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Slippery slopes: native firms adapt to changing oil industry conditions.

The three Native corporations most active in oil and gas exploration or development on their vast federal land entitlements find themselves in a quandary: as industry continues its flight from Alaska -- once among the nation's most attractive oil domains -- investment capital continues to evaporate at a frightening pace.

However, Cook Inlet Region Inc. (CIRI), Arctic Slope Regional Corp. (ASRC) and Doyon Ltd. are learning to adapt to business realities. Flexibility, innovation and patience appear to be the keys to their future.

"I think we are realists in that we believe the days of wonderfully high front-end (cash) bonuses appear to have passed us by. We are trying to be very innovative in our exploration terms, to try and get people on our land and looking at it," explains Margie Brown, vice president in charge of CIRI's oil and gas division.

In fact, the exploration of lands to determine their oil and gas potential is a primary theme for all three Native corporations, whose holdings stretch from Cook Inlet to Interior Alaska to the North Slope.

But two decades after Congress established 13 regional corporations under the Alaska Native Claims Settlement Act -- a law that set aside an unprecedented 44 million acres for Alaska's indigenous population -- CIRI is still the only Native corporation that actually produces oil or gas from its 2.5 million acres of land entitlements.

CIRI

CIRI was fortunate because many of its land selections were located in and around producing oil and gas fields on the Kenai Peninsula, where Alaska's first large oil discoveries were made in 1957 at Swanson River. The corporation began collecting royalties at Swanson, Beaver Creek and at the Kenai gas field.

CIRI later established varying working interests in the fields and bought into a small percentage of British Petroleum's Endicott oil field on the North Slope.

As the old Kenai Peninsula fields slipped farther into natural decline and CIRI's royalty revenues began to slip, the corporation realized that a more ambitious exploration program represented the only hope of rejuvenating the income stream.

Says CIRI's Brown, "Yes, anticipating that eventuality has been something the board and I have been looking at for a number of years. It was very much a cause of concern for us, and it was very much a motivator for us to get more active. Our primary responsibility is trying to encourage our lands to be explored."

CIRI's efforts already have produced fruit. After discovering the West Fork gas accumulation just south of Swanson River, CIRI last year became the first Native corporation to both wholly own and operate its own field. The gas is being sold to Phillips Petroleum.

Though CIRI has maintained a long-term relationship with ARCO Alaska, the state's most active explorer, the prospect of attracting new partners for future exploration ventures on CIRI land is diminishing as more and more oil companies leave the state.

Explains Brown, "It's going to be difficult for companies like CIRI to keep going in a progressive way... unless we have a menu of prospective partners. It's very difficult for anybody to do everything 100 percent anymore, even with ARCO and the majors. I'm very concerned about the exodus of companies and talent and interest from Alaska."

Nevertheless, Brown says she is cautiously optimistic that ARCO's recent Sunfish discovery in the Cook Inlet will spark new interest in the region.

She adds, "I think as other companies pull up and retrench that there may be opportunities for new players in the Cook Inlet. We've been approached by several entities interested in doing exploratory work on our property, and some of them have not been players in the Cook Inlet before. I see that as a good sign."

ASRC

Meanwhile, Arctic Slope Regional Corp. most likely is sitting atop or near the last remaining oil bonanza in North America but can't do anything about it. That's because Congress won't permit any exploration and development on the forbidden Arctic National Wildlife Refuge coastal plain, which abuts 92,000 acres of ASRC village land near the Eskimo community of Kaktovik.

Under a special arrangement with Congress, ASRC teamed up with Chevron USA and British Petroleum in the mid-1980s to sink the only exploratory well ever to have been drilled on the coastal plain. Well data from KIC No. 1 remains a tightly guarded secret, but some industry watchers believe a significant discovery was made beneath ASRC lands.

Over the years, ASRC has carefully fashioned a diversified network of subsidiaries encompassing oilfield services, petroleum refining and fuel distribution. But there remains a missing link in the corporation's portfolio.

"The only part missing from our vertically integrated oil company is on the production side, finding the oil on our own lands," explains John McClellan, ASRC's vice president of international business development.

Adds McClellan, "The coastal plain is really being looked at as the greatest hope for ASRC as an oil producer. Once the oil comes out of the ground, we then have all of the capabilities to take the oil, transport it, process it, refine it and distribute it. We even have the service stations (two in Fairbanks) to put it into the customer's car."

But ASRC is not banking its entire future on either the opening of ANWR or work in the oilfields of Alaska's North Slope, especially in light of declining production and industry's flight from the state. Like many other Alaska contractors, ASRC has made the decision to expand overseas, specifically to the oil-rich fields of Russia.

Says McClellan, "ASRC has a lot of its client base in that oil industry that's leaving the state. That's who we work for. So it sort of makes sense that when your clients go somewhere else, you should pick up and follow them."

McClellan says long-time Alaska client British Petroleum already has designated ASRC as its oil-field service contractor should BP land a contract with the Russians to develop fields in the Surgut-Tyumen region of northern Siberia. ASRC also is negotiating directly with local governments to provide oil field services elsewhere in Russia.

The Surgut-Tyumen area is similar in size to the North Slope, lying on the coast above the Arctic Circle. It contains approximately 20 billion barrels of proven reserves, or about twice the amount of crude that can be recovered from North America's largest oil field at Prudhoe Bay, although the oil is located in numerous smaller fields. The region is especially suited for ASRC and its expertise in cold-weather construction.

Says McClellan, "There are a dozen regions exactly like this in Russia. Picture what's happened at Prudhoe Bay over the past 20 years. Multiply that by 10 or 100 and that's what is going on in Russia over the next generation. The work, the revenues and the services we've provided to Western oil companies in Alaska could be multiplied by 10 or 20, just for what we're working toward."

McClellan emphasizes that ASRC has no intention of abandoning Alaska, explaining that the corporation has simply outgrown the market. He says, "The only way to grow is to acquire new business, to diversify for the future and to take our companies into new markets. We were forced to do some downsizing of revenue in Alaska, but we intend to be a major player here for some time. We don't intend to close the door."

Doyon

Of the three Native corporations, perhaps Doyon faces the biggest challenge when it comes to getting its lands assessed for oil and gas potential, partly because it has so much of it (12.5 million acres). Interior Alaska also is a region that has attracted only sparse interest from oil companies over the years.

Most of Doyon's exploration efforts currently are focused on the Kandik Basin adjacent to the Canadian border, although the Native corporation holds mineral rights in all of the large Interior basins, including Yukon Flats, Middle Tanana and Minchumina. Some of the prospects are within 40 to 100 miles of the Trans-Alaska Pipeline.

Doyon has 3 million acres in the Yukon Flats, an area that was partly evaluated in the late 1980s through an agreement with Exxon and Amoco. The agreement terminated in 1990, and Doyon is reprocessing the data, hoping to find another company to continue exploration work.

In the Kandik basin, Doyon also has about 200,000 acres of land under lease to ARCO. But the oil company has had problems finding partners to drill an exploratory well, primarily because of the risk and high cost associated with drilling in the remote area.

Doyon is pushing hard for state legislation that would provide special drilling credits to companies willing to take on high-risk ventures. Under the proposal, companies could deduct up to half the cost of drilling and geophysical work from lease rentals, royalties, bonuses and taxes owed the state on oil and gas properties elsewhere in Alaska. Doyon would also like to see the incentive applied to private lands.

"We're trying to attract more capital to the state and stimulate exploration and production. It certainly can't hurt given the current climate of so many companies leaving the state," says James Mery, Doyon's vice president in charge of land and resources.

In fact, Native corporations believe the state should be doing more to encourage oil and gas exploration and development on private lands. Although the government would collect no royalties, Mery points out, "The state will receive substantial taxes from production. The state would get lots of benefit."

DNR's Role

The Alaska Department of Natural Resources (DNR) has taken steps to encourage exploration on state lands. During the past legislative session, DNR introduced a bill calling for drilling credits, as well as legislation that would open huge blocks of unleased state acreage in the interior to so-called concession leasing.

Also known as large-block licensing, concession leasing is practiced in virtually every oil province outside of the United States as an incentive to attract explorers. Under Alaska's proposal, the DNR commissioner would have the authority to bypass the traditional competitive bidding process and issue exploration and developments rights directly to oil companies based on the merit of their plans.

Though the drilling credit and concession leasing bills failed to pass earlier this year, DNR has made them its top legislative priority for the upcoming session in January.

Says James Eason, director of DNR division of oil and gas, "It represents a commitment from the state that it would share in the expense of exploration and would encourage people to come and make those investments. We think that those kinds of investments can lead to exploration technology being utilized on all lands in the state that will benefit the state from increased royalties, taxes, employment and a whole range of things."

Concludes CIRI's Brown, "It's a benefit to the state when CIRI produces, even though they are private lands. It would be a benefit to the state if we had a discovery; it would be a benefit to the state if Doyon had a discovery; and it would be a benefit to the state if Arctic Slope had a discovery. We do pay taxes."
COPYRIGHT 1992 Alaska Business Publishing Company, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Cook Inlet Region Inc.; Arctic Slope Regional Corp.; Doyon Ltd.
Author:Tyson, Ray
Publication:Alaska Business Monthly
Date:Nov 1, 1992
Words:1849
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