Wednesday, February 04, 2009

Decrease In Natural Gas Drilling In Utah And Wyoming Does Not Bode Well For Alaska; Conoco And BP Sustained 4Q2008 Losses

We've become so accustomed to and dependent upon Big Oil in Alaska that we take their presence - and their taxes - for granted. We frequently go beyond responsible criticism of their actions and transform them into "al-Qaeda in Alaska".

But the cornucopia isn't bottomless. For the first time in quite a while, two of the Big Three producers experienced quarterly losses. British Petroleum just checked in with a 4Q2008 loss of $3.3 billion, although their overall profit for the year was still $21.2 billion. Earlier, ConocoPhillips reported a stunning 4Q2008 loss of $31.8 billion. Only Exxon reported a profit during 4Q2008 - $7.82 billion. Free-falling oil prices were the catalyst. The "windfall" profits of previous quarters will be used to carry the producers through these upcoming leaner times, but Conoco's losses were significant enough to cause them to trim their workforce by four percent and reduce charitable contributions.

But even though oil & gas prices have now stabilized, the effects have been felt in the Lower 48 as well, where production costs are lower and environmental challenges less severe. On February 3rd 2009, the Deseret News reports that tumbling petroleum prices have slowed the pace of drilling in Utah's biggest gas field, the Uintah Basin, to the lowest level in four years. The number of drilling rigs operating statewide is down to 23, or fewer than half the record number of rigs that were working last August, according to the Utah Division of Oil, Gas and Mining.

Most of Utah's drilling activity takes place in the Uintah Basin near Vernal, where one operator, Colorado-based Gasco Energy Inc., said declining natural gas prices combined with "sticky high service costs" have made drilling unprofitable. Gasco still operates 120 wells but has put on hold an experiment in horizontal drilling, which can dramatically boost production if the drill finds the right gas seam, typically thousands of feet underground. The number of gas wells completed in January was 63, down from 84 for the same month last year. Drilling is at its lowest level since December 2004.

The slowdown also is being felt in Wyoming, where the number of drilling permits fell to 446 in January from 623 for the same month last year. "That's an indication that the permit activity is slowing," said Bob King, interim supervisor for the Wyoming Oil and Gas Conservation Commission. "It hasn't been long enough to make a definite trend, but we definitely have seen a drop."

The point: If production is continuing to slow in Utah and Wyoming, where costs and challenges are less than in Alaska, what reason have we to expect that the producers will suddenly ratchet up production here in Alaska? We have to be prepared for the possibility of a sustained slump. Our penchant for jacking up oil and gas taxes on a whim must cease.

The other point: We must try to create a more business-friendly climate in Alaska. The misguided cruise ship initiative we passed two years ago is now starting to put a damper on cruise ship activity. We just narrowly averted imposing additional restrictions on the mining industry last summer, when we recovered our wits and shot down Ballot Measure 4. If Alaska is open for business, we must talk and act like it.

This becomes even more important now that we know that the Palin Administration busted the bejesus out of their revenue forecast. In December, the Administration forecast a $450 million shortfall based on a projected oil price of $62 per barrel, although leading commodity forecasters were projecting an oil price in the $40-$50 range. Now the Administration is forecasting a $1.65 billion shortfall based on a more realistic $41.17 per barrel oil price. More about this issue on Andrew Halcro's blog. These people in Juneau are a bunch of freaking amateurs. Fortunately, we have over $7 billion in savings, but the Palin crew could end up burning that up in no time.

I don't suggest we roll over like puppy dogs for the Big Three like we sometimes did during the Murkowski Administration, but the anti-producer rhetoric of the current Administration must be moderated. The recent decision by the Department of Natural Resources to allow Exxon to drill two wells at Point Thomson is a cautious step in the right direction. We must see more of this from the Palin Administration.

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