Alaska oil and gas operators are cautiously optimistic about prospects in 2012 on several fronts. Here’s an outline of where things stand for the industry in the new year:

• The state Legislature will resume work on a revamp of the state’s oil and gas production tax when it goes into its annual session Jan. 17, and although the measure remains highly controversial there are some signs that key obstacles may be overcome.
• Shell is very close to securing final approvals to pursue long-planned exploration in the federally-owned Beaufort and Chukchi Sea offshore areas of the Arctic. These areas are highly prospective and in the case of the Beaufort Sea could result in new production moving into the Trans Alaska Pipeline System in just a few years because of the presence of onshore pipelines in the area. The Chukchi is highly prospective as well but because of the remoteness of the region it would take a decade or more to plan and secure permits for infrastructure.
• One of the busiest exploration seasons in years is underway on the North Slope, and though the bulk of this is being driven by one company – Repsol – the hope is that new discoveries will be made. Another, smaller company, Great Bear Petroleum, will test an idea that shale formations on the North Slope are capable of producing oil similar to the way oil is being produced from shale in North Dakota and Texas.
• Cook Inlet explorers Escopeta Oil, NordAq Oil and Gas and Buccaneer Energy will be working to confirm gas discoveries in the Inlet and on the Kenai Peninsula and to drill new wells. Cook Inlet Energy, another small company, will be working to expand oil and gas production at the small Redoubt Shoal and West MacArthur River oil fields on the west side of the Inlet.

The tax debate in Juneau will be at center stage
Gov. Sean Parnell and North Slope producers argue the state’s high tax rate impedes new investment particularly in the large operating fields. Unlike the exploration underway, where it will take several years to bring new oil into production, major producers like BP and ConocoPhillips say new production can be established relatively quickly in the large producing fields if the state can offer tax relief to encourage new development. Parnell’s bill to adjust the tax, HB 110, passed the state House in 2011 and is now in the state Senate.

There’s reason to be optimistic about some movement on this. In a recent talk to Commonwealth North, an Alaska business and policy group, Senate President Gary Stevens, R-Kodiak, said the Senate will develop a compromise tax proposal to the House-passed bill that will focus on a formula in the production tax that sharply escalates the tax rate at high oil price ranges. Stevens’ remarks, and similar statements by Sen. Bert Stedman, Republican from Sitka who is cochair of the Finance Committee, signal a possible breakthrough in the political impasse that developed over the oil tax bill in 2011. (See more discussion of the tax in our regular Alaska Economic Report.)

Repsol leads slope exploration, driven by lease deadlines
On the exploration front, Repsol, leading the North Slope exploration surge, will have four to five drill rigs working and has chartered an Alaska Airlines 737 to provide twice-weekly jet service to the slope to handle movement of people and cargo. Repsol acquired a 70 percent interest in 500,000 acres of North Slope lands in an early 2011 deal with Armstrong Oil and Gas. The company is being pushed by pending expiration dates on many leases and will have four to five drill rigs working on exploration this winter, Repsol’s Alaska operations manager, Bill Hardham, told the Resource Development Council’s annual conference in late November. The company will be working to test prospects northwest and southwest of the Prudhoe Bay and Kuparuk River fields.

The other North Slope project to watch is Brooks Range Petroleum’s testing of its discovery west of the Kuparuk field this winter and its plans to test other prospects in the immediate area. If the tests are positive Brooks Range plans a fast-track development that could see production fairly quickly. The prospects are near existing pipelines, an important advantage.

There is a lot of interest in the plans by Great Bear Petroleum, an Alaska-based independent, to test the feasibility of producing oil from shale formations south of the large Prudhoe Bay and Kuparuk producing fields. The shales to be tested with drilling are the source rocks for the oil in the large conventional fields, and Great Bear is betting that substantial amounts of oil remain in the shale. The company is hoping the oil can be produced with horizontal wells and fracturing, Great Bear’s president Ed Duncan has said. It will take two to three years to assess whether this is feasible, one year for the initial tests to see if the oil is there and whether it can be produced, and one to two more years to do longer-term production tests and to assess prototype production facilities.

Some geologists believe much of the oil in these source rocks may have leaked out, to accumulate in the reservoir traps that are the currently-producing large fields including Prudhoe Bay and Kuparuk River fileds. However, Great Bear and state geologists believe that a great deal of the original oil formed in the shales is still there. Another key question is the quality and thickness of the oil. If it is too “heavy” or viscous it might not be able to flow in significant quantities from the microscopic pores in the shale rock. Once Great Bear drills its tests samples of the oil can be obtained and analyzed.

Another significant onshore North Slope project is a plan by Australia-based independent Linc Energy to delineate and test a long-known oil deposit at Umiat, in the southeast part of the federally-managed National Petroleum Reserve-Alaska. Oil was discovered at Umiat in the 1950s by explorers working for the U.S. Navy, when the NPR-A was the Naval Petroleum Reserve No. 4, but the find was never developed because of its small size and remoteness. Linc Energy believes more oil can be produced from Umiat than estimated earlier with the drilling of horizontal wells, and also that there are deeper resources not tested by the Navy’s explorers.

The state of Alaska is planning a 90-mile road to Umiat from the Dalton Highway, the North-South road that serves the Prudhoe Bay-area oilfields. Linc Energy spokeswoman Colleen Richards said the road would help Linc Energy in building a pipeline to transport Umiat oil to the Trans Alaska Pipeline System, which parallels the Dalton Highway. However, the pipeline would follow a different route than the road.

Shell hopes to finally get okays to drill offshore
There are also expectations that Shell will finally be able to drill Arctic offshore prospects in the Beaufort and Chukchi Seas in 2011 after years of effort and $4 billion in investment, about half of it spent in acquiring federal Outer Continental Shelf leases. The U.S. Bureau of Oceans and Energy Management has approved Shell’s exploration plans for the Beaufort and Chukchi drilling although Shell is concerned about a short seasonal drilling season allowed in the Chukchi Sea when the plan was approved earlier this month, company spokesman Curtis Smith said. BOEM’s approval for Shell’s Beaufort exploration has meanwhile been appealed by environmental groups to the U.S. Ninth Circuit Court, and similar appeals are expected for the agency’s approval of Shell’s Chukchi drilling program. The BOEM approvals are also contingent on Shell receiving final approvals of air quality permits by the U.S. Environmental Protection Agency. EPA has issued final permits for both the Beaufort and Chukchi drilling but both were appealed by environmental groups to an internal EPA appeals panel. Shell cannot get the final permits until the appeals panel reaches its decisions.

In southern Alaska, a renaissance for Cook Inlet?
In south Alaska, Cook Inlet is seeing a renaissance of industry exploration. Three independents, Buccaneer Energy of Australia, Houston-based Escopeta Oil Co. and Alaska-based NordAq Energy, made gas discoveries in 2011, all which need further testing in 2012. Buccaneer is due to start production in one well in late December, however, to supply gas to the regional gas utility, Enstar Natural Gas. The discovery there was made in early 2011. Buccaneer will also be drilling a new well near its discovery well to test the extent of reserves. One other well drilled by Buccaneer near the discovery last fall was unsuccessful.

On the west side of the Inlet, Cook Inlet Energy, a subsidiary of Tennesee-based Miller Energy, restarted the shut-in Osprey production platform in west Cook Inlet in late 2011 and plans to expand production with new drilling in 2012 on the platform and nearby onshore producing leases owned by Cook Inlet, company CEO David Hall said. Cook Inlet has moved two rigs to the area, one a small rig owned by Miller that has been undergoing refurbishing and winterization to drill shallow onshore gas and oil prospects, and the second a larger rig brought from Texas to drill on the Osprey platform, which is now being installed.

Also in Cook Inlet, Apache Oil Corp. will complete the first year of a planned multi-year 1,200-square-mile 3-D seismic program now underway on a large group of Cook Inlet leases the company owns, company spokesman Bill Mintz said. Apache has plans to drill an exploration well in 2012 depending on results of the seismic, he said. There will also be two jack-up rigs drilling exploration wells in Cook Inlet in 2012, one rig already in the Inlet that will be working for Escopeta to test its discoveries and do more drilling, and a second being brought to Alaska from Southeast Asia by Buccaneer Energy. Buccaneer owns Cook Inlet offshore leases with discoveries made years ago, but which need further testing, company spokesman Dean Gallegos said.