01/04/2011 02:22 pm ET | Updated May 25, 2011

Alaska's Oil Future May Lie With Upstart Drilling Companies

What was the biggest trend in the Alaska oil industry in the last decade? Despite the hype, it wasn't declining production, aging infrastructure or changes to the tax code, because all of those were merely accelerations of earlier trends. The biggest trend unique to the '00s was the rise of independent oil companies on the North Slope.

While BP, ConocoPhillips and ExxonMobil made headlines over the past decade, smaller oil companies leased hundreds of thousands of acres across the North Slope and drilled dozens of exploratory wells, leading to the first independently operated oil production in the history of the North Slope. If that trend continues, Alaska will become home to many smaller oil companies this decade, fundamentally changing how the North Slope works.

"When we can produce a barrel, and prove to everybody else that we can produce a barrel, I think there's going to be a flood of independents coming to the North Slope," said Jim Winegarner, vice president of land for Brooks Range Petroleum Corp., an independent operator leading a joint venture of small companies on the North Slope.

After years of exploration work, Brooks Range Petroleum is evaluating a prospect in Gwydyr Bay, the stretch of coast north of Prudhoe Bay. If the company sanctions the project, it would become the smallest oil producer on the North Slope. In the 2000s, Alaska proved it could be profitable for large independents, but Winegarner believes the same can be said for small independents, tiny players looking to compete on a big field.

Indies large and small
The term "independent" covers a lot of ground. They are usually "upstream" companies that focus exclusively on producing oil and natural gas, unlike the vertically integrated "majors" that also own pipelines, refineries, gas stations and research divisions. Independents cover a broad spectrum that includes multibillion-dollar international companies as well as domestic "mom-and-pop" oil producers.

The two most prominent independents in Alaska are on the larger end of that spectrum. Anadarko Petroleum is one of the largest independents in the world, earning $9 billion in revenue last year and employing thousands. Since arriving in Alaska in the early 1990s, the Houston-based company helped bring the large Colville River unit online and drilled numerous exploration wells, including the first to target natural gas on the North Slope. Pioneer Natural Resources produces more than 100,000 barrels of oil per day on two continents. The Dallas company arrived in Alaska in 2002 and brought the Oooguruk field online in 2008, becoming the first independent producer in North Slope history.

Brooks Range Petroleum, which only operates in Alaska and employs just a few people full time, is at the smaller end of the spectrum, alongside other independents active in Alaska, companies like Armstrong Oil and Gas, Savant Resources, UltraStar Exploration and various small companies that have all drilled wells on the North Slope since 2000.

Independents are not entirely a recent phenomenon in Alaska. Prospectors drilled wells across the state in the first decade of the 20th century. That trend expanded after Congress passed the Mineral Leasing Act of 1920, opening almost the entire territory to drilling and making access to land much easier: a matter of paperwork, rather than on-site staking. "This first-come-first-served method of leasing gave everyone, including the little guys, a chance to play in Alaska's oil and gas leasing game," Jack Roderick wrote in "Crude Dreams," his history of the Alaska oil industry.

Drilling is still difficult and expensive in Cook Inlet - though not quite as a difficult or expensive as the North Slope - yet it's home to several independent companies. But since the discovery of Prudhoe Bay in 1968, majors have ruled the North Slope: BP, Chevron, ConocoPhillips, ExxonMobil and their predecessors drilled most of the wells, made all the largest oil discoveries and built all the major infrastructure projects.

Those majors have grown substantially since the 1960s, and the influx of independents in Alaska over the past decade can be traced to industry consolidation at the turn of the century. The gigantic companies created by those megamergers passed over many relatively large oil fields in favor of huge discoveries to replace their reserves. In Alaska, those mergers led to the Charter for the Development of the North Slope. While the Charter primarily outlined divestments needed to alleviate State of Alaska antitrust concerns, it also opened the door for independents to come to the North Slope, according to Jim Weeks, a former ARCO Alaska executive and managing member of the independent UltraStar Exploration, one of the smallest companies ever to explore for oil on the North Slope.

"If it weren't for the charter, I don't think we'd be hanging around," Weeks said. The Charter gave independents access. Today, it obligates ConocoPhillips and BP to license proprietary North Slope seismic data, to buy crude oil from small producers at a predetermined formula and to grant access to processing facilities "on reasonable terms." It also created provisions for arbitration to keep disputes from getting out of control.

In the first half of the '00s, Denver-based Armstrong Oil and Gas brought a new business strategy to Alaska, drilling exploration wells to establish prospects like Oooguruk and Nikaitchuq that it then sold to larger companies to develop. Rising oil prices in the second half of the decade made more independents willing to risk the high cost of Alaska exploration. The Palin administration sweetened the deal by increasing tax credits for exploration, but also pursued other small-business-friendly avenues that did not make headlines, like pursuing legal cases to keep pipeline shipping rates low, which benefits independent producers.

Smarter and faster
So what will the next decade hold? Weeks doesn't think independents will ever fill the trans-Alaska oil pipeline, which is already two-thirds empty, but he sees opportunity for job creation and economic growth. Winegarner quantified that economic impact. In 2008, Brooks Range Petroleum employed more than 400 people by running two drilling rigs and a seismic operation. But he also believes independents can collectively be important producers.

"If we can go after these smaller reserves sizes that the major can't justify, that's going to add to the resource base and ultimately get much more oil out," Winegarner said.

In its most recent forecast, the Alaska Department of Revenue projected that North Slope oil production will fall from 616,000 barrels per day next year to 520,000 barrels per day in 2020, but shows new production increasing from about 5 percent to 51 percent of total oil production over the course of the decade. Independents bringing new production online could mean a new chapter in North Slope history.

And if the smaller outfits continue arriving, the biggest change will be for the state, according to Alaska Division of Oil and Gas director Kevin Banks.

"We're going to have to be able to work smarter and faster," said Banks, who oversees the state agency dealing most directly with oil companies.

The current system for managing state lands - from holding lease sales to permitting wells to forming units - is the result of five decades of dealing with a few major oil companies developing several giant oil fields, not dozens of smaller companies spread across a huge area, exploring and developing a broad array of prospects. The system designed to promote responsible development at Prudhoe Bay and Kuparuk may not work for new arrivals like Great Bear Petroleum, which wants to drill into oil source rocks, or GMT Exploration, which holds leases in the White Hills and Beaufort Sea, or Savant, which helped BP bring the Badami unit back online.

The first four decades of North Slope production played out simply: several large companies developing several large fields. Banks expect the next few decades to be more complex, with the majors pursuing big plays like offshore fields and heavy oil, larger independents bringing new production online, and smaller independents proving up plays, like Armstrong, or targeting overlooked prospects, like Brooks Range Petroleum.