There’s Money to Be Made in Alaska’s Resources

I have taken wing and come up to the great state of Alaska to go on a geological field trip. We are traversing from the Kenai Peninsula in the south to Prudhoe Bay and the Arctic Sea in the north.

I’m looking at one critical component of the nation’s energy resource base, as well as the utterly spectacular wilderness of this vast and complex land.

There are few more complex geologic terrains anywhere on Earth.

Western North America in general, and Alaska in particular, is a complex mosaic of many different ages and types of rocks, called "terranes," all formed at different periods of geologic time…

The Anchorage area, and Kenai Peninsula alone, is comprised of at least eight different types of rock terranes, all formed over the past half billion years or so…

Then, you have granite plutons, formed at depth within the Earth, almost right next to active volcanoes erupting the melted sediments that were subducted, millions of years ago, beneath the Aleutian Trench…

I could go on and on, but my point is not to overwhelm you with geological concepts or jargon. My point is to introduce the notion that Alaska holds a treasure trove of resources, but the exploration and production process is difficult.

Take the difficult-to-decipher geology, and then couple that with the remoteness of Alaska and the need to transport equipment and supplies literally thousands of miles over the North Pacific Ocean and through the adjacent seas. Then, you have to land your goods and transport them, often as not to some site in the mountainous interior. Add in the utterly hellacious weather that strikes this land for much of the year. And if you find something, now you have to extract it and haul it out. So Alaska holds great wealth, but only for the hardy, the patient and often for the lucky, if not the good.

To Build? Or, Not to Build?

When I arrived here in Anchorage, the lead business story in the Anchorage Daily News concerned the proposed "Arctic Gas Line" that people have desired for decades to build from the North Slope, down through Canada’s Mackenzie Valley and into the U.S. The headline in the newspaper states, "Exxon Frets Over Arctic Gas Line Cost."

You have surely heard of the vast oil resources of the North Slope. To date, more than 13 billion barrels of oil have been pumped from beneath the frozen tundra of Prudhoe Bay and environs, with more to come.

But there is also an immense resource of natural gas in the rocks below. In fact, moving west from Prudhoe Bay, the reservoir rocks dip downward and are buried deeper and deeper. Many exploration geologists believe that any hydrocarbons that will be found are probably in the form of natural gas, not oil. So the next big play in the northern Alaska region will likely be natural gas drilling. But as with much else that occurs in Alaska, progress is measured in glacial increments.

The newspaper story described the concern of ExxonMobil over the spiraling costs to build the proposed line. At the annual Exxon shareholders’ meeting, Exxon CEO Rex Tillerson described how the cost estimates for just the Alaskan portion of the gas line had more than doubled in recent years, to $15 billion. He may recall the original Trans-Alaska Pipeline, and the initial cost estimate of $800 million that ballooned in the mid-1970s to near $8 billion. And cost estimates for the entire Arctic Gas Line, if it is ever built to a proposed terminus in the U.S., range up to $30 billion, making it the largest single private capital project in history.

"At that cost, it is not viable to build the pipeline," said Tillerson. "It involves lots of steel, lots of compressors, lots of valves," said the Exxon CEO, referring to the skyrocketing prices of most basic industrial products and commodities. In addition, the cost of labor is rising, and there is a critical scarcity of personnel who have the necessary technical skills to manage such immense capital projects.

That is, any gas pipeline in the Arctic is competing for labor, steel and equipment with shipbuilders in Korea and skyscraper constructors in China, as well as with comparable oil and gas projects ranging from the Gulf of Mexico to offshore Brazil and the Middle East. We live in a world of vast marketplaces…

"Shed Our Shackles to Exxon"

The day after the Anchorage Daily News article, in an editorial piece published in the same newspaper, longtime Alaska oilman Jack Roderick, author of Crude Dreams: A Personal History of Oil in Alaska , stated that it was "time to shed our shackles to Exxon." Roderick came up to Alaska in 1954 and has been involved with Alaskan resource development since before the place was even a state. He is a former mayor of Anchorage, a former member of the state natural resource commission and currently a member of the federal Arctic Research Commission.

I took the occasion to look up Mr. Roderick, and we had a very cordial and informative discussion. In Roderick’s view, the massive 1968 oil strike at Prudhoe Bay drew essentially all attention and exploration emphasis on oil toward the North Slope, where major oil companies were looking for giant oil fields.

Hydrocarbon exploration languished elsewhere in Alaska, particularly near the Cook Inlet area, where the first major oil strike in Alaska had occurred in 1957. This 1957 oil strike, at the Swanson River on the Kenai Peninsula, was actually quite instrumental in propelling Alaska to statehood, because it demonstrated that Alaska would have the economic means to support itself, and not become a net drain on the federal Treasury. But about 10 years later, the North Slope bonanza drew the focus of the oil world away from the many other prospective basins of Alaska.

According to Roderick, "For 30 years, we have contentedly collected our oil taxes and royalties from the North Slope. Exxon, BP and ConocoPhillips are responsible for keeping this largesse flowing to Juneau, and we should thank them for it. However, these same three giants now want to control our natural gas."

Roderick points out that Exxon and BP are not making any major effort to explore for gas, while ConocoPhillips is, to its credit, investing in such an effort. Roderick asks, "Does it make sense to put the two companies that will not be exploring for natural gas on the North Slope in charge of the pipeline that is to carry that gas to market?"

Roderick believes that the North Slope of Alaska and the regions to the west in the National Petroleum Reserve will be exploration and production plays "for the next 50 years." He told me that he anticipates development activities in the far north "comparable to what you see today in the Gulf of Mexico after 50 years of development down there."

According to Roderick, the north of Alaska should be, and currently is, opening up to more exploration by more companies. If Exxon does not want to invest in Alaska, then "the best solution is for Exxon to leave Alaska."

Well, we all know that Exxon will probably not leave Alaska. But sometimes an editorial writer simply overstates a point to be sure that the point gets made.

For us investors, the idea to keep in mind is that there are immense opportunities within the U.S., and particularly in Alaska, for the companies that understand what they are doing in this complex, distant, rugged and often harsh locale.

Until we meet again…
Byron W. King

June 12, 2007

The Daily Reckoning