Recently we witnessed the biggest disasters in the oil and gas business in many years. When the Deep Water Horizon exploded it brought with it a host of issues. First, 11 people lost their lives in the blink of an eye. This was followed by an oil spill that went on for over 80 days, polluting the Gulf of Mexico and highlighting the very real risk of deep water exploration. The explosion and the subsequent rush to cap the well highlighted our lack of experience and technology as it relates to deepwater equipment failures and the spills that can occur. It also showed the world just how much oil is parked deep under the sea at depths we can barely reach.
Throughout this adventure we have also been watching the events as they have unfolded on the surface. It may well be that in the rush to achieve deepwater success BP, Transocean, Halliburton, and Cameron may have taken shortcuts, or they may have become complacent with their excellent safety records and taken short cuts. All of this will come out during the investigations to come. At the same time we are finding that the Obama administrations’ response to the spill was sorely lacking. It took some time to come to grips with the gravity of the situation and then deciding what to do about it was equally challenging. The net result, we have the entire industry standing still waiting for the Federal Government to decide what will happen in the Gulf of Mexico and with our natural resources around the country.
One thing does not change; the demand for oil in the United States cannot be changed by waiving a magic wand and wishing it so. We use roughly 18 million barrels of oil every day and if the recession is truly ending and we are heading for recovery that number is going to go up. 95% of our transportation in the United States runs on the hydrocarbon and we don’t have a viable alternative that can be turned on quickly. So while the administration wishes to bury its head in the sand and congress wants to increase our regulations and levy taxes on the domestic oil and gas industry. The rest of us need to fill up our cars. Our grocery stores need to take delivery of our food, and our transportation infrastructure continues to need oil.
So where do we find the leadership to move forward. Recently the states of Alaska, Texas and Louisiana all have made moves to help the industry. This could be the saving grace for the country or the precursor for a tenth amendment showdown. The most vocal and the most aggressive in making the case to increase drilling is Alaska led by Governor Parnell. The State has enacted several tax incentives and created credits and actively freed up acreage for exploration. Recognizing that the oil is in decline on the North Slope and the very real danger of running out of natural gas in the Cook Inlet the state has reacted. Additionally, while the federal government has frozen drilling in the Gulf of Mexico and in the federally controlled waters off the shores of Alaska, the State can take advantage of an industry looking for a place to drill.
In the past, the majority of the oil and gas industry has left Alaska to be the play ground of only a handful of companies. BP, Shell, ConocoPhillips, ExxonMobil, and Chevron account for most of the activity. As a result, very little exploration has been done in state waters and over the last few years as the oil production has declined the majors have shifted their efforts elsewhere. The majors have become focused on activities like the deepwater of the Gulf of Mexico and other major projects around the world. This strategy has resulted in the need to create a shift in the way the industry perceives Alaska. In order to attract investment the State of Alaska needs to position itself as the one place that the ban cannot reach and at the same time be perceived as friendly to the independent oil company.
So can Alaska create a new image for itself in the eyes of the independents? As a result of the oil spill in the Gulf of Mexico BP has had to put several assets up for sale. It was widely speculated that they would sell their stake in the Prudhoe Bay field and potentially their holdings in the Transcontinental Pipeline. The wire was buzzing with conjecture and the odds-on favorite was Apache (an independent), not Shell, Chevron or ExxonMobil. Led by Steve Ferris, Apache has been expanding all over the globe. It was leaked that they were going to make a bid for the assets and that the bid might exceed 10 billion dollars.
However, when the deal was done Alaska was left out of the mix with Apache opting for a basket of properties where they would be in control and could do what they see fit to increase production. So does this mean that Apache is not interested in Alaska? Not at all, they are pursuing a different strategy. At the same time that the media was covering Apache and BP, Apache purchased acreage in the Cook Inlet of Alaska.
After the dust settled surrounding BP and Apache the Department of Natural Resources (NYSE:DNR) announced that several leases in the Cook Inlet had changed hands. The assets belonging to Donkel/Cade made up the largest holding purchased by Apache. It seems that industry insider, Dan Donkel, has been accumulating in Alaska for several years in anticipation of the independents coming to Alaska. By taking a position in the Cook Inlet and taking advantage of the hard work that Dan Donkel has done over the years, Apache can determine its own fate in the State of Alaska and avoid the drilling ban imposed by President Obama. Of course this is exactly what independents are looking for, they don’t want to be controlled by the economics that rule large integrated oil companies but rather prefer to be nimble and be able to decide their own fate.
Aside from Dan Donkel, who else decided to come to the Cook Inlet before Apache began to flex their muscles. Two Australian companies were also out in front, Buccaneer Energy (NYSE:BCC) and Linc energy (NYSE:LNC) lead the charge. Both smaller independents recognized the value of the reserves being left behind by the majors and the changing environment in the states’ rules and regulations and moved quickly to enter the Inlet. With independents rushing into the Cook Inlet, what happens to the North Slope? Recently Dan Donkel announced that he had over 90,000 acres leased in the area. He has also announced the hire of Jerry Bailey, a former Exxon President to sell the acreage to companies wishing to come to the North Slope. So if recent history is any indication, the independents should also be heading for the North Slope and Dan Donkel is all ready in position and waiting for them.
So have the independent oil and gas companies, drilling 90% plus of all wells in the United States changed their attitude toward Alaska? It seems that events are breaking in that direction.
So what can other States do? Recently Texas announced the creation of a coalition of companies to develop spill response technology and keep the rigs running in the state. His recent talk on “The importance of State and Local Regulations in the New Energy Reality” shows that he certainly has taken the success of Alaska to heart. At the same time we are watching the citizens of Louisiana cry out against the drilling ban and vocalize their need to return to the Gulf of Mexico before the opportunity to work in the offshore, moves completely offshore and to another country.
With the changing political climate in the United States, States like Alaska, Texas and Louisiana find themselves squarely at odds with the federal government. I think it is also important to realize that Governor Perry, Governor Parnell, and Governor Jindal are all Republican Governors and outspoken in their opposition to some of this President’s more recent actions. Additionally, all three are energy producing states that rely on the revenues from the industry to provide a good portion of their State revenues. All three recognize that this country is in dire need of domestic oil, without it the wheels stop turning.
So where do we go from here, recently HR 5626 came out of committee and is heading to the floor for a vote. In that bill the federal government will lay down the gauntlet and challenge states about their right to drill within their own borders.