A small company developing Cook Inlet's first new oil pool in years -- and possibly a large gas field -- underscores the challenges policymakers face as they look to alter the state's controversial oil-tax credit scheme.
Move too aggressively to cancel credits and companies advancing toward new production could suffer, hurting future state income from royalties and taxes.
At the same time, the state faces towering deficits. A program that pays oil companies hundreds of millions yearly, including $500 million this year, provides a big target.
BlueCrest Energy, a Texas company founded by a former Alaskan, may not be able to develop a gas play in the Cosmopolitan field west of Anchor Point without the credits, said its founder, Benjamin Johnson, a 1975 graduate of Kenai High School, who once worked on the North Slope.
With oil and gas development in Alaska on average three times more expensive than Lower 48 projects, at least, the company needs state support to continue drilling, Johnson said. If the state can't offer that support, the lone offshore drilling rig remaining in Cook Inlet, awaiting work from BlueCrest, will leave the state. It could be years before another one returns, he said.
"If it leaves, it won't be easy to get it back," said Johnson.
Cook Inlet wanes
Once the state's premier petroleum basin, Cook Inlet saw oil and gas investments fade once oil began flowing from its giant cousin 700 miles the north, the Prudhoe Bay oil fields.
But things began to change in 2007, when a new tax law boosted incentives for Cook Inlet exploration. Investments from new independents rose, and after 15 years without a jack-up rig, Cook Inlet suddenly had two.
Now, with the Endeavor gone, only the Spartan 151 remains. Owned by Louisiana-based Spartan Offshore Drilling, it's in a holding pattern in Seward, costing thousands of dollars a day to wait for the possibility BlueCrest will move ahead with developing the gas prospect, said Johnson.
If it gets the chance, the company estimates it can produce up to 70 million cubic feet of natural gas daily, about 30 percent of the natural gas consumed in Southcentral Alaska.
But if it doesn't, gas production in a region that has only begun to climb in recent years could fall again to critically low levels, Johnson said.
"BlueCrest projects there will be a shortfall of natural gas in four or five years, and that's not something that can be immediately fixed," he said.
BlueCrest agrees some change necessary
Though the oil and gas industry is quick to defend the tax credits, privately owned BlueCrest isn't opposed to change.
Johnson, who earned an master's degree in engineering from the University of Alaska in 1983, said he understands the state needs to slash costs to help close a $3 billion fiscal shortfall.
But he also argues the state should move ahead carefully so companies on the verge of success, which he said includes BlueCrest, can meet preexisting commitments and increase the oil and gas production the state badly needs.
One option, he said, is Alaska can guarantee third-party loans instead of providing the credits. That arrangement, depending on the details, could still allow the company to develop the gas field.
Lawmakers are looking at those ideas and others.
Sen. Bill Wielechowski, D-Anchorage, said the tax credits have worked to bring new investment. He said he supports the "scalpel approach" of limited changes to the tax credit program rather than a broad overhaul.
He said the 2007 tax law that created the credits, Alaska's Clear and Equitable Share, featured a sharply progressive tax rate that brought the state huge returns for its upfront investments when oil prices were high.
The new tax system passed by the Republican-led Legislature in 2013 eliminated that steeply progressive rate. Now, the state won't get a fair return, he said.
"We need to find a balance," he said, which could include a larger royalty stake in exchange for credits.
Sen. Cathy Giessel, R-Anchorage, who convened a legislative working group on the tax credits, said the incentives have brought Alaska jobs, new independents, and new investment from outside investors such as Bank of America.
She said any change should take into account that oil companies are planning their budgets a year in advance, and need to maintain financing arrangements backed by income from the credits.
"I'm looking at gradual changes," Giessel said.
Lured back by tax credits
Johnson cut his teeth in the 1980s creating a development plan to optimize oil recovery from the Kuparuk field for Arco, the predecessor of ConocoPhillips. He said a career in the industry took him out of state. But the tax credits brought him back after he and other investors founded BlueCrest, based in Fort Worth, Texas.
In 2012, the company acquired acreage from Pioneer Natural Resources, which left the state for the Lower 48. Last year, BlueCrest bought out a minority partner, debt-ridden Australia-based Buccaneer Energy, which filed for bankruptcy protection.
Now, having sunk about $200 million into the project, BlueCrest is on the verge of producing the first oil from a new Cook Inlet pool since 2002, when Forest Oil began production at its disappointing Redoubt Shoal prospect. The BlueCrest oil, like the gas, would come from the Cosmopolitan field.
The state credits paid to BlueCrest -- about $25 million so far -- have been critical, he said.
The company has purchased a $77 million shore-based drill rig made by a company in Texas, with help from a $30 million loan from the Alaska Industrial Development and Export Authority. The rig will be the largest in Alaska when it arrives early next year, capable of boring a hole more than 4 miles deep to reach the oil pool in Cook Inlet.
At a 55-person man camp on a 38-acre site north of Anchor Point, BlueCrest is building a processing facility that can handle 10,000 barrels of oil daily, where water and gas will be separated from the crude oil.
State says the oil is there
AIDEA has reviewed the company's data on the oil potential, and hired its own independent analyst to confirm that the field can support production of at least 8,000 barrels a day.
Plans call for first production in April, but the company is starting slowly. It wants to sink two wells in 2016 that will produce 3,000 to 5,000 barrels of oil.
That will allow revenues to begin flowing, providing some cash to help the company begin repaying capital investments and investors who have contributed about $200 million to the project.
But to keep drilling wells, expand the oil production and eventually reach a break-even point, the company is counting on the state to first honor its existing tax credits, beginning with about $50 million in 2016 for money spent this year.
The company hopes to receive more tax credits in 2017 to help pay for another three wells and to boost production toward 10,000 barrels daily.
Johnson said he's hoping the company can get the most out of the field, and in the years to come return $360 million in royalties to the state for its upfront investment of about $120 million in tax credits. Just to reach a point where it's making more than it's spending, BlueCrest expects to have spent $525 million on the oil project.
As for its gas prospect, BlueCrest said it needs certainty from the state regarding some kind of support so it can ensure Spartan Offshore Drilling will move ahead with development.
"The tax credits don't have to be exactly the same, but if they work and are favorable, then we'll start drilling next year," he said.