Hidden Profits from These Forgotten Treasures

In the 1850s, hardy Russian explorers and fur trappers traipsing about mountain ranges and sea passages noted oil seeps around what we call Cook Inlet today. These are the earliest historical references to the oil in Alaska.

Over the next hundred years, a variety of fortune-seekers – lone prospectors, private wildcatters and big oil companies – took shots looking for commercial oil here. While there was some success, there were mostly setbacks and a trail of abandoned wells.

It wasn’t until 1961 (two years after Alaska became a state) that Swanson River – a joint venture between Richfield and Standard Oil – became a commercially successful oil field.

The rest, as they say, is history.

More than a billion barrels of oil, along with 5 trillion cubic feet of natural gas, has been pumped out of the Cook Inlet area. Oil and gas development in Alaska as a whole has been huge. About one-fifth of the domestically produced oil in the U.S. comes from Alaska.

But these assets have been in long decline. Production of crude oil is down more 70% from its high in the 1980s:

Alaskan Oil Production

Cook Inlet is now an old horse with oilmen trying to coax whatever they can get out of it. But here’s where things get interesting.

Chevron, one of the largest Cook Inlet producers, decided recently to sell all of its assets here. This includes offshore and land-based oil and gas fields, 10 offshore rigs and two gas tank farms. Chevron will also part with its interests in two regional pipelines.

“The decision comes as production from Cook Inlet oil and gas fields is declining,” Anchorage Daily News reports, “typically, a period when big energy companies lose interest in their investments and smaller operators jump in.”

Here, then, is the opportunity. There is still a lot of oil and gas left in Cook Inlet. It’s just too small for big guys like Chevron to spend time and money on. For a smaller outfit, it could mean a fortune.

The state of Alaska is bending over backward to keep investment in oil and gas flowing. The state leans greatly on this industry. Some 80% of state revenues depend on oil and gas extraction. It employs thousands of people. Those people in turn support shops, restaurants and the whole wheel that is a community.

So the government created some sweetheart deals for oil and gas companies to spend money here. Among these goodies is a 40% state refund on money spent for drilling and exploration costs – paid in cash to the operator. There are other laws in place that could refund as much as 20% of other costs and 25% of net losses incurred.

Again, for a small operator looking to get a sweet return on a moderate-sized pot of money, Alaska is like the El Dorado of oil and gas.

And there is actually a natural gas shortage in the region. Current proved reserves may well fall behind demand by 2012. Yet the inlet has an estimated 13-15 trillion cubic feet of gas, as well as more 200 million barrels of oil – mostly overlooked by the big majors.

As a result of the shortage, prices for natural gas here are about $3 more per million cubic feet (mcf) than they are in the lower 48. While gas wallows around $4, Alaskan natural gas goes for $6.50 and as much as $10 per mcf in the winter.

This is the fascinating thing about natural gas that many investors don’t understand. Location is very important. As with real estate, where you are makes all the difference.

I could see a kind of echo boom to Alaska’s oil and gas, where it becomes a very profitable region for smaller companies. Cook Inlet may well enjoy a revival.

In fact, the seeds are already starting to germinate. One group is bringing the first new drilling jack-up rig to come to Alaska in 16 years. Another group is bringing back shut-in wells. There is actually a fairly long list of companies squeezing life from old assets and/or exploring new prospects, spurred on by generous state incentives.

It’s the beginning of a good old-fashioned Alaskan oil and gas boom. In a world where foreign sources of oil are more frowned upon and uncertain than ever, my guess is that investors will look warmly on the efforts of those in “the last frontier.”


Chris Mayer
for The Daily Reckoning

The Daily Reckoning