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Currently, sitting on my portch. In the beginning, spent 16 years with drilling company starting out as a roughneck and rising through the positions of drilling manager, operations manager and finally Executive Vice President and CBW (Chief Bottle Washer). I have worked with a variety of... More
  • Three Mile island, The Exxon Valdez, and the Deepwater Horizon and Alaska 0 comments
    Jun 27, 2010 12:08 PM | about stocks: AOG, BP, XOM, APA, RDS.A, EIX
    As I watch the morning talk shows and hear about the General in Afghanistan, the oil spill in the gulf, and the stated new offshore rules, I would like to ask a question of anyone out there that is reading, how are Three Mile island, The Exxon Valdez, and the Deepwater Horizon, and the future of economy connected? One thing is certain, this crew in Washington is not going to figure it out.
    Back in 1979 we had experienced the oil embargo of 1973 and we were actively working to power our economy with a new discovery, Nuclear power. We were building the next generation of power plant, clean, efficient, and long lasting. Better yet, no imported oil needed to make it work. Then we had an accident at 3 mile Island. The melt down that could have occurred, didn’t. The safety features in place should have sent a message to our federal government. They did, just the wrong one. The legislature passed so many rules and regulations that our nuclear industry all but died. We didn’t see an application for another one until 2007.
    1n 1989 the Exxon Valdez ran aground and spilled a great deal of oil, 11 million gallons or 257,000 barrels to more exact.  That came out of a tanker carrying 53,094,510 gallons or 1,264,155 barrels. We are all aware of the environmental damage that occurred and the resulting regulation of our oil industry in Alaska,  but unless you are in the Oil and Gas business in Alaska you might not be aware of the other effect. 
    Since the peak, Alaskan crude production has been declining at an average rate of 4.9%, and averaged (fiscal) 2009 at 693,000 BOPD. Going forward, the state expects the decline rate to flatten out to 3.6%, after fiscal 2010, of course. Now, fiscal 2010 ends on June 30, 2010, right about now. The state expected 2010 to average 659,000 BOPD. through 2010, we are averaging 656,577.  So, if 2010 were to follow suit, we could see average production fall as low as 650,000 BOPD for the year. That would represent a YOY decline of 6.2%. Basically, the State is running out of oil.
    Or is it? If you tie up to the local watering hole and speak to the elder geologists and engineers they will tell you of wells drilled and abandoned, of fields discovered and not produced. Of opportunities they would have loved to have had to develop their favorite prospect. Why has it never been done? Up until Governor Palin took office, the regulations and bonding requirements and environmental zealots have made it impossible for anyone but the very biggest to work operate in Alaska. 95% of all of the production in Alaska belongs to the majors and they don’t have the time or the inclination to mess with “little deals”. 
    Finally the State Government under Palin and now Parnell decided to do something about this mess. Hopefully, we are not too late to reverse this disturbing trend. After years of other administrations catering to the environmentalists and a lack of foresight several laws were passed, not appease the “Big Oil” guys but to instill a sense of partnership and encourage the explorer to get busy. This idea of actually doing something is catching on, a few independents have arrived. If the culture of “get it done” eventually permeates into the regulators and those that assess the bonds we will be rocking.
    Now we move on to the Deepwater Horizon and the damage it is about to do the Gulf of Mexico and it goes well beyond the oil seeping onto the beaches. Those will recover, the US economy might not. As a result of the accident the federal government is now going to follow in the footsteps of Three Mile Island and the great state of Alaska and re-regulate the offshore industry in the United States. I reference the above decline rate in Alaska. In the Gulf of Mexico the decline rate has been suggested to be as high is 25% and it has been offset by the myriads of small finds and big finds thanks to robust exploration. If you stop the exploration you stop the flow of oil. The majors are not all that good at this type of exploration, they are looking for elephants and home runs. Shooting elk or making base hits does not interest them. 
    As the regulations get started the costs will drive the independents out of the Gulf of Mexico. This exodus will permanently affect the region and force the United States to spend more money on foreign oil. It will cause innovation to stop, the rest of the world learned to build really good nuclear power plants. The rest of the producing basins in the United States are heavily worked and explored by independents, not Alaska. History has a nasty habit of repeating itself.
    On the upside for Alaska, we’ve all ready been through the process so hopefully the independents will come to Alaska where we are on the downside of that curve. We are actually taking the money from the majors and redistributing it. I have always thought that if President Obama ever looked at our program he would find it right up his alley. While the Federal Government is busy trying to do hand the Gulf over to the operators that fouled it up, Alaska is trying to get the nimble creative independents up into our Cook Inlet and out onto the North Slope.
    Could Alaska do more? Sure we could, one of the nasty hold over from the Valdez requires up to $ 5 million for permitting bonds for small onshore oil and gas wells, Billions of dollars for Bonds on Tankers to bring oil to the West Coast markets which ran all the smaller competition out of Alaska, by pricing them out of the markets. Could we do something about these things, sure we could.
    Let me use the example of the fire station, to require everyone to have a fire station at each home would be considered really stupid when one government run fire station could be used. Alaska could become a self insured state and cover offshore platform abandonment and oil spills using the 470 fund. This would allow the majors to sell their platforms and other onshore facilities like Badami and others so that smaller companies ready to come to Alaska and begin production can buy them. This would relieve the majors from any and all liabilities, and let them keep hunting elephants.
    Before we laugh this off, I would remind everyone that this program works very well in Brazil, the Middle East, and the North Sea where the governments are in charge of funding the clean up and the producers, not explorers,  are taxed to fund it.
    I am pretty sure the lessons of Three Mile Island and the Valdez are going to be ignored by our federal legislature and the people in the lower 48 are going to get a taste of what we have been dealing with up here for years. Hopefully the State of Alaska can get some new independents from the lower 48 before you guys wake up and start reversing some very policies.
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