10-21-13

Jim Prentice's LNG message yesterday was as important to Americans as today's commentary may be to future investors in Canada's oil patch!  -dh

Take Heart But Take Heed!

Alaska Must Never Become Like Hostile Argentina

Cautious Optimism From Alaska's Oil Patch

Commentary by

Dave Harbour

Would you rather invest your money in a safe place or an unsafe place? 

Spanish oil company, Repsol, has answered that question by shifting its attention from Argentina to Alaska and other more reliable investment areas among the some three dozen member states of the  OCED (Organization for Economic Cooperation and Development). 

In  1993 Repsol paid $13 Billion for nearly 60% of YPF, the Argentine oil company.  In 2010, Repsol discovered a significant oil shale play in an area called Vaca Muerta.  In 2011, Argentine President Cristina Fernández de Kirchner took action leading to nationalization of most of Repsol’s YPF interests.  Since then, production has declined and the trade deficit has increased.  In wake of the expropriation, according to Forbes, “The EU, along with the UK, Mexico, Chile and Colombia” condemned Argentina’s action.  The U.S. State Department also condemned nationalization of the company. 

Last Friday, at a presentation to Commonwealth North’s Energy Action Coalition, Repsol’s Alaska Operations Manager, Bill Hardham (NGP Photo), told members his company acquired a large lease position in Alaska in 2011 amid peaking tensions in Argentina — as Alaska’s oil tax reform effort was promising an improved investment climate here. 

Oil tax reform finally did occur later with the 2013 passage of SB 21, though a short time later environmental activists and anti reform legislators — among others — promoted repeal of the law via a voters' referendum.  The question of whether to repeal oil tax reform will appear on Alaska’s primary ballot next summer.

Recognizing the voters' referendum to repeal tax reform during the primary election next summer, Hardham said that, “We purchased leases and partnered with Armstrong with confidence that Alaska would adopt a tax reform proposal.  Repsol remains confident that Alaska voters will see the benefit of filling the pipeline and attracting new investment into the state.” 

Hardham briefed members on the company’s significant progress since obtaining its Alaskan stake.  In addition to offshore leases in the Chukchi and Beaufort Seas, Repsol  has a 70% working interest in and is operator for 700 thousand leased acres on the Alaska North Slope (ANS).  In 2012 the company completed 48 miles of ice roads and drilled two exploration wells.  Last winter, the company completed 38 miles of ice roads, drilled three wells and identified gravel sources for future operations.  This winter, the company is, “well underway with its planning and permitting,” Hardham said, for 22 miles of ice roads, an air strip, 3 wells, appraisal of last year’s work and flow testing. 

“We want to be here for the long haul,” Hardham emphasized – more than once. 

At conclusion of the presentation, NANA Development Corporation’s Senior Vice President and Chief Operating Officer David Marquez said, “I appreciate your confidence in Alaska voters but what would a vote for oil tax repeal do to your plans?”

“Plans would change,” Hardham said. 

Commonwealth North President and University of Alaska – Anchorage Chancellor, Tom Case wondered about ‘surprises’ the company had experienced upon its arrival in Alaska.  Hardham spoke of the complexity of the permitting process and said, “Without our very capable consultants, we would have had a very difficult time navigating the regulatory process.” 

Another member asked about what ‘we’ could do to help.  “The best thing Alaskans could do would be to defeat the referendum to repeal tax reform.  Other than that,” he said, “it would be nice if you could lower Alaska’s very high operating costs.”  The audience greeted that commentary with knowing smiles and a little ironic laughter. 

Former Revenue Commissioner, now a Great Bear Petroleum LLC Vice President, Pat Galvin, asked about Repsol’s plan regarding expiring leases.  Hardham replied that the company regarded expiring leases as a ‘driver’ of plans.  He said that expiring leases would have priority attention while in other cases the company could seek extensions of expiring leases. 

Hardham concluded with a summary of the many consulting and contracting opportunities Repsol’s development projects would require, including employment for several hundred Alaskans.   

“Hopefully, we’ll have multiple phases of development,” he said, a statement of optimism chastened by caution.  It was clear that the jury is still out on whether Alaska’s policies will enable the company to continue its progress, or whether a repeal of oil tax reform will align Alaska more with the policies of Argentina.  

One listening to the presentation could take heart at Repsol's large, decisive and rapid Alaskan investments.  But Alaskans who wish to learn from others should also heed the counsel of Fredrik Erixon, director of ECIPE, the world economy think tank in Brussels.  The author of “Pariah in the world economy – how should other countries respond to Argentina’s return to  economic nationalism”, he wrote this spring that, “ the most damaging consequence of the confiscation is that the government has undermined efforts to fund new production in the giant oil shale reserve, Vaca Muerta, discovered by Repsol in 2010.  The expropriation has created a very uncertain investment environment, to say the least, for potential partners in Vaca Muerta.”

Repsol’s management will, no doubt, long remember Argentina’s 2011 expropriation of over $10 billion in shareholder assets, including the undeveloped shale play called Vaca Muerta.   Vaca Muerta is fittingly translated as, “Dead Cow”. 

One hopes that Repsol’s current investment in Alaska is greeted by a friendlier regime – one that does not take assets by increased taxation after investments are made—as has been Alaska’s recent practice. 

After all, “killing the Alaskan goose that lays golden eggs, up here”, in principle, is similar to “killing an Argentinean cow that sustains a faltering economy, down there”. 

Either analogy repels and is repugnant to investors.  

Today's news briefs courtesy of the Office of the Alaska Gas Pipeline Federal Coordinator:

• Putin orders tax breaks for gas fields near Yamal LNG
• Gazprom says it is not worried about U.S. LNG exports
• Rosneft signs eastern Siberia joint-venture deal with Chinese
• South Korea move to reduce nuclear power could boost LNG demand
• New LNG storage tanks at Japanese power plant can hold 7 bcf
• China looks to limit some users to ease winter gas shortages
• LNG plants in China protest natural gas price hike
• BP chief advocates market-based natural gas pricing in India
• Imperial says LNG might be an option for Mackenzie gas
• Shell exec says not all shale plays turn out well
• Consultant doubts new federal rules will slow oil and gas production
• New Brunswick shale gas protest turned violent
• N.Y. residents protest fracking and also offshore LNG import terminal
• FERC warns of natural gas, electricity price spikes in New England
• Canadian officials investigate bird kill at LNG import terminal
• North Dakotans sue over lost royalties from flared gas
• Opponents testify against Enbridge plan to move Alberta oil eastward
• Expanded Alberta oil-to-rail terminal can handle 120,000 barrels a day