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Looking to invest in Alaska O&G leases?
Veteran investor, independent Paul Craig offers advice to individuals, groups, companies interested in making money in Alaska’s oil patch Kay Cashman Petroleum News
The most common advice received from current and former state and federal officials asked to offer guidance to private and public individuals or groups looking at oil and gas leases and prospects in Alaska and/or considering operating in the state was to seek help from an experienced Alaska investor or independent. Most of them named several individuals they felt were trustworthy, with the most votes cast for Bill Armstrong of Armstrong Energy (see Oil Patch Insider in this issue for latest from Armstrong) and Paul Craig of Trading Bay Energy, both of whom have proven credible sources of news for Petroleum News.
Dr. Paul Craig, a board-certified neuropsychologist who practices in Anchorage, was first to respond to a questionnaire circulated by Petroleum News to a select group of investors and independents. He was encouraged to talk about his own learning experiences in Alaska.
In answer to the first two questions - “What advice do you have for individuals and private groups interested in investing in Alaska leases and prospects (including overriding royalties), but do not know how to go about it? What do you think the greatest challenge will be for them?” - Paul Craig said the following:
Sunfish becomes Deadfish In January 1993 I participated in my first state of Alaska oil and gas lease sale. I was young, naïve and blindly enthusiastic.
Nonetheless, I was successful beyond my wildest imagination securing four square miles of leases in the middle of ARCO’s Cook Inlet Sunfish prospect. As fate would have it, the Sunfish became the Deadfish after ARCO brought in two jack-up rigs and drilled two dry holes in 1994.
My wild success quickly became an abysmal failure. Paradoxically, I view failure as a key ingredient of success.
During the same 1993 lease sale, I acquired other Cook Inlet leases from which I developed an independent oil and gas company - Trading Bay Energy Corp.
Trading Bay acquired permits to drill three onshore gas wells and registered a public offering with the state of Alaska Division of Banking and Securities. The registration for this public offering was granted on precisely the same day that Stewart Petroleum filed for Chapter 11 bankruptcy protection in 1996 (see editor’s note at end of article).
Needless to say, on the heels of Stewart’s demise raising investment capital from Alaskans was slightly harder than extracting teeth from an irritable mountain lion.
Then, along came Forcenergy, which bought all of the assets from Trading Bay in 1997.
Since those early days, I have learned a tremendous amount about the oil patch, and I continue to learn. The school of hard knocks is an unforgiving but important classroom.
Today, my company owns one-third of Amaroq Resources LLC. Amaroq is the owner and operator of the Nicolai Creek Unit gas wells.
Partners and I also own about 56 square miles of Nanushuk/Torok leases in NPR-A.
I have experienced a lot of failure during the past 25 years - but enough success to keep me in the game.
The greatest challenge In short, the greatest challenge for any independent attempting to do business in Alaska is being capable of financially and emotionally tolerating the risk of total loss of investment capital.
Some of the sources of economic risk for independents include the ever-changing Alaska fiscal policies (e.g., tax regimes, investment credits etc.); the elastic pricing for oil and gas reserves that constantly changes the commercial viability of any oil and gas prospect; governmental policies; and a laundry list of other man-made challenges - not to mention the geological risk posed by dry holes.
If you lack tenacity and are not willing to look down the loaded barrel of failure while moving forward toward success, the upstream Alaska oil patch is probably not a business you should consider entering.
Do you have nerves of steel and the tenacity of Edison who developed more than 1,000 prototype bulbs that each failed before he invented the first successful lightbulb? If so, you may be a candidate for joining the small cadre of independent upstream oil and gas investors in Alaska.
What NOT to do In answer to, “Is there anything in particular investors should NOT do?” Craig said:
Do not buy any oil and gas leases without first doing three things: homework, homework and more homework.
You need to know the geology, the ‘nearology,’ the economics, and the probability of complete loss of investment.
After a lot of homework, I bought the north half of the Umiat Oil Field in 2002 when oil was at about $22 a barrel. Umiat was not a commercial deposit at that price but I projected that oil prices would increase during the coming 10 years - the term of the lease.
I could have been wrong about oil prices, but I got lucky and was right.
Armstrong proved Craig’s thesis correct A few years later, the lease was purchased from me at a substantial profit and I was able to retain a modest overriding royalty interest on oil produced at Umiat.
My theory based upon my homework regarding the Umiat Oil Field was that the big oil would be discovered deeper and to the north in the Nanushuk group and Torok formation north of Umiat Mountain. Bill Armstrong proved my thesis to be correct several miles to the north. On the same Umiat lease I purchased in 2002, there is a Torok structural feature that could be charged with oil. Regarding this possibility, the drill bit is the only truth serum in the oil patch.
Pursuant to my ‘go deep, go north’ thesis, partners and I picked up 56 square miles of Nanushuk leases north of the Umiat Oil Field (20 miles south of Armstrong’s Horseshoe wildcat well) in 2013.
Bad luck ensued with the collapse of oil prices in late 2014, but I have tenaciously held onto those NPR-A leases waiting for better days ahead. With Armstrong’s recent announcements about the Nanushuk discoveries to the north and with oil prices strengthening, my ship may be coming into port.
Of course, what I perceive to be my ship’s mast on the horizon could be a shark fin coming straight at me!
In the meantime, I’ll keep my nerve, stand firm and be tenacious. Extensive homework leads to informed tenacity.
Risk tolerance When asked, “Is there anything in particular they should do?” Craig responded as follows:
Assess your risk tolerance.
It takes all types of risk tolerance profiles to make the world go around. If we all had to have the security of employment with monthly salaries and benefit packages, there may be no jobs available for anybody to occupy.
Jobs exist because entrepreneurs are able to tolerate the risk required to start businesses, some of which become the companies where the security of long-term employment can be enjoyed by those who cannot tolerate the risk of failing in business.
Likewise, if we all had the risk tolerance of entrepreneurs that could lead to its own set of problems. Where would the employees come from?
Alaska grossly underexplored Assess your risk tolerance and then pursue business or employment goals consistent with your tolerance for risk.
If you cannot stand the heat, do not enter the kitchen.
When Richfield Oil (predecessor to ARCO, later ConocoPhillips) came to Alaska in the 1950s it was a small independent that developed into one of the majors after first discovering the Swanson River Oil Field and then Prudhoe Bay.
Given the grossly under-explored basins of Alaska, there is still a lot of room for one or more of today’s tiny Alaska independents to become tomorrow’s major.
Unless the state’s regulators understand the actual history of the Alaska oil patch, the regulatory environment may exclusively focus on encouraging the majors to harvest yesterday’s discoveries rather than encouraging small independents to judiciously deploy capital to discover tomorrow’s elephant fields.
Assess your risk tolerance and develop your plan accordingly. And if you decide to move forward with acquiring and exploring Alaska leases, pray that the bureaucratic powers-that-be do not abruptly change policies or impose sanctions that block you from moving forward with your plans.
Without small independents taking on the risk of exploration, there may not be elephants fields from which majors can harvest tomorrow’s oil.
For access to the data room: www.nanushuk.com. Or contact: Paul L. Craig, Ph.D. President, Trading Bay Oil & Gas, LLC. +1-907-830-1151. [email protected]
Editor’s note: Bill Stewart, founder of Stewart Petroleum, was a flamboyant independent oilman and globe trotter, making oil and gas discoveries in seven states, including notable finds in Alaska’s Cook Inlet basin that garnered international press coverage for Cook Inlet, including a May 24, 1993, article in World Oil that reported, “Almost 36 years after the Cook Inlet basin gave Alaska its first significant oil discovery, the basin is bounding back with a burst of exploration and development. Players in the renaissance are ARCO Alaska Inc., Phillips Petroleum Co., Unocal Corp., Shell Western E&P Inc., and Anchorage independent Stewart Petroleum Co.”)
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