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Cook Inlet oil questions.

Arco has announced that its Sunfish strike in Cook Inlet may have 750 million barrels of crude. Industry experts speculate about changes the find will spark throughout southcentral Alaska.

Analysts are grinning from ear to ear at Arco Alaska Inc.'s announcement last month that the Sunfish discovery in Cook Inlet may contain as much as 750 million barrels of oil. On the street, jubilation was contagious, with some optimists casually rounding the published figure up to a cool billion barrels and others spending the greenbacks sure to follow the flow of crude.

"I was pretty thrilled," says David Johnston, chairman of the Alaska Oil and Gas Conservation Commission, who was traveling outside the state when he heard Arco's announcement. He predicts "tremendous benefits" for the economies of Anchorage and the Kenai Peninsula. "It just staggers the imagination, it's huge."

Johnston, whose agency is responsible for overseeing industry efforts to obtain maximum productivity from Cook Inlet oil field, says it would be reasonable to expect that 30 percent to 50 percent of the 750 million barrels in reserves to be recoverable, given current technology and geologic understanding. While Arco's reserves estimate indicates the field is larger than Cook Inlet's McArthur field, Johnston says that from the standpoint of productivity, the two fields are comparable. The 600-million barrel McArthur field produced a peak of 45 million barrels a year during the 1970s.

Other industry experts agree the announcement is good news, but they, along with Arco officials, note there is work yet to be done to understand in detail the size and limits of the discovery.

"I don't think they know yet how they intend to develop it," says state petroleum specialist Dr. Charles Logsdon.

State labor economist neal Fried agrees that the 750 million barrels is an "impressive" figure, but says it's early to make assumptions about employment and other economic impacts. He notes that some production platforms in the North Sea are fully automated, an obvious damper on employment. While development of Sunfish will undoubtedly help sustain economic growth in southcentral Alaska and forestall the state's budgetary crisis, Arco's announcement does not presage a boom, in part because so much of the needed infrastructure is already in place.

"The psychological boost, although immeasurable, may be more important than any of the other things," says Fried.

According to Johnston and Logsdon, one of the most important benefits of the Arco delineation at Sunfish is that other oil companies are likely to perceive Alaska as a viable exploration risk and consider making new investments in the state. This would help reverse a recent trend for oil companies to invest exploration dollars overseas.

The techniques employed by Arco to delineate its discovery are still a matter of speculation, and according to a company spokesman, this information is proprietary. Although such technical angles are likely to be lost in the hype about royalties, revenues and hoped-for employment, any new exploratory approaches or newly-proven theories about the geology of the inlet could result in other oil companies re-examining their own properties with a greater degree of success.

Enticing Economic Impact

On the Kenai Peninsula, residents and communities have suffered from the gradual decline of the Cook Inlet oilfields and the shutdown of Chevron's refinery in Nikiski. To the unemployed and under-employed residents of the region, even the tentative nature of Arco's initial announcement didn't dim their feelings of jubilation.

Stan Steadman, executive director of the Kenai Peninsula Borough Economic Development District Inc., was meeting with his board of directors when Arco made its January announcement. The room was filled with a cross-section of borough residents, including those who work in the oil industry.

"The reaction was one of applause," Steadman recalls. "It's kind of a sigh of relief that something is going to happen out there again, a new lease on the future."

But borough officials have been quick to note that recent developments in Cook Inlet, including the Arco find and plans announced by Unocal to invest $119 million over the next three years in Cook Inlet properties, do not exactly constitute a boom. The borough mayor expects the economy to continue growing at about 4 percent a year. The real estate market is projected to remain stable.

Some skeptics have even suggested that Arco's prospects could be frustrated by thorny environmental and regulatory issues.

Others point to Marathon Oil Co.'s mid-1992 announcement that it would shut down some of its Cook Inlet operations because of low oil prices. This takes some of the sheen off the Arco find, critics say, and suggests that any good news from the volatile oil industry should be watched with caution.

Furthermore, the borough has a large local labor force, including many workers trained in the oil and gas industry. Hopefully, many of these who lost oil jobs during the last several years may be able to return to work.

No one foresees the kind of job growth from this new activity that would bring an influx of new borough residents, but local employment offices have already begun receiving job inquiries from outside Alaska.

Steadman says the primary economic boon for the local economy will be an increase in the tax base at a time when many residents were beginning to worry about cutbacks in government services, especially schools.

Although the $65 million Arco and Phillips paid to lease the tracts around their discovery is exempt from both state and local taxes, the borough can assess physical improvements and expansions, including oil platforms.

The most recent of the 15 platforms built in Cook Inlet is assessed at $75 million. Borough officials estimate that a new platform today will cost about $100 million, resulting in taxes of about $855,000 per platform per year. Additional tax revenues would come from new pipelines, wells and expansion of local service industries.

Where Will the Oil Go?

Invariably, as word of Arco's find has raised economic expectations, it has also incited environmental concerns. The inlet's infamous 30-plus-foot tides and winter ice exert a huge force on platforms, and there is always the fear of a well blowout.

Joe Sautner, with the Alaska Department of Environmental Conservation (ADEC), says that around the world, blowouts are extremely rare and that the state of offshore oilfield technology makes such an event in Cook Inlet "highly unlikely."

"I'm more concerned about the tanker traffic," says Sautner.

Oil industry analysts also agree that even under highest-volume scenarios, Alaska could only absorb a relatively small fraction of refined product.

Furthermore, while there is some technical capability to control the flow of oil from wells, Arco will have strong regulatory and market incentives to get the crude out of the ground and off to market somewhere. Oversight by the Alaska Oil and Gas Conservation Commission will ensure that any efforts to restrict daily flows will not shorten the life of the field and cut into state royalty payments.

Additionally, says petroleum economist Logsdon, Arco will come under heavy pressure to recover its costs on a fast track, and Cook Inlet crude is in demand.

"There's a deficit of sweet crude oil. It would be a Cadillac crude. There's ready market for that stuff," Logsdon says.

Forecasting how these assumptions translate into a realistic scenario requires a closer look at past and present shipping levels.

Looking Back at McArthur

Walter Parker, former state transportation commissioner and chairman of the Alaska Oil Spill Commission, remembers the peak years of Cook Inlet's McArthur field in the 1970s.

The field was producing nearly half a million barrels of oil a day. Three times a week, a tanker with a 500,000-barrel capacity would call on the Drift River Terminal, in the shadow of Mount Redoubt on the west side of Cook Inlet, to load its cargo of crude.

Presently, he says, Drift River is taking in about 36,000 barrels a day from 10 platforms and is receiving two or three tankers a month.

Parker says a risk analysis conducted by the Oil Spill Commission for Cook Inlet suggests the risk of a tanker spill is "slight" and that production levels would have to exceed those of McArthur to seriously raise the probability of risk.

The analysis was based on the whole history of production in the inlet to date, and included not only the Drift River traffic leaving Alaska, but also the traffic to and from refineries at Nikiski on the east side of the inlet.

"The risk is definitely going to go up," says ADEC's Sautner. But he notes that the risk could be partly mitigated if Tesoro Alaska Petroleum was able to take a substantial volume of the crude. This would involve much shorter cross-inlet tanker runs, or even a pipeline, to carry crude to Tesoro's Nikiski refinery.

Presently, Tesoro is eating a lot of cost to haul a tanker load of heavier, residual-laden North Slope crude oil from Valdez to Cook Inlet every 10 days or so to provide the refinery with feedstock. Just this year, Tesoro purchased crude from operators on the west side of the inlet, but it is unclear whether this is an experiment or a permanent arrangement.

With a ready market for Cook Inlet crude on the West Coast, prices to local refiners could still be stiff, even if they represented an improvement over the laborious tanker haul from Valdez.

"Tesoro would love nothing better than to get a lot of that oil," says Bill Stillings, general manager for Cook Inlet Spill Prevention and Response Inc. (CISPRI), the non-profit consortium of oil companies that contracts to prevent and clean up inlet spills whenever they occur.

With Tesoro's needs, capacities and markets posing a substantial question mark, it is difficult to project with any certainty how much of Arco's new oil will stay in Alaska, or leave via tanker as either crude or refined product.

Tanker Traffic Tiff

Even without a major increase in tanker traffic resulting from Arco's new production, regulators, industry and other interested parties are already embroiled in conflict about whether to require tankers to be escorted by tug boats.

The Cook Inlet Regional Citizens Advisory Council (CIRCAC), a citizen watchdog group created by federal statute, has asked that tanker escorts be mandated.

The Alaska Department of Environmental Conservation is leaning in the same direction. In a January letter to the U.S. Coast Guard, Michael Conway, director of ADEC's division of spill prevention and response, noted:

"Recent events, particularly the near miss in Valdez Narrows of the tanker Kenai that was averted by escort vessels, the engine malfunctions of three tankers in Cook Inlet, and the disastrous tanker Braer oil spill in the Shetland islands that resulted from engine malfunction have forced us to re-examine the issue of escort vessels and other prevention systems for Cook Inlet and its approaches. Because of the risk to the environment from tanker oil spills in Cook Inlet, the State is nominating the Cook Inlet area for additional Coast Guard rulemaking to define escort vessel requirements.

"Alaska is not satisfied with the prevention system for tankers operating in Cook Inlet," the letter concluded.

Stillings says a vessel capable of towing a disabled tanker is already stationed in the inlet. But escort proponents say the response vessel needs to be left free to respond to a spill immediately, especially if a disabled tanker is responsible for the spill.

Lisa Parker, executive director of CIRCAC, says it's too early to tell how Arco's new discovery will affect the volume of shipping in the inlet.

"There's a lot of possible scenarios," says Parker.

She agrees that risk factors could actually be mitigated if Tesoro didn't have to bring the North Slope crude oil into the inlet. New measures taken by the Coast Guard in the wake of recent vessel engine failures should ease many current concerns.

Citing Cook Inlet operators as "very conscientious," Parker says those concerned about increased tanker traffic can take a measure of comfort from the fact that Arco is in the driver's seat for the new development.

"I believe there will be increased activity in Cook Inlet. |But~ Arco Transportation |a subsidiary~ is setting the standards by which other companies are operating," she adds. "Arco Transportation takes prevention very seriously and that is of great benefit to the folks in Cook Inlet."

Awash in Rumors

In the end, no one can be sure what changes in tanker regulation there will be in Cook Inlet.

"You may wind up here with a port authority or traffic lanes or other measures we haven't needed in the inlet before. It's not highly regulated right now. We could wind up with a system similar to Prince William Sound if they find something really big," says ADEC's Sautner.

"There's a lot of rumors out there. A lot of them," he adds.

Stillings, manager of CISPRI, the industry-run oil spill response organization, says Cook Inlet regulation has been and will continue to be dynamic, as new rules come into force and debate continues over the vessel escort issue.

While a new discovery may spell tighter controls, he says the industry will continue trying to work closely with regulatory agencies.

"There are an awful lot of changes that I believe will take place in the next year or two," Stillings adds. "I think you're going to see improvements anyway. New oil in the inlet makes it easier to swallow for everybody."
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Title Annotation:Cook Inlet, Alaska
Author:Richardson, Jeffrey
Publication:Alaska Business Monthly
Date:May 1, 1993
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