Staying invested in Alaska: though cost on the North Slope can be up 60 percent higher than a company's global average, the outlook for 2004 is good for investment dollars to the state.

No matter what the issue is for the oil and gas industry in Alaska for 2004-the bottom line will be the bare-bones, hardcore competition for investment dollars for infield development and especially for new exploration and new developments.

This is not bad news; it is simply the new fact of life.

A dramatic shift in global exploration spending is taking place, ac cording to a report by the firms of John S. Herold and Harrison Lovegrove. Cost is driving the industry from up stream North America (where finding and development costs soared to $11.85 per barrel of oil equivalent in 2002 from 4.76 in 1999) to less expensive plays in Asia, the Pacific, Africa and the Middle East (where costs average $3.31 to $3.33 per barrel).

HIGH COST OF DOING BUSINESS

Investment dollars to Alaska are competing against even higher odds: Cost on the North Slope can be up to 60 percent higher than a company's global average.

Alaska companies have been hammering the cost factor hard with--increased investments in technology and by concentrating on being more efficient.

"The price of oil doesn't matter when it comes to competing for investment capital, cost does," one company president told an Alaska audience. "If prices are high for North Slope oil, they're high for oil from anyplace. Costs of producing and transporting it gives one area a competitive advantage or disadvantage compared to another source. To successfully compete for investments, we need to lower costs."

At the right time and the right place, the state of Alaska is also taking a hard look at the cost factor. Gov. Frank Murkowski is very clear in his intent to keep Alaska competitive for oil and gas investment dollars.

OPEN FOR BUSINESS

And the industry is staying invested in Alaska. The outlook for 2004 is one of good news.

1. The oil and gas companies in Alaska are making billion-dollar investments in Alaska and are expected to continue to do so throughout 2004.

2. Because of this investment, production on the North Slope is holding steady. Short-term production on the North Slope, with increased investment in the core Prudhoe/Kuparuk fields and new investment and production from satellite fields, is expected at just less than or more than 1 million barrels per day through the end of the decade.

3. The proved and recoverable reserves of oil on the North Slope hold the possibility for production for the next 60 years. Alaska's gas resources are the largest gas resources in the U.S.

Combined capital budgets for the three largest companies, ConocoPhillips, ExxonMobil and BP, are more than $1 billion in the Prudhoe Bay/Kuparuk fields alone. This winter three companies are drilling exploratory wells on the North Slope: ConocoPhillips, TOTAL and Armstrong/Kerr-McGee. Additional multi-millions are being spent for new ships, satellite fields and technology. All Cook Inlet companies--Marathon, UNOCAL, ConocoPhillips, Forest Oil, XTO--have made substantial new investments in each of the last three years. Independents--Anadarko, EnCana, Pioneer, Armstrong, Andex, Evergreen, Aurora Gas, Pelican Hill and Winstar--have all made new investments in Alaska over the past three years and are expected to make additional investments in 2004.

INDUSTRY INVESTMENT CRUCIAL

Industry investment in Alaska continues to be crucial to the state's economy. Oil revenues continue to make up 75 percent of the state's unrestricted general fund. The oil and gas industry generates 12 percent of private sector jobs and 20 percent of the private-sector payroll in Alaska. Indirectly and directly the oil industry generates nearly 35,000 jobs in the state. The direct payroll of the oil and gas companies continues to be about 400 million. Well over $1 billion is spent purchasing goods and services from contractors and vendors in Alaska. That means about $2.1 billion in combined payroll and purchasing in Alaska, about the same as our general fund spending each year.

Because of these investments, the Department of Revenue projects that for the rest of this decade, oil production on the North Slope will average 990,000 barrels per day ... just about what it is today. This is important because it provides a breather for the new opportunities to be developed and the state to finish the job of getting its fiscal house in order. This breather does not come automatically. It assumes billions of dollars of investments in new fields and it takes for granted continued new investments of more than $1 billion a year in the core fields of Prudhoe Bay/Kuparuk.

EXPANDING OPPORTUNITIES

Just as there is a new reality in worldwide competition for investment dollars, there is a new reality for oil production in Alaska. In 1990, 93 per cent of North Slope production came from just two fields-Prudhoe and Kuparuk. The remaining 7 percent came from fields smaller than 100,000 barrels per day. Today 40 percent of our production comes from these new, smaller fields. By 2010, almost 60 per cent of the North Slope production will come from these new, smaller fields. Shy of the Arctic National Wildlife Refuge being opened, it is likely that this trend will continue.

The projections of just less than or just more than 1 million barrels per day to the end of the decade rely on production from Northstar and Alpine, and the projected development of Nanuk, Fiord, Sourdough, Point Thomson and Liberty.

Smaller fields are challenged by a lack of economic scale and generally face more marginal economics, it will take a combination of technical innovation, cost reductions and good fiscal policy to ensure that future new developments become a reality.

EXPENSIVE DECLINES

Mature fields have their own challenges, which is why it takes $1 billion a year in investments to keep Dudhoe and Kuparuk producing at their most economic levels.

In 1990, Prudhoe was producing about 1.4 million barrels a day; Kuparuk was producing about 300,000 barels a day. Right now about 435,000 barrels a day comes from Prudhoe and 158,000 barrels a day comes from Kuparuk By 2010, 326,000 barrels a day' is expected from Prudhoe and 122,000 from Kuparuk.

Declining fields are more expensive to operate. It quite simply takes a lot more money to produce a barrel of oil today in these fields than a few years ago. It will continue to cost more.

RESERVES TO LAST

A critical advantage for Alaska has to do with reserves. Alaska has good rocks. Without good rocks you are finished as an oil and gas province. Alaska is not finished. The proved and potentially recoverable reserves of oil and gas on the North Slope hold the possibility for production for the next 60 years.

According to the Department of Energy, the North Slope has 4.85 billion barrels of proved oil reserves--22 percent of the total U.S. proved oil reserves. The North Slope also has 35 trillion cubic feet of natural gas reserves--20 percent of the total U.S. natural gas reserves and 7.1 billion barrels of additional potentially recoverable reserves, which does not include NPR-A, the federal outer continental shelf or ANWR.

Of course, talking about producing these billions of barrels of reserves on the North Slope is like talking to a bright 18-year-old about the possibility of being president of the United States. A whole lot of stuff has to happen in between the possibility and the White House.

The important fact is that Alaska does have reserves. This is what Gov. Murkowski focuses on when he talks about the future of Alaska. This is what the company presidents and managers focus on when they make the case for investments in Alaska. Reserves mean possibilities.

All of these possibilities will be on the oil and gas menu for Alaska in 2004-either in the planning stage, the negotiating stage or the real time doing-it stage.

A FUTURE IN HEAVY OIL

One of the possibilities is heavy oil. The future of the North Slope will include increased production of heavy oil. There are literally billions of barrels of heavy oil in place underneath the existing infrastructure at Prudhoe Bay, Kuparuk and Milne Point. The challenge is to get the thick, cold, heavy oil in fields such as West Sak, Schrader Bluff, Orion and Polaris to flow at economic rates.

In 1990, only a few thousand barrels of heavy oil per day was produced on the North Slope. Today about 30,000 barrels per day is produced. By 2010, we could be producing more than 150,000 barrels per day. New technologies and favorable fiscal polity will be the keys to achieving these rates.

CHALLENGES AHEAD

New fields in National Petroleum Reserve Alaska are another possibility. It is expected that future oil and gas operations will extend to more and more remote regions of the North Slope. As the new production gets further from infrastructure, the cost and technical challenges of exploration will increase.

As the industry moves further into NPR-A, companies will need to continue to work closely with residents of the North Slope Borough. The role of subsistence, the role of traditional knowledge, is all part of the partnering and the being mindful of local concerns that the industry and the borough residents, along with the state and federal government, must work out together.

Increasingly short winter seasons provide additional challenges. Right now the companies can only operate 100 days or less each year. It takes three years to do what they could do in other places in one year. This challenge goes hand-in-hand with the challenge of meeting the high environmental standards expected on the North Slope. The standards and technical achievements of the industry in Alaska are a great source of pride, but there is an added cost. Ice roads, for instance, cost about $1 million a mile, and melt in the spring.

Probably the greatest single change for the oil and gas industry in Alaska will be the shift in the industry from oil toward gas. The construction and start up of a gas export pipeline from the North Slope will be equivalent to the start up of a 600,000- to 700,000-barrel-per-day oil field. It will open up a whole new business for Alaska.

The propose ANS gas pipeline will be the largest, most expensive domestic energy project ever constructed. It is projected to cost approximately $20 billion and will require 25,000 man years of construction.

So, great rocks, great possibilities, great challenges-including remote fields, the distance to market or tide water, moderate size fields, a technically difficult resource, increasingly short working seasons, high environmental standards, subsistence concerns of local residents, harsh climates--this is where the cost factor comes in. This is where technology and efficient management and a little luck from the industry side come in. This is where access to land, cost-effective environmental standards, permit streamlining, stable fiscal climate, incentives, come in from the public policy side.

This is where the rubber meets the road on competition for investment dollars.

And everybody has a role to play.

GOVERNMENT SETS THE AGENDA

Gov. Murkowski has set the agenda and the tone for his administration and the state on new development, new jobs and new energy for the future. He and his advisors have focused the state on new oil and gas development in Cook Inlet, on the North Slope, in Bristol Bay and in Interior Alaska. They have focused on taking the steps necessary to support the development of the huge North Slope gas resources. They listened when the industry told them that the best thing government could do is streamline the permitting system, have a stable fiscal policy and be willing to consider incentives where they matter. They listened and they acted.

Key Alaska legislators stepped to the plate and moved ahead with legislative initiatives-sometimes initiatives that not everyone agreed with. They took the heat for what they believed is best for Alaska now and in the future. The Legislature is already making a difference.

Here is what Alaska has done in 2003 to make the state more competitive for new investment dollars:

* Passed legislation updating Alaska's Coastal Management Program to provide a local voice without duplicating other jurisdictions;

* Passed legislation establishing an exploration incentive credit to encourage new development;

* By legislation extended the renewal period for oil spill contingency plans;

* By legislation began streamlining the air permit program;

* By legislation established Department of Natural Resources as a lead agency to coordinate for large projects;

* By legislation passed an act prohibiting discrimination in awarding of attorney fees;

* Administration is establishing a protocol for packaging all permits in one bundle;

* Administration is establishing a protocol for coordinating permit timelines and requirements among state, federal and local government managers;

* Administration is focusing on reasonable timelines that are adhered to;

* Administration is focusing on clarity of standards and process.

The year 2004 will be the making-it work time as the regulations are being written to carry out the mandates of the legislation. There will be a watch and see attitude to see if the bureaucracy will stall or move in the direction intended. There will he fits and starts as there is with new focus and new programs. But by the close of 2004, the hard work of the past session and the hard work of future sessions are expected to pay off.

The companies are responsible for efficiencies, for the technologies, for the financial risk of moving forward. The state government is responsible for the business climate, the fiscal climate, the regulation climate and process, and the incentives to go the extra mile.

The goal is for the oil and gas industry to stay in invested in Alaska--for 2004 and for the next 50 years.