Awash in can-do enthusiasm fueled by construction of the 800-mile-long, crude-oil-hauling Trans-Alaska Pipeline System almost 40 years ago, oil producers on the 49th state’s North Slope made a good-faith, never-fulfilled offer to soon ship natural gas south, too.
A lot has happened since then.
Largely thanks to oil wealth, Alaska has grown from a new and struggling state of slightly more than 300,000 people pre-pipeline to a successful (at least temporarily) oil-rich state home to more than twice as many today.
Oil money helped build new ports that boosted cruiseship traffic to the 49th state and oil money transformed the George Parks Highway from a rough goat trail between Anchorage and then McKinley National Park into a pleasant drive between the state’s largest city and what is now Denali National Park, one of the state’s largest tourist attractions.
Along the way, Anchorage exploded from an outpost community of about 125,000 scattered across flatlands at the edge of the Chugach Mountains into o a thriving city of 300,000 with downtown high rises and spectacular homes high up in the Chugach foothills.
And, of course, Alaskans started getting those beloved Permanent Fund Dividend checks as their “share” of the oil wealth just for living in the cold, dark north.
But one thing didn’t change. The gas once trapped beneath Arctic permafrost on the North Slope remained frozen in place.
Alaska Gov. Bill Walker this week moved to blast that gas out of its bunker by threatening Alaska oil producers with a shutdown of the Prudhoe Bay oil field if they don’t show the Alaska Department of Natural Resources (DNR) evidence they are trying to get the gas to market.
It was either the boldest move in the history of the oil and gas business in Alaska or the craziest. Because of Walker’s decision, Prudhoe Bay is today operating under a temporary plan of development (POD) good only until Nov. 1. Legally, the oil field can’t operate without a POD.
“DNR WILL ALLOW ONE FINAL OPPORTUNITY TO PROVIDE A COMPLIANT PLAN OF DEVELOPMENT,” Corri Feige, the director of DNR’s Division of Oil and Gas wrote in a letter to Scott Digert, the Prudhoe reservoir manager for BP Exploration (Alaska).
(MustReadAlaska.org posted the entire letter here: http://mustreadalaska.com/without-comment-governor-rejects-lease-plan/)
Fiege temporarily extended the existing POD until the Nov. 1 date, and gave Digert until Sept. 1 to come up with a new “modified proposed POD.”
What happens next is unclear.
Should BP stand firm attorneys once associated with state oil and gas say the most the state could do is order the field shut down. That would be the perfect lose-lose for both sides, but a big win-win for attorneys. The litigation would be certain to make some of them rich.
The loss of oil revenue would obviously hurt the bottom line of BP, ExxonMobil, ConocoPhillips and to a lesser extent Chevron. Exxon owns a 36.4 percent interest in the Prudhoe field; Conoco, 36.1 percent; BP, 26.4; and Chevron, 1.1. To date, the companies have backed BP in its standoff with the state.
The loss of Prudhoe Bay revenue, while a blow to the companies, might hit the state of Alaska even harder. About 90 percent of state revenue has for decades come from oil and gas taxes and royalties, but because of low global oil prices due to the glut of the moment what was once a gusher of revenue has trickled to a drip.
With the cash flow low, the state is facing a budget deficit approaching $4 billion. The deficit would quickly grow if new oil revenue was shut off at the wellhead, but the state is sitting on $53 billion in the Permanent Fund, a storehouse of past oil revenues.
Alaska could, if need be, raid the fund to cover the costs of state government as it battled in court to try to force the oil producers to do what they promised to do in 1977.
The cost of playing nice
Feige, in her letter, noted the companies that year signed a POD that promised “to commence gas pipeline deliveries of 2 BCF/D as soon as a pipeline and plant to condition the gas to specification can be completed. This is currently estimated to be about five (5) years after the tart of oil production. Studies have shown that the Prudhoe Bay (Permo-Triassic) Reservoir could be managed so that the planned deliveries would not affect ultimate oil recovery. Depending upon the reservoir performance, it might be possible to increase gas deliveries to 2.5 BCF/D.”
What happened in the years that followed was both simple and complicated. The simple part was that there was never a pipeline built to move the gas to market. The complex part was that reinjection of gas into the oil field became a key part of maintaining oil production.
Bill White, a former business editor at the Anchorage Daily News who later went to work for the now defunct Office of the Federal Coordinator, Alaska Gas Transportation Projects, penned a very good history of North Slope gas last year.
Plans for gas development were underway even “as crews drilled the initial wells, laid the 800-mile trans-Alaska oil pipeline and built an oil tanker port in Valdez during the mid-1970s,” he wrote.
“The plan was almost as grandiose as the oil development then underway. A multibillion‐dollar project to build a separate gas pipeline system to the Lower 48 states. About 2 billion cubic feet a day of Prudhoe’s gas would be sold, starting in the early 1980s, about five years after oil production began.
“The timing would solve the problem of more gas coming up with the oil. Gas not piped south or used to run Prudhoe would be reinjected.
“To offset the pressure loss from oil and gas both going to market, the companies running Prudhoe would inject water.
“In fact, water injection — in massive amounts — began in 1984 after several years of building the plant, pipes, wells and other injection machinery. Injections didn’t stop the loss of underground pressure the Prudhoe reservoir was experiencing every year. But water injection slowed it.
“Meanwhile, the gas pipeline project died. The market would not support its multibillion-dollar cost.”
So much gas
That’s where the simple part ends, and the complicated part begins. By the mid-1980s, Prudhoe oil production was starting to bring up more gas than the field managers could handle.
The complexities of oil and gas production on the North Slope and the vast technology in play there is little understood by most Alaskans, but suffice to say Prudhoe is in some ways the 49th state’s mission to the moon. There is a lot of complicated and sophisticated technology employed to produce oil on the Slope.
To get rid of surplus gas, White writes, the producers deployed production techniques developed elsewhere only on a new and “enormous scale.
“They would muscle up the gas-cycling program, injecting most of the produced gas back into the reservoir. This would give the producers a two-fer: Not only would it pressure more oil to wells as expected, but it would vaporize oil that otherwise wouldn’t flow and bring that oil to the surface, too.
“In addition, the giant facilities they would build would strip out natural gas liquids from the methane stream. Back then almost 14 percent of the gas was NGLs, such as ethane, propane, butane and pentane.
“Once extracted from the stream, these liquids could be put to two purposes.
“Some — tens of thousands of barrels a day of butane, pentane, hexane, etc. — could be routed to the oil pipeline and sent to market (they can be used to make gasoline, for example); this would be like producing a whole new oil field.”
Alaskans were big winners in this deal. The “whole new oil field,” as White describes it, produced higher flows that kept state revenues up through an oil price slump that began in mid-1980s and continued into the 1990s, and it stuffed Alaska coffers with cash when oil prices sky-rocketed in the 2000s.
Money, money, money
Despite steadily declining Prudhoe production from a field that peaked in 1988, state oil revenues topped out at more than $12 billion in 2008.
By then, gas had become vital to oil production, and nobody really wanted a gas pipeline.
Testifying before the Alaska Senate Resources Committee just last fall, Dan Seamount, a geologist and commissioner with the Alaska Oil and Gas Conservation Commission said, that when he started his job with the state in 2000 amid talk of a gasline in 2014, it “scared the hell out of me” because of the potential loss of North Slope oil production.
The AOGCC is a state entity charged with maximizing oil and gas flows from Alaska oil fields. The North Slope field was in 2000 producing 1 million barrels of oil per day and Seamount feared a major drop. He told Senate Finance it was his professional opinion it would be unwise for the state to allow major gas production before 2025.
The oil producers – BP, Exxon and Conoco – had been moving toward a goal of trying to get a gas pipeline in place by then in cooperation with the state. All the companies signed an agreement to cooperate, but company willingness to push the project has lessened as continued low oil and gas prices have both called into question gas markets and limited access to construction capital.
Walker on Tuesday hinted to the Alaska Dispatch News that these problems led producers to suggest “Alaska lead the project.
“Alaska’s potential adoption of the lead role was a much better alternative than the other suggestion by the companies, Walker said — a ‘go slow’ approach of waiting out the current low prices of oil and gas,” the newspaper reported.
Former Commissioner of Natural Resources Mark Myers has, however, warned that studies show that anything greater than a 25 percent state interest in the gas line is a loser for the state because the costs of pipeline operation progressively devalue state royalty gas. The real money for the state is in the gas not operation of a pipeline, he said.
Myers left DNR this winter. He was replaced by Marty Rutherford as acting commissioner. A longtime DNR manager she was expected by many to be named commissioner, but left the department earlier this month. She has not publicly revealed why.
Andy Mack, a managing director for PT Capital, an investment firm, was then named the new commissioner.
PT Capital is a company started by Alice Rogoff, a friend of the governor and a big thinker, as Platinum Holding Company some years before she bought the Dispatch News and became publisher. Rogoff is the wife of David Rubenstein, one of the country’s richest men and a founder of the Carylye Group.
Rubenstein has his own interesting Alaska connection. After the late Sen. Ted Stevens, R-Alaska, amended the U.S. tax code in the 1980s to allow then struggling Alaska Native Corporations to “sell” their operating losses to successful companies as tax write-offs, Rubenstein and his partners helped broker many of the deals.
“He says his big innovation was an accounting method that found far more losses than the $50 million originally projected,” Liz Ruskin, a reporter for Alaska Public Media wrote in 2014. “He once said his firm sold some $8 billion dollars worth. It was a boon for the Native corporations, for the buyers of their paper losses and also for Rubenstein and his partners. Only the U.S. Treasury was the lesser for it.”
At the time Platinum (now PT) was set up, his wife told this reporter she was looking for Alaska investment opportunities, specifically those that would help build new infrastructure or restart old infrastructure.
Rogoff’s first interest was in the Platinum Creek Mine in Western Alaska, but the deal fell through. The mine itself later ran afoul of federal environmental officials.
Platinum, the company, morphed into PT before that happened, and the publicly stated owners shifted and changed over the years. Until recently Rogoff was reported to be an advisor to the company.
Her name, along with that of other advisors, now appears to have been removed from the PT Capital and PT Public Policy websites. Knoweldgeable sources, however, say PT principals Mead Treadwell, a former lt. governor and now PT company president; Hugh Short, a co-founder and the company chairman; and Mack remain regular visitors to her Dispatch office.
PT Public Policy is a lobbying organization. Mack remains listed as its president. The company chairman is former North Slope Borough Mayor Edward Itta, a good friend of Rogoff’s.
Rogoff’s PT and Carylye connections and her close relationship with Walker, who began his statewide political career as one-issue candidate pushing gas pipeline construction, has fueled speculation she might be trying to help him entice private equity investors to fund construction.
Gas markets are weak at the moment, but natural gas experts say there is little doubt the governor could ink a major gas deal with Asian gas buyers if he was willing to agree to a long-term contract at a low-enough fixed price.
Walker told Rogoff’s newspaper that he’s “not interested in (pipeline) delays because the project needs to meet deadlines to ensure massive reserves of North Slope natural gas can be super-chilled, liquefied and shipped to Asia for sale.”
Business vs government
Walker also told the newspaper he had no plan to threaten to declare North Slope producers in default on their leases, and then he appeared to take the first step toward doing exactly that. If there is no POD, Prudhoe cannot operate. And if Prudhoe cannot operate, the oil producers would technically end up in default because their leases require they operate.
The oil companies and the governor do have different agendas. The former are businesses that exist to make money; it’s how they survive. The latter could be in the game just to get a pipeline built. That would leave a mark on Alaska history that might, or might not, put Walker up there with former U.S. Secretary of State William H. Seward of “Seward’s Folly” fame.
And Alaska would get an economic boost out of gas pipeline construction. There would be a big, temporary increase in jobs. Long term, though, a gas pipeline producing low or minimal revenue for the state and an oil pipeline yeilding less and less as production continues to fall would force a major change in the state tax structure.
Walker has proposed reinstituting the Alaska income tax. The first proposed taxes are minimal. They would have to grow in a major way to replace oil revenue.
How this all plays out only time will tell.
On Friday afternoon, a BP spokeswoman would say only that the company had received the state’s 15 page letter and was studying it. It appeared, though, that at least for those in the oil bidness the Fourth of July holiday fireworks were starting early in Alaska.