Oil and gas industry activity slowing down: some pockets of success and optimism exist.

• Author: Strieker, Julie
• Position: OIL & GAS

Alaska's oil and gas industry made some big headlines in 2016, with massive oil discoveries on the North Slope and exploration expanding in previously undeveloped areas of the state.

Many of those discoveries came through smaller, independent petroleum exploration companies lured to Alaska by generous tax credits for exploration passed by the Legislature in 2013. Senate Bill 21 (SB21), which increased production taxes but provided tax credits for companies exploring for oil and gas in Alaska, was cited as the impetus behind the increase in petroleum exploration by independent companies such as Caelus Energy Alaska, Great Bear Petroleum, and Armstrong Oil and Gas, as well as regional Native corporations Doyon, Limited and Ahtna Inc. However, recent changes in the tax system are spurring some uncertainty about the future for these finds.

In 2016, low oil prices led to a massive budget deficit for Alaska. Critics said SB21 tax credits were too costly for a state operating in the hole and Alaska Governor Bill Walker signed a law cutting oil and gas exploration credits. He also vetoed $430 million in funding for existing tax credits. The changes mainly affected smaller, independent exploration efforts, but perceived instability in the state's regulations could have far-reaching repercussions.

"Alaska is still opportunity rich--but so is the rest of the world and especially the Lower 48," says Scott Jepsen, ConocoPhillips vice president of external affairs and transportation. "Decisions over the next few years will determine if Alaska can stay in the game."

Higher Stakes

The stakes for some companies got much higher in 2016.

In October, Caelus Energy Alaska announced it had made a "significant" light oil discovery at Smith Bay on Alaska's North Slope. Caelus drilled two wells in early 2016, which, coupled with existing 3D seismic testing, indicated reserves in its current leases of up to 6 billion barrels. In a news release announcing the discovery, Caelus said oil in adjoining acreage could boost reserves to 10 billion barrels.

"This discovery could be really exciting for the state of Alaska," Caelus CEO Jim Musselman said in the release. "It has the size and scale to play a meaningful role in sustaining the Alaskan oil business over the next three or four decades. Fiscal stability going forward is critical for a project of this magnitude. Without the state tax credit programs, none of this would've happened, and I'm not sure Caelus would've come to explore in Alaska. We're proof that the credit programs work."

Smith Bay could add 200,000 barrels of light oil to the trans-Alaska pipeline daily, Caelus said. Both wells tapped into a large petroleum-bearing complex that spanned more than three hundred square miles. Caelus had planned to drill a third well in 2017, but fiscal uncertainties brought on by low oil prices and questions about the future of Alaska's oil tax credit system made the company decide to delay the well. It also...