Until recently, if you produced oil in Alaska you probably worked for one of the Big Three -- ConocoPhillips, BP or ExxonMobil -- but that's changed with arrival of the "independents." These small, nimble companies have an increasing presence in Alaska's oil patch. They come from all over the world and just down the street -- following the same dream that's always lured people to Alaska: striking it rich off the state's bounty of natural resources.
Before the big oil strike in 1968, independents were numerous in Alaska. "The little guys," as Jack Roderick refers to independent oil companies in his book, "Crude Dreams," didn't produce oil; they were, however, able to get in the game buying leases and selling them to those who did. Many, including Robert Atwood, the former editor and publisher of the defunct Anchorage Times, got rich doing so.
All that changed after Alaska revised its leasing terms to "competitive bidding," where the highest bid gets the prize. Inevitably, that was the "megas," as the Big Three are sometimes called.
But today's little guys are producing oil. They're renting rigs and crews. They're pouring over seismic charts. They're getting their hands dirty. They're pumping oil. And, pretty much for the first time in about three decades, little guys have a shot at the prize.
Many see the emergence of these independents as a good sign. Joe Balash, deputy commissioner of Alaska's Department of Natural Resources, called this resurgence of interest in Alaska's oil patch beyond the "legacy units" -- areas that first attracted Big Oil and kept the multinationals here -- "a fantastic thing." He and DNR Commissioner Dan Sullivan are doing everything they can to lure those companies to Alaska. Sullivan spends much of his time crisscrossing the country meeting with both small and large companies, touting the benefits of doing business in Alaska. DNR is placing ads in various publications, touting that "Alaska is open for business."
There is a measure of good-news bad-news about the development. Arrival of the independents signals the current natural life cycle of Alaska's oil patch is waning. The elephant fields have been found, facilities built, resources mostly extracted. Small pools of petroleum are much of what remains. That said, Alaska's small pools aren't so small. According to the United States Geological Survey, dozens of North Slope pools hold between 50 million and 150 million barrels oil. Elsewhere, beyond the shadow of Prudhoe Bay, these finds would be significant. Enough to make lots of people extremely rich.
However, even if independents can produce these myriad small pools of petroleum, it still won't be enough to fill the trans-Alaska pipeline system, 800-plus miles of pipe that transfers Alaska's North Slope oil to tankers in Valdez.
Seemingly overnight, Alaska's pipeline is nearly two-thirds empty.
But every little bit helps.
Drilling a well is expensive, and independents know that doing business on Alaska's forbidding North Slope is fraught with risks. It's a frigid, otherworldly moonscape most of the year. Machinery breaks down. Environmental regulations are stringent. Negotiating with the Big Three -- who own or oversee most of the facilities needed to get oil to market -- can be messy and trying.
The Alaska tax structure called ACES, enacted in 2007, includes steep taxes -- about 53 percent, including royalties, on oil selling for $100 per barrel -- targeted at companies already producing oil.
The Feds take another 17 percent, leaving the companies with about 30 percent profit. Much of that, though, is pure profit because the infrastructure is largely paid off.
But lawmakers that crafted ACES realized Alaska's oil future relied on exploration. The Big Three, the megas, had for at least a decade all but given up on exploring the North Slope. ACES aimed to change that by offering lucrative tax credits to independents bold enough to prospect in Alaska's oil fields.
The credits range up to 40 percent for exploration, 25 percent to build infrastructure and a $10 million annual credit on profits for companies that produce less than 50,000 barrels a day. All together, they provide a huge incentive to independents.
Jim Weeks runs one of those independent companies and is the rare oil man willing to talk freely about his business. Although he thinks Alaska's windfall profits tax is too high, he acknowledged he couldn't explore without the credits.
"It's a very good deal for us," he said.
Weeks said this not from a glass-encased high rise office. He spoke from his home, a massive triplex turned single-family dwelling in Anchorage's South Addition. It's the kind of office that could perhaps become the new normal for Alaska's oil men.
Making of an independent oil company
The newcomers hail from Italy, Spain and Switzerland, from Colorado and Texas. So far, only two that have actually punched holes in the tundra are home-grown Alaska companies: Brooks Range Petroleum and UltraStar Exploration LLC. Brooks Range, however, is nearly a mega company compared to UltraStar. Brooks Range has about eight employees when it's not in active production and as many as 80 when it is. It has 241,000 acres under lease. It has drilled 10 wells, with another one planned for this winter or early spring 2012. It has agreements with big capital venture firms.
UltraStar, formerly known as Winstar (and Petersburg Energy before that), was founded in the mid 1990s by commercial fisherman John Winther and Dale Lindsey, the owner of Petro Marine Services, the largest fuel distributor in the state.
Both are native Alaskans. Both were heavily involved in protesting the 1999 acquisition of ARCO by BP. Both spent their own time and money helping create an agreement -- called the Charter Agreement -- after that acquisition that gave independents access to the Slope. Both dreamed of a big find and bought some acreage. Neither knew the business. They paid too much for the leases and with a seven-year drilling deadline, found themselves in trouble.
They called Weeks. Weeks knew the business. Weeks's heritage is Big Oil. He was raised by his father, an oil man in Bairoil, Wyo. His degree is in petroleum engineering. He speaks the masculine nomenclature of oil -- casings and penetration, tight holes, and fishing in tight holes for jewelry, of all things.
An entire vocabulary has been developed over time by men working the male-dominated oil patch, describing the activities surrounding their holes.
Weeks's career largely tracks with that of many Big Oil men. He spent time at ARCO, some of it in Alaska, where both of his children were born. In 1995 he was sent to China to head up the company's operations there. When he came back to Alaska in 1999, no ARCO left, Weeks sought other challenges. And that's when his future partners called.
The prize
Working as an independent in Alaska's oil fields -- or any other oil field, for that matter -- is no career path for the faint-hearted. Millions of dollars, reputations and careers are at stake. Rigs have to be leased. Crews hired. Countless hours spent staring at seismic maps, charts and graphs. And while all of that helps, no amount of technology can pinpoint oil. As much as anything, it comes down to a gut feeling and a lot of luck. And independents typically don't enjoy flush cash reserves or Big Oil support if they fail.
UltraStar has already drilled two wells. Both came up empty. Weeks is working on the capital to drill a third, where he's sure, absolutely sure he'll find oil. How much is the next question.
Even finding a well that would produce 1,000 barrels a day would be a success for Weeks (by comparison, North Slope fields send nearly 600,000 barrels a day down the trans-Alaska pipeline).
Weeks's home is across the street from Bill Allen, the founder and former CEO of the now-defunct VECO Corp. who may perhaps best be known as the federal government's star witness in its investigation into Alaska political corruption. Weeks attended parties at Allen's home, most notably Rep. Don Young's famous pig roasts. He sold Allen his Little Su Lodge for about $720,000.
He is, in many ways, still an old-school oil man. And in true old-school fashion, particularly old-school ARCO fashion, Weeks is a gambling man. After the first dry well, a half dozen partners high-tailed it out of there. Three remained and Winstar became UltraStar. And now UltraStar is gambling on finding black gold in a section of the 3,800 acres it's leased.
It is, indeed, a gamble. One that will cost UltraStar about $13 million from the time drilling starts until the bit goes down as far as intended. Find oil and the independent will spend another $25 million -- and at least two years -- before there's so much as a dime of profit. That's if everything goes right: the well, the permitting and a big find. And this assumes a deal can be worked out with the majors for access to the facilities needed to get oil to market.
Relying on the Big Three to grant access to facilities is not the biggest gamble independents make when they decide to do business in Alaska, but it's not a small one, either. When asked about the issue, various independent oil men only offered a tense silence. The process is likely fraught with politics.
The facilities -- roads, pipelines, separating and conditioning plants built over the years by the Big Three -- are needed to turn the black stuff into something that goes into the trans-Alaska pipeline. The facilities have cost the majors dearly. And sometimes they're understandably reluctant to open those facilities to oil men with no hand in building and developing that infrastructure.
"Until recently, they've had that playground all to themselves," Weeks said. "(The big producers) are very willing to work with us, but they aren't cutting us any slack," either.
The majors might not be so willing, even today, were it not for that Charter Agreement, fought for by John Winther and Dale Lindsey after the BP-ARCO merger, to grant independents access. That agreement requires ConocoPhillips and BP to license proprietary North Slope seismic data, to buy crude from small producers and to grant access to processing facilities, "on reasonable terms."
If the companies and an independent can't agree on what's "reasonable," they go to arbitration, according to the agreement.
Weeks said it's the Charter Agreement that makes his business possible.
But because Exxon has a third of the say in much of the Slope's operations, it can get a little tricky and expensive. Because Weeks had the old-school connections, he was able to work out a deal for access to Exxon's seismic information. It was a deal that involved quite a few phone calls, and a dinner.
Not everyone has those connections.
The business model of the other Alaska-grown independent oil company, Brooks Range, involves building its own processing facilities rather than using what's already there, said Jim Winegarner, the company's vice president of land and external affairs.
Had Weeks not gotten access to that seismic information, would he have taken the majors to arbitration? Probably not.
"They'd grind us into talcum powder," he said.
If they could do that to Weeks, how would other, less connected independents fare?
It's those issues -- facilities access, access to geologic data, taxes -- that will be worked out on the political stage and in the years ahead. Alaska's production tax is steep; the fight to lower it was fought bitterly during the last legislative session and likely the next. Alaska's generous exploration tax credits make drilling pencil out for UltraStar, Brooks Range and other independents. And the credits make those investing in Alaska's smaller petroleum pools very rich.
No doubt, Weeks and the other "little guys" will be large players on the political stage as these battles are waged. They may eventually even replace the corporate titans who fly into Alaska from Texas on private jets. From their home offices, they'll be replacing them one barrel at a time.
That is, if Alaska can keep them in Alaska.
"There's money to be made in Alaska. It's an oily place," Weeks said, wearing an oil man's gambling grin.
Contact Amanda Coyne at amanda(at)alaskadispatch.com