Alaska oil policy: understanding investment.

AuthorKeithley, Bradford G.
PositionSPECIAL SECTION: Oil & Gas - Column

Alaskans heard the word "investment" a great deal during the recent legislative session. They likely will hear more of the word in the months and years ahead as the state continues efforts to bring increased investment to the North Slope, and others evaluate whether those efforts are successful.

In that context I thought it would be useful to write a column on oil investment.

The Chart

To do that, I have borrowed a chart from a company called Petoro. Those who read my January column ("Alaska Oil Policy: Achieving Alignment," Alaska Business Monthly, January 2013), will recognize Petoro as the arm of the Norwegian government engaged in co-investment with industry in the development of that country's oil and gas resources. I chose to use a chart from Petoro because it is viewed largely as a neutral entity, not likely to tilt the information playing field one direction or another.

The chart shows the relationship over time between investment and production in the development of a typical oil field. The bars are investment levels, by year. The higher the bar, the greater the investment made in that year.

The blue line is production level, again by year. The higher the line, the greater the production level for that year. The bars and production line go out 26 years, a useful proxy for a significantly sized field.

The bump in the line beginning about the 18th year represents the application of improved oil recovery (IOR) methods that often are employed in mature and aging fields. Depending on the characteristics of the field, the application of such methods can boost both then-current production levels and the ultimate recovery of oil from the field.

As also shown on the chart, however, such increased production and recovery rates require added investment. The substantial increases in investment levels shown in years 17, 18 and 19 are directly tied to the increased production and recovery rates depicted by the bump in the line. Those increases would not occur but for the increase in investment.

As complete as the chart is, there are two additional events that are useful to visualize to help understand oil investment in Alaska. One comes before this chart begins. A producer must find a field to produce before bringing it into development.

This chart only depicts the development phase. There are several years before this chart begins that are involved in the exploration phase. All that occurs in those earlier years is investment; there is no production.

The second is in the later years of the development phase. This chart shows one cycle of improved recovery. Actually, some major fields, like...

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