Plan aims to make 'orphan pools' viable

Royalty waiver proposal floated

Posted: Wednesday, April 10, 2002

Spread out amongst the aging but still producing reservoirs of oil and natural gas beneath Cook Inlet lie pockets of product cut off from the main pools by geologic formations, according to available high-tech seismic data.

Oil production companies won't drill to them, however, because the amount of product they contain is thought to be too small to be profitable, too small to warrant the expense and risk under existing state land leasing rates.

But what if that equation could be altered so that those pockets looked more attractive to inlet oil and gas companies? An idea proposed by a group of Kenai Peninsula businessmen might provide oil companies with just such an incentive.

Among those who first floated the idea were Dan Ungrue, a superintendent with Peak Oilfield Services, Jim Evans, manager of Air Liquide America, a Houston, Texas-based supplier of welding equipment and industrial gases, and former Kenai Peninsula Borough Assembly member Jack Brown, now business manager of the borough's Community and Economic Development Division.

What began a year ago as casual conversation about how to keep the oil industry alive and well in the Cook Inlet has turned into a draft Senate bill -- yet to be introduced -- which proposes a one-year waiver on all state royalty payments for wells drilled to tap so-called "orphan" pools in Cook Inlet.

Ungrue said the proposed legislation was not an oil industry idea, and oil companies, as far as he knows, are not lobbying for it at this time. But he thinks the idea has merit, and once legislation is actually introduced, the industry will support it.

Cook Inlet's reserves of oil and gas are dwindling, Ungrue said. But high-tech seismic readings show pockets of product that might be profitable if the companies get some tax relief. The marginal reserves also could extend the life of the Cook Inlet oil and gas industry by a decade or more, he said.

Just how much product is there the oil companies aren't saying. That remains an industry trade secret. But in Ungrue's opinion, if those pockets aren't pumped soon, they may languish below ground forever. The infrastructure needed to tap them -- the platforms, drilling equipment, pipelines and personnel -- is here now, but could be gone in the not too distant future.

Indeed, some currently producing platforms actually lose money. But dismantling them is so costly, it is cheaper to keep pumping while waiting until such time as several platforms might be dismantled at one time, Ungrue said.

"One day you'll wake up and they'll be gone," he said.

Thus, the time to tap marginal fields is now.

"From what I understand, I think (a royalty waiver) could extend oil production's life as much as 10 years," said Jim Evans, who also is president of the Kenai chapter of the Support Industry Alliance, which he said has been promoting responsible development in Alaska for 25 years. The lost royalties wouldn't mean much in terms of revenues to the state, he added, but extending the life of Cook Inlet fields would mean a great deal to the local economy.

"It would provide a lot of high-paying jobs," Evans said.

A draft bill prepared by the Legislative Affairs Agency proposes amending the oil and gas leasing provisions of the Alaska Land Act by granting the one-year waiver of royalty payments to companies that go after certain carefully defined orphan pools. The issue of which pools is complicated, but in general, here is how it would apply.

Existing language in the Alaska Lands Act already contains a tax break cutting the royalty in certain marginal Cook Inlet fields from 12.5 percent to 5 percent on the first 25 million barrels of oil and the first 35 billion cubic feet of gas. Those fields were discovered prior to 1988 and have been undeveloped or shut in from at least January 1988 through December 1997.

They include fields at Falls Creek, Nicolai Creek, North Fork, Point Starichkof, Redoubt Shoal and West Foreland. That tax break was meant to encourage their production.

The tax waiver proposed in the draft legislation would not only wipe out the remaining 5 percent on those fields, but also would apply to some -- but not all -- orphan pools around existing reservoirs elsewhere in Cook Inlet Basin, according to Jack Chenoweth, a legal counsel with the Alaska Legislative Affairs Agency's Division of Legal and Research Services.

While certain other fields covered under tax-break provisions in a separate section of the law would not be eligible for the waiver, the waiver would apply to orphan pools positioned around main reservoirs yet to be discovered, Chenoweth said.

Evans said the waiver doesn't have a down side as far as he can see. Extending the life of Cook Inlet production is good for everyone -- more taxes for the borough, long-term employment and money in the economy's pipeline, not to mention one other factor.

"There is nothing to say that what appears to be a small pool might not turn into a large pool," he said.

Giving up a small royalty in exchange for a lot of years of production "seems like a small price to pay," he said.

Last week, the Kenai Peninsula Borough Assembly agreed to send a letter to the Legislature expressing support for waiver legislation. Time is slipping away, however.

Sen. Jerry Ward, R-Nikiski, and Rep. Mike Chenault, R-Nikiski, said this week that it is too late in the session for individual members to introduce bills, though committees or committee chairs may still do it. Neither expects that to happen, though both said the idea of a tax waiver makes a lot of sense.

Brown said the timing isn't that important, ultimately.

"It may be too late (this year), but if it is, this is a good start on next year," he said.

From the perspective of the oil companies, the risk factors are higher in Cook Inlet than in many other places largely because the inlet is a mature field, Brown said. Nevertheless, companies are exploring, and that activity tells him the oil companies believe there are commercial quantities remaining to be exploited.

Brown also said that the grass-roots effort begun on behalf of waiver legislation is likely to be seen as proof that the peninsula community supports the continued presence of oil companies.

"That goes a long way with the corporate folks making decisions to spend dollars in this area," he said.

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