IPAA CHAIRMAN SEES E&P AS CREATIVE SIDE OF BUSINESS

Bob Tippee
Managing Editor
Economics and Exploration

For George A. Alcorn, exploration and production represent the creative side of the oil and gas business.

That's why the new chairman of the Independent Petroleum Association of America went into business for himself 32 years ago rather than join his drilling contractor father.

"It wasn't that I didn't like it (the contract drilling business)," says Alcorn, president of privately owned Alcorn Exploration Inc., Houston. "I wanted to be in the creative side more than the service side. "

He is quick to point out the creative side's problems: unstable commodity prices, taxes, a shortage of capital, strict and changing environmental regulations, and limited access to federal land.

But as chairman of the group he calls the independent producer's "strongest voice" in the nation's capital, he'll be a chief advocate for the domestic oil and gas industry.

It won't be easy.

"We're an industry out of style today," Alcorn says.

"We've lost some political ground" with the departure of key industry supporters in the Senate and House of Representatives.

But it has always been a tough business.

"Anybody that thinks the oil business is easy and glamorous just hasn't been in it."

AN EXPERIENCED VIEW

Alcorn has been in it long enough to have seen -huge changes not just in the politics of oil and gas but in the nature of the business itself.

Natural gas, for example, is a much more important target than it was when Alcorn and a friend first began putting together drilling deals in 1961. Today, IPAA members earn an average of 70% of their income from natural gas production and 30% from oil.

The earnings split for Alcorn's company is only slightly more traditional: 65% from gas and 35% from oil. The firm has producing interests in Mississippi, Louisiana, Arkansas, and Texas and has also worked in Florida. It doesn't operate any of its properties.

Its main exploratory tar-et now is deep, pressured natural gas along the Texas Gulf Coast.

Alcorn has five employees, all geologists and landmen.

"We didn't downsize because we have always run this thing with just a few people," he says. A partner of 25 years, Lloyd Naylor of Shreveport, La., died last year.

There are advantages in staying small and being a nonoperator, Alcorn points out, repeating a theme: "It gives you time for the creative end of the business, to do the kind of leasing and have the kind of landowner relationship that we like to have. "

After his first 10 years as an independent, Alcorn and two older brothers, Chuck and Fred, formed a partnership called Alcorn Bros., with Chuck as the operating partner.

In 1982, Chuck left and formed a firm that eventually made several oil discoveries off the Philippines, and Fred left the oil and gas business. The partnership still operates about 20 producing properties but isn't active otherwise.

Family ties have played a role in business for George Alcorn since the beginning. After earning a business degree from the University of Texas and serving in the U.S. Army, Alcorn decided to study geology and become a producer.

So he made a deal with his father, a founding partner of Falcon Seaboard Drilling Co. In exchange for help with tuition at the University of Houston, Alcorn agreed to work for his father part-time while a student and fulltime for I year after graduation.

"He was nice enough to never tell me that it wasn't a very good deal for him," Alcorn says.

SEEKING CONSENSUS

Alcorn will carry a long-held business philosophy to work in the political arena.

"We're consensus builders," he says. "he like to know what the other guy is doing. We like to build consensus and make our decisions based on what a lot of people think is correct rather than just for ourselves."

Coalition building was a key to IPAA's success in reforming the alternative minimum tax last year.

"We went to the White House and got President Bush to say 'Hey, we need to change that,' and then got some other leaders to say, 'Yep, we've got to change that."'

Alcorn credits IPAA Pres. Denise Bode and outgoing Chairman Eugene Ames Jr. with making government aware of the independent producing industry's problems.

"It's In shambles. It's really in trouble. I think the government recognizes that. People in the industry recognize it. The message is out loud and clear."

Alcorn hopes to build on that recognition by forming coalitions of government officials who can help solve the industry's problems. Strong federal lawmakers are at least interested in the industry again, he says. State and federal regulators will work constructively with producers.

And the Clinton administration can be part of the coalitions Alcorn envisions. President Bill Clinton seemed to support the industry during his campaign, and members of his administration haven't been hostile.

"They say that this industry's important and they're going to do as many things as they possibly can to make this industry work," Alcorn says.

Administration officials have been approachable, he notes. "We're just hopeful that some of the things they said they'd like to do they can get done.

But there's a difference between favorable words and real help.

"Just because you've got the President saying 'I like the domestic oil and gas industry' doesn't mean that Congress is going to like it again," Alcorn says.

IPAA swung into motion when Clinton, as a candidate, said he'd consider a fee on imported oil. In September, however, Deputy Energy Sec. William White told a -roup of independents in Houston that an import fee wasn't in prospect.

"Many or most members of IPAA, even though they were interested and willing to go on record to say they were for it, were not very hopeful that it would come to pass," Alcorn says. "I don't think it was any surprise when the administration said that we can't do it."

PRICE STABILITY

Price stability, whether it comes from an import fee, floor price, or some other means, is high on a list of what Alcorn considers to be essential to recovery of the independent oil and gas producing industry.

"Producers are more and more interested in a stable price for oil and gas," he says. "I think users are more interested in maybe not a lower price for gas or oil but a stable price so they can make some plans."

Tax incentives can help, Alcorn says, pointing to gas drilling stimulated by the expired tax credit for production from coal seams and low-permeability reservoirs.

Similarly, producers need stability of regulation, especially as it pertains to environmental issues-the "red button in most independents' offices," according to Alcorn.

"There's no certainty, about it. They change the rules all the time. That's a terrific burden, especially for independents."

Independents need better access to federal land, onshore and off. Alcorn cites the eastern Gulf of Mexico, where exploratory prospects are high especially for natural gas and where drilling can be conducted safely. Major discoveries in the region would lift U.S. natural gas supplies and federal revenues.

"But it's being blocked because of unreasonable concerns that our industry poses an environmental threat," Alcorn says.

The government can help the industry by encouraging development of technology, he adds. The Department of Energy, for example, is studying ways of using defense research capabilities to advance oil and gas technology.

Is there a conflict between wanting help from government but freedom from regulation?

"Most independent producers would like government to be totally out of their business," Alcorn says. "But on the other hand, occasionally we say, 'Gosh, he need them to do something-some kind of intervention that would cause greater stability in the price or supply of oil."'

He believes current oil prices reflect deliberate efforts by oil exporters to grab U.S. markets.

"We're the best market in the world," he says. "The less we supply ourselves, the more opportunity there is for somebody else to supply it."

U.S. OPPORTUNITIES

But there are opportunities in the U.S., especially for gas.

Alcorn says U.S, independent producers will have to fill 60% of the country's growing need for natural gas during the next 50 years.

"In order to do that, we've got to have capital, we've got to have access, we've got to have reasonable environmental regulations, and we've got to have some certainty that those rules aren't going to change."

Capital is beginning to return to domestic exploration and production, he notes, partly on the strength of technological progress in such forms as 3D seismic surveys and interpretation, horizontal drilling, and new fracturing techniques.

These advances have reduced costs, lowered dry-hole risks, and increased the amount of information available to producers and their financial backers. Alcorn says the information explosion may be one of the factors luring investors back to the upstream petroleum business.

More technological progress, especially in enhanced recovery, will be crucial to the future of U.S. oil drilling and production, he says. While the oil part of the business remains strong, exploratory prospects for oil "are just harder to do" than gas prospects.

"The future for the oil part of this business, especially for independents, is to be very thoughtful, careful, and aggressive and produce our wells in the most efficient manner so that all the reserves identified in a particular oil property are produced."

And there are "previously overlooked plays for oil," which Alcorn thinks will be "the salvation for independents on the oil side. On the gas side, there just seem to be more places where you can go do exploration."

GAS PROSPECTS

Federal Energy Regulatory Commission Order 636, which separated pipeline transportation and sales functions and capped a long effort to deregulate the gas business, has helped stabilize prices, Alcorn says.

The order requires that prices for transportation services be determined individually and takes steps to provide all potential buyers and sellers equivalent access to those services.

A result, in Alcorn's view: "There's a growing awareness that the producer can't be sitting around waiting on the highest price he ever thought about. He's got to be looking for a stable price and stable take. The user of gas can't be looking for the lowest price anymore. He's looking for a stable price and supply. Order 636 enables us to get to that."

Problems remain. Small independents sometimes have trouble meeting the financial criteria that state public utility commissions set for long-term sellers of gas to regulated local distribution companies (LDCs).

IPAA is working through its State Outreach Committee and with other natural gas groups to assure state regulators and utilities about the reliability of small producers and security of supply. And independents are forming groups to offer gas in the volumes utility purchasers need and to help satisfy the financial tests of utility regulators.

LDCs are responding. Alcorn recently learned of an LDC that approached several producers with an offer to buy 10-15 MMcfd under a 7 year contract.

"The reason they can do that is there's not just one independent producer providing that supply," he says. He attributes some of the marketing success of Canadian gas in the U.S. to the combining of output from hundreds of producers.

"That gives the users of gas in this country a lot of comfort," he says. "Groups of producers could be the answer" to restoration of long term sales agreements.

With a large gas resource and plenty of potential left for oil in both discovered and undiscovered reservoirs, the U.S. offers independents no shortage of opportunities. The keys, he repeats, are capital, land access, price stability, and evenhanded government.

"We've got to keep getting the message out that the oil and gas industry is important to this country. It provides a lot of jobs," Alcorn says.

"The opportunities are going to be there, and we need to have faith in these opportunities. That's what I'll be working on."

Copyright 1993 Oil & Gas Journal. All Rights Reserved.