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FEX pushes forward in NPR-A But warns that oil and gas industry needs improved Alaska business environment; PPT shaves 25% off NPV of exploration projects Alan Bailey
On Jan. 19 at the Alaska Support Industry Alliance’s annual Meet Alaska conference Timothy England, senior manager of exploration for Talisman Energy, painted a good news/bad news picture of his company’s Alaska operations. On the one hand FEX, Talisman’s Alaska subsidiary, is forging ahead with an aggressive exploration program in the National Petroleum Reserve-Alaska. On the other hand issues such as land access, rising costs, permitting inefficiency and the Alaska tax regime threaten the viability of Alaska petroleum exploration and development, England said.
England reviewed the history of NPR-A petroleum exploration and said that FEX, with almost 1.5 million gross acres under lease, was continuing from some deep drilling done by industry in the early 1980s. But modern drilling equipment is enabling the drilling to be done much more quickly than in the past, he said. In the winter of 2005-06 FEX drilled the NPR-A Aklaq 2 well and a sidetrack.
The company is planning to spud another deep well, the Aklaqyaaq No. 1, on Jan. 27 — the well should take about 57 days to complete, England said. At around Christmas FEX started moving the Nabors 14E rig to the Aklaqyaaq location; the Nabors rig had been stacked at the FEX Cape Simpson staging area over the summer.
FEX is also moving the Akita-Doyon Arctic Wolf rig 180 miles across rough tundra from Prudhoe Bay to drill the Amaguq No. 2 well in NPR-A, England said.
“We should have completed our second ice pad today and we’re expecting to spud our Amaguq No. 2 well on Feb. 7,” England said.
If the drilling goes according to plan FEX will spud a third NPR-A well, the Aklaq No. 6, later in the winter, which totals three wells in NPR-A this winter, down from a previous goal of as many as five wells. Industry observers said five wells could only have been possible if the company had had earlier tundra access.
Continuing challenges England said that NPR-A exploration continues to face many of the challenges that existed during exploration of the region 20 years ago. In particular operational costs are very high and becoming higher. England quoted data from the U.S. Department of Labor showing that, for example, the cost of diesel increased by 80 percent and the cost of steel increased by 56 percent between 2004 and 2006.
“The whole cost basis is going up for the work that we do,” England said.
England said that industry can manage its costs through partnerships, cost sharing, by becoming more efficient and through the use of new technologies. He also said that the state could help with the cost issues — he especially praised the state’s exploration incentive tax credit program.
“Without those substantial exploration incentive credits we wouldn’t be here,” England said. “That substantially affects our ability to compete for cash to explore in Alaska.”
The state might also be able to help in other ways, England suggested, perhaps through tax credits for operational efficiencies such as the use of modern drilling rigs. Tax incentives for drilling multiple wells in a single drilling season might be another possibility.
PPT will drain 25 percent of value But England slammed the state’s switch from a petroleum severance tax to PPT, the new oil and gas production tax. The substantial increase in the state’s oil and gas tax revenues under PPT will drain profits from oil and gas projects, he said.
England used a cash flow curve for a typical oil and gas exploration, development and production project to illustrate the problem. Exploration and development costs trigger a large negative cash flow in the early years of a project, England said. Only after perhaps 10 years does the production of hydrocarbons from the new development start to remove the red ink from the cash balance sheet. And a company like FEX looks at the net present value, or NPV, of the cash flows for the entire project life when assessing whether to invest capital in the project.
“When we look at the economics of our exploration efforts we account for all of that future capital. … The change from the severance tax to the PPT took 25 percent of our net present value that we calculate when we bring those cash flows back to present value,” England said, adding that FEX is now banking on high future oil and gas prices to restore the economics of its NPR-A exploration initiatives.
Land access Access to North Slope land is also proving problematic, England said. There has been a time lag of two years between successive NPR-A lease sales, and third party pressure has caused lease sale cancellations and postponements, he said.
“The federal administration should really think about holding more frequent lease sales, providing greater access to its lands,” England said. He also said that industry and government need to take the appropriate steps to curtail “nuisance legislation,” saying that he had estimated that industry had expended about $40 million in preparing for the September 2006 NPR-A lease, a substantial part of which was subsequently postponed following a court case.
“Those (costs) are large numbers and we are less receptive to keep doing that in the future … and we’ve got to get it fixed,” England said.
England urged people to seek ways of extending the North Slope exploration drilling season, with a review of the criteria for the tundra travel opening date. He said that FEX supports ideas for state or federal staging areas in remote areas, to enable equipment to be stored close to exploration areas during the summer.
“That could be a joint federal and state initiative, and we’ve had some discussion in that regard,” England said. “… We’ve got to figure out ways to get our equipment in use for more days in a season to drill those extra wells.”
England also criticized the regulatory process for North Slope operations as lengthy, repetitious and expensive. People need to find ways of reducing the redundancy involved in doing multiple environmental assessments in the same area year after year. Multi-year permitting might provide one solution, he suggested.
Stemming the decline From the state’s perspective, the crucial question is how to stem the decline in oil production, England said. To address that decline both industry and the state need to address some critical issues, if they want to increase North Slope exploration and development activity.
“Do we tackle these problems and improve the business environment, or are we content with having this (current situation) as the ghost of our oil patch future?” England asked. “… We need to drill a lot more exploration wells on the North Slope to even have a chance to offset that decline.”
And England emphasized that when making investment decisions the oil industry can manage the technical risks inherent in petroleum exploration; the industry cannot manage factors outside its own control.
“In NPR-A exploration, industry is facing major subsurface risks on the reservoir quality, trap integrity and hydrocarbon phase,” England said. “These are the risks that, as explorers, we can manage, if we know what the rules of the game are and what the potential reward is.”
Bullish on NPR-A
England emphasized that FEX with its NPR-A partner Petro-Canada remains bullish on the prospects for oil and gas development in NPR-A.
“We’re taking a long-term view to developing our subsurface knowledge and our experience in building in our second operating season,” England said. “… We are developing good partnerships with the North Slope Borough stakeholders and we hope that will help us bring future development. … We are doing some very exciting stuff. … We have 157 people out in the field right now.”
England ended his presentation with a photograph of the Cape Simpson oil seep on the Beaufort Sea coast of NPR-A.
“It’s still there and it’s massive,” he said. “… There is the potential for massive deposits untapped … out in NPR-A, but we need to drill a whole bunch more wells to find them.”
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