Industry wary amid shakeups

  • Monday, February 23, 2015 1:51pm
  • Business

There was an apprehensive mood among oil support contractors and service companies at the Alaska Support Industry Alliance’s annual “Meet Alaska” conference in Anchorage Jan. 9.

Activity is still bustling on the North Slope despite the steady slide of crude oil prices — Alaska crude oil slid to $50 per barrel last week — but contractors worry that the layoff of rigs, crews and budget cuts being seen in the Lower 48 will spread to Alaska.

Two major North Slope producers, BP and ConocoPhillips, will announce their 2015 capital budgets in early spring.

There’s worry that capital spending will be reduced after being substantially hiked in 2014. There are two pending Slope development projects, North East West Sak viscous oil expansion and the Greater Moose’s Tooth No. 1, both operated by ConocoPhillips, that will be before the company’s board for approval.

Also, BP has yet to give the green light to its big Prudhoe Bay west end development, which will involve new wells, new pads and facilities in the western part of the field.

On a more positive note, BP’s North American president John Minge and Steve Butt, ExxonMobil Corp.’s manager of the big Alaska LNG Project, were both upbeat about progress made on the big gas pipeline and liquefied natural gas project in comments at Meet Alaska.

“Most people underestimate the progress that’s been made on the Alaska LNG Project, but it’s significant,” Minge said. “With agreements made between the parties (including the state) on how to move forward, and with Senate Bill 138 (passed in 2014 by the Legislature) laying out a roadmap for the project, it’s clear that Alaska gas has never been closer to reality than it is today. And yet, there’s still much to do.”

Minge and Butt, speaking for the Alaska LNG Project itself, made thinly-disguised pleas to new Gov. Bill Walker to stick with the “roadmap” laid out in Senate Bill 138 passed by the Legislature last spring.

The structure lined out in the bill achieves the long-sought alignment between the producers, TransCanada, a pipeline company, and the state.

“Big projects succeed when all the participants are aligned,” in their interests, Butt said.

Both Minge and Butt mentioned critical 2015 decisions needed by the state as a partner including the approvals in March by the Department of Natural Resources for the state taking “in kind” payment (in gas) for royalty and the gas production tax.

The authorizing legislation for the state’s participation in the project provides for this, but the state administration must take certain actions this spring to make it happen.

Gas “in-kind” underpins the structure of the state-industry partnership in the gas project, achieving the alignment between state and industry interests needed for the project to move forward.

Butt mentioned the importance of stable fiscal terms for the project, which will be among other “project enabling agreements” needed this year. An LNG purchaser signing a long-term contract will need to know that the financial terms, including taxes, won’t change.

Butt made an oblique reference to the current controversy over Walker’s firing of three Alaska Gasline Development Corp. board members.

“The Alaska project is unique,” with private industry in partnership with a state government, he said. “Democracy can be pretty messy at times and it’s a challenge to preserve the project,” through these events.

“The Alaska LNG Project will operate for decades, however, and it will span a lot of political transitions.”

He also made reference to the governor’s action to restrict new AGDC board members from signing confidentiality agreements: “Confidentiality is about respecting private information (of partners) as we work together. It’s not about ‘veiling’ a project but about creating an environment where people can work together. You want to know your private information will be held confidential.

“How would you (as oil support contractors) feel if the details on all your bids on projects were out there in the public domain?”

Later in the meeting, new state Revenue Commissioner Randy Hoffbeck gave assurances that the new administration was still committed to seeing the gas project schedule remain on track, a pledge the governor made during his campaign.

Despite this, the firing of the AGDC board members and the limitations on protection of confidentiality has raised concerns, not so much about Walker but about some of the people he has appointed.

Minge was upbeat, however, about the state’s role in the project: “Thanks to the Legislature’s work on SB 138 we now have a roadmap for progress. Gov. Walker has repeatedly said that he wants to keep the project on track, and I am going to interpret that as support for SB 138 and the process it laid out.”

Most of Hoffbeck’s remarks dealt with the state revenue situation and the sharp drop in oil prices, but he did say, “pushing the gasline forward is critical,” to securing a new source of income for the treasury.

Hoffbeck also said the governor and other state officials were concerned about the effects of industry incentive tax credits on state finances as oil prices continue to drop.

“However, the governor is not seeking any change to the credits or oil tax structure,” at least for now, Hoffbeck said.

On the oil price situation and revenue slide, Minge said he is optimistic about the future but, “there will be impacts — that’s the reality of a significant price drop — but we have to keep our nerve and stay strategic. This isn’t our first rodeo. We’ve been through ups and downs before.”

There are upsides, too.

“A low-price environment has a way of focusing the mind and encouraging companies to innovate, develop new technologies, and become more efficient,” he said.

He cited some recent examples within BP’s Alaska group, which works through integrated teams with contractors. A series of innovations in drilling have allowed BP to enjoy a 30 percent gain in efficiency, in terms of days per 10,000 feet, despite the complexity of wells, Minge said.

A series of improvements have increased the number of well-work jobs by 50 percent over the last three years while also improving performance.

“Another example involves innovations allowing the team to do casing repairs without a rig, saving 50 percent of the cost,” Minge said. “Without this the economics of some of the workovers wouldn’t have made sense, even at high oil prices, so this is a solution that will increase production over the life of the field.”