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US—revival in the north

Drilling in Alaska is pricey compared with tight oil in the Lower 48. But the potential remains huge

At one point in the 1970s Alaska was home to some of the largest oilfields ever found in the world. The rise of lower cost tight oil in the Lower 48 may have eclipsed the North Slope—but, at the right price, much riches lie in wait.

Still, the recent history has been about decline. Alaskan exploration in recent decades has dropped off and production of around 490,000 barrels a day is now barely a quarter of that heyday high. The major players—ConocoPhillips, BP and ExxonMobil—seemed content to milk their white elephants and skim the cash.

That could change with some compelling new discoveries that have altered the landscape.

In early 2016, Denver-based Armstrong Energy made a major strike at Nanushuk, 240km south of Barrow and midway between ConocoPhillips's ageing Alpine and Kuparuk River fields. Independent engineering suggests it could support 120,000 b/d, which state officials say could be the biggest producer since the Alpine field itself, and possibly even Prudhoe Bay. Those numbers could prove to be low.

Armstrong's Horseshoe 1 wildcat was followed by ConocoPhillips's Willow discovery on the same play, also in 2016. Then in July of this year, Dallas-based Caelus Energy said it found a large, undisclosed, amount of oil at Smith Bay about 80km southeast of Barrow.

Bouyed by that success, Armstrong and partner Repsol have plans to drill a pair of $30m wildcat followups this winter. Armstrong has suggested the oil window could extend for more than 160km.

Land access is a problem, given that it butts up against the Alaska National Wildlife Refuge and traditional Native lands. But since 2011, Armstrong and Repsol have amassed nearly 0.75m acres over the play and spent $1.2bn to drill 16 exploration wells and shoot 3-D seismic.

Greenfield exploration remains acutely expensive, more so in remote areas such as Alaska where equipment must be hauled across tundra on temporary ice roads. The reason wells cost $30m—triple the outlay for a similar hole in the Permian—is because of these complex logistics and an extremely short window for drilling in winter.

Given that Alaska is at the wrong end of the pipeline, figuratively and geographically, it's not clear if even monumental discoveries would move the needle enough for major producers to spend the billions it would take to bring them into production. Future investment decisions will hinge on the size and scope of any new finds—they'll have to be elephants.

On the plus side, the Alaska pipeline has more than enough room to accommodate a substantial increase in output. Given the US' new found status as an oil exporter, those barrels could find a willing home through Valdez to Asia.

For investors looking to cash in on a new gold rush, the obvious candidates are the smaller explorers like Armstrong and Caelus, which will ultimately need to secure hundreds of millions—-if not billions—of dollars in new capital via IPOs or private-equity funding.

Side opportunities are likely to be found in supplying essential services and supplies. Again, look to the usual suspects—Schlumberger and Halliburton—for clues.

This article is part of a report series on Top 10 upstream bright spots. Next article is: Canada's home-ice advantage

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