Will ConocoPhillips be allowed to produce at Willow? State decisions factor in


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Last week, ConocoPhillips-Alaska President Joe Marushack stood before a room of energy contractors and service providers and, in his low-key way, made a dramatic announcement:

Three-hundred million barrels of oil have been identified at the company’s Willow drilling site in the National Petroleum Reserve-Alaska.

Joe Marushack, ConocoPhillips-Alaska President
Joe Marushack, ConocoPhillips-Alaska President

It was some of the best news the members of the Alaska Support Industry Alliance could have received first thing on Friday the 13th.

A visitor could almost see the thought balloons dance above their heads: Things were, perhaps, looking up for the gritty, determined energy contractors who have come to expect nothing but bad news. If only they can hang on through low prices. If only government will not get in the way. If ConocoPhillips can clear the state and federal obstacles to get from discovery to production.

That the announcement was made to the actual Alaskans who have workers freezing in the cold, dark Arctic nights to make these projects happen was not lost on this crowd. A buzz rippled through the banquet hall.

The two exploration wells Marushack referred to are at Greater Moose’s Tooth Unit and are a stone’s throw from the company’s Alpine operation. The Willow prospect could put 100,000 barrels a day of light oil into the Trans Alaska Pipeline, he said to the Alliance’s annual Meet Alaska conference.

Production from Willow might continue for well over a decade and bring the volume of the pipeline up by nearly 20 percent during its peak production years, something that is very much in Alaska’s interest.

A find this size, within 28 miles of existing infrastructure, is a big deal. On federal land, the oil would go through the pipeline and be subject to royalties and taxes that the State of Alaska and local governments like the North Slope Borough would receive. Alaskans would get their share through their Permanent Fund dividends.

Also, the development phase of Willow would require many billions of dollars, Marushack said, and bring potentially thousands of jobs online. Much of that would spin through the currently faltering Alaska economy and, especially, the heavily battered oilfield services industry.

ConocoPhillips’ Greater Moose’s Tooth-1 project, now under construction, and GM-2, in the permitting stages, will put 30,000 barrels into the pipeline during peak production. GMT-1 will start pumping oil in 2018. GMT-2 will follow, and Willow could start pumping by 2023, if the company can get through all the federal permits in a timely way.

Alaska has a big dog in the fight to help this company and others get their projects up and running. Between GMT-1 and 2, Willow, and Armstrong Energy’s Pikka project, these producers could increase today’s pipeline’s flow from 517,000 barrels per day to close to 650,000. The point is: Prospects are good.

RAZOR’S EDGE: There are things that can get in the way. ConocoPhillips is working in Alaska at a loss right now. Cash flow is negative. The company hopes to get to “cash flow neutral” this year, but if legislators or state officials in the Walker Administration do anything that raises the cost of doing business in Alaska, then the folks who run ConocoPhillips-Alaska will have a tough time preserving the projects in the near future.

Marushack noted that the entire ConocoPhillips annual capital spend for 2017 is $5 billion, and $1 billion of that is slated for Alaska.

He also pointed out there are many great finds in the continental United States, not to mention globally. For example, shale oil that is easy to get to, provides quick return on investment, and doesn’t require long lead times is a very attractive investment right now. Alaska is having a tougher time competing because of it.

Alaska is in a precarious position if it wants to see these major oil finds move forward to development. Companies need to know that oil taxes aren’t going to spike again, and that the State will do its part to make sure the project can be competitive with all the other prospects ConocoPhillips has around the world — projects that have managers and other internal advocates who would love to get their hands on the $1 billion now designated for Alaska.

“If we get delayed, that capital goes somewhere else,” Marushack stated. “So it is very important we stay on track.”

DECISIONS IN THE BALANCE: As the Alaska Legislature gavels in today, and the State’s looming government budget crisis is making Alaska’s oil producers wary, Senate President Pete Kelly articulated the role he’d like to see government play:

“As we are looking at oil taxes or oil tax credits, production has to be our goal,” he said during a press availability this morning.

Last year the Gov. Bill Walker Administration had pages upon pages of complicated tax restructuring plans, and there was no focus on oil production, Kelly said. Production is what’s needed to get the Alaska economy stabilized.

“Whatever actions we take cannot result in less oil going through it,” Kelly continued, referring to the Trans Alaska Pipeline, which is running nearly three-quarters empty.

ALLIANCE AT 40: The Alliance is a 40-year-old trade organization with more than 500 members that provide over 50,000 Alaska jobs in the state’s oil, gas, and mining industries.

That ConocoPhillips made the announcement to this group went over well. They know that a find this size has big implications for their businesses, which have all suffered during the downturn in oil prices and with Gov. Walker’s tax attempts that have made oil production less attractive.

The majority of the companies making up the Alliance have had to downsize operations, cut jobs, and lose valuable employees who have years or decades of North Slope experience — experience that is hard to replace.

Marushack identified with that. His company has also gone through two tough years, he said: “This is about as different a time as we can recall. We can’t control oil prices so we need to control the things we have a lot of control over.”

“We need to retain a capable Alaska workforce,” Marushack said. “That means enough work to maintain health of contractors.”

At the beginning of every Alliance conference, people who were present during the original discovery at Prudhoe and who worked on building the Trans Alaska Pipeline are always asked to stand and be recognized.

As years go on, the numbers diminish, but even last week, some 30 people stood and received a round of applause. They’ve seen the booms and the busts, the upturns and the downturns. They’ve recently watched as hundreds of jobs have been shed, and as wages, including their own, have been frozen.

For the graying crowd of pipeline pioneers, they are just hoping and praying for government policies that will lead to a healthy industry for their children and grandchildren.

Joe Marushack was speaking their language. The Willow project going forward has “got to have fiscally stable tax structure,” he said. “This is multi-billion dollar project, a step up from GMT-1 and 2. We are basically structured for $1 billion of capital investment, and that is at risk if there is an increase in taxes.”

Read ConocoPhillips-Alaska’s press release on the Willow discovery.