralleled this decline. Even now and in spite of the importance of North Slope oil to domestic production, worldwide industry restructuring has been felt in Alaska's economy as higher-paid jobs are eliminated and operations are streamlined.

Still, Alaska has tremendous confirmed reserves-more than 7 billion bbl of crude oil and 30 tcf of gas.

And unlike some rather risky overseas opportunities, Alaska offers a stable investment climate, predictable leasing strategies, and a secure and operational oil delivery system, In its role as the principal landholder, the

Alaska Department of Natural Resources (DNR) intends to capitalize on these strengths.

BOOSTING EXPLORATION

Several measures to encourage exploration activity are currently being considered by state government officials.

Among these are exploration licenses and an expansion of the state's existing exploration incentive credit program. Both concepts are embodied in bills proposed by Gov. Walter J. Hickel that will be submitted to a new state legislature convening in January. Neither bill won legislative approval during the last session.

At present, Alaska is limited to "selling" oil and gas leases to the highest bidder based on purely monetary considerations-cash bonuses, royalty shares, or net profit shares.

Most lease sales must be scheduled 2 years in advance and listed in a 5 year leasing program document submitted biennially to the legislature. Lease tracts are limited to a size not larger than 5,760 acres, or 9 sq miles. There are no requirements that the leases be explored.

While this leasing system has worked well on the North Slope and in Cook Inlet, where there are significant probabilities of finding oil or gas, it is not realistic for Alaska's poorly understood interior basins (Fig. 2).

In these basins exploration is too speculative and costs are too high to support paying bonus bids for small, site-specific leases. In these areas where information about oil and gas potential is sparse, the state can promote development by opening large tracts of land for exploration.

A LICENSING PROGRAM

Exploration licensing programs-or concessions, as they are often called - are used by most countries outside the U.S. and are the rule rather than the exception.

Cash bonus bidding as employed by the federal government and most states, Alaska among them, is really quite unique.

While the state is still working out the specific terms of an exploration license program, it should ensure that the program contains these elements:

The exploration license system would allow a company to "bid" a work commitment for a large block of land-up to 2.5 million acres.
Companies would not have to pay an up-front cash bonus bid.
The company promising the most aggressive exploration would receive an exclusive right to explore for oil or gas on the block being offered.
The promise would be secured by a bond equal in value to the amount of work to be performed, whose value would be reduced commensurate with the work completed. The bond would be forfeited if the work is not done.
Upon discovery, the company would receive a lease covering the area of the discovery.
The state may solicit proposals or the license areas could be nominated by industry. The state would follow the public notice and "best interest finding" provisions currently required under the competitive leasing process.

Best interest findings typically consist of an economic, social, and environmental analysis of the sale area and must be published and available for public comment before a sale is held.

In this case the best interest finding would also include a notice of the exploration license award criteria, the terms of the exploration license contract, and the terms of the lease eventually awarded in the event of a discovery. Every effort would be made to clarify in advance the regulatory ambiguity that often accompanies frontier exploration.

Exploration licenses would primarily be available in Alaska's large unexplored interior basins - Minchumina, Holitna, and Yukon-Kandik, to name a few.

INCENTIVE CREDITS

The second initiative proposed by the governor would expand the successful exploration incentive credit program.

Exploration incentive credits, currently authorized by Alaska law, allow certain costs of exploration to be deducted from taxes and royalties owed the state.

As presently configured, credits are only offered as a component of new lease sales and are intended to mitigate the high, up-front costs of a wildcat exploration program.

Companies can deduct up to 50% of these costs from taxes and royalties owed the state. For companies not presently producing oil or gas, the credits are transferable.

The legislation would allow similar credits for exploration drilling and geophysical work on unleased state land, federal land, and private land including the large areas owned by regional Native corporations established under the Alaska Native Claims Settlement Act of 1971. Credits would also be allowed for drilling stratigraphic test wells in interior basins.

Policy changes that do not require new legislation are also being considered by DNR.

As with most oil producing states, Alaska's oil and gas leases contain environmental and social terms and stipulations governing exploration, development, and production. Additionally, leasehold operations are subject to numerous site-specific terms.

These conditions are imposed by the Alaska Departments of Environmental Conservation, Fish and Game, and Natural Resources, as well as the Alaska Oil and Gas Conservation Commission.

Each agency maintains a field presence to ensure compliance. Because much of Alaska's oil and gas development occurs on land classified as wet-lands, federal agencies may impose additional conditions on permits.

With so many agencies involved in regulating oil and gas operations, restrictions have become duplicative and complex. Recognizing that overregulation is a disincentive to development, DNR's Division of Oil and Gas has initiated an aggressive review of leasehold terms and stipulations.

The goal is to eliminate redundancy and to require that proposed restrictions be consistent with a resource development-oriented economy.

COALBED METHANE

Nationwide interest in coalbed methane has also reached Alaska. The division is investigating the viability of producing coalbed methane from the state's vast reserves of coal.

Alaska contains more than one third of the nation's coal. Associated with this coal may be natural gas, which could be an important resource in the 21st century.

To begin to evaluate this potential resource, a loose consortium of parties has been formed. The parties include the University of Alaska at Fairbanks, Marathon Oil Co., Enron Exploration Co., and Geomet.

Marathon has agreed to sample coals in a Cook Inlet development well to be spudded this summer. ARCO and Unocal Corp. are investigating the possibility of sampling other wells in Cook Inlet as well as on the North Slope.

The state is still actively campaigning for the opening of the Arctic National Wildlife Refuge to oil and gas leasing. A majority of Alaskans recognize that Congress' inaction on opening ANWR's Coastal Plain has dampened industry enthusiasm in the state .

The governor's office continues to lobby in Washington, D.C., and to promote development of ANWR through nationwide advertising.

Alaska officials recognize that changing times and a changing oil industry present an unprecedented challenge.

Meeting this challenge through new leasing strategies and an improved regulatory climate will help maintain a healthy and productive industry.

REFERENCES

Alaska Department of Revenue, Spring 1992 Revenue Source Book, March 1992.
Alaska Department of Natural Resources, Historical and Projected Oil and Gas Consumption, April 1992.