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Conoco agrees to process Oooguruk oil Historic deal gives Texas independent access to Kuparuk facilities; Crockett says could open door to other North Slope explorers Eric Lidji Petroleum News
After several months of silence, the first independent operator in northern Alaska and the largest oil producer in the state have signed a precedent-setting, North Slope facilities sharing agreement, the companies said Feb. 25.
The agreement allows Pioneer Natural Resources Alaska, operator of the Beaufort Sea Oooguruk unit, to use Kuparuk River Unit facilities operated by ConocoPhillips Alaska.
Under the agreement, oil production from Oooguruk will flow through a gathering line to Kuparuk River unit drill site 3H, then on to a Kuparuk River Unit processing facility. From there, the processed crude oil will go to Pump Station 1 and the start of the trans-Alaska oil pipeline.
The agreement also allows Pioneer to use roads, runways and vertical support members owned by ConocoPhillips in the Kuparuk River Unit.
As the unit operator, ConocoPhillips made the deal on behalf of the other working interest owners at Kuparuk: BP, Chevron and ExxonMobil.
Pioneer is partnering on Oooguruk with the Italian super-major Eni Petroleum, which maintains a 30 percent working interest ownership in the unit, located north of the Colville River delta in the shallow waters of the Beaufort Sea.
New legislation and operational issues delayed deal Pioneer and ConocoPhillips reached an “agreement in principle” about 18 months ago on the major points of the deal, and the two companies seemed close to wrapping things up as construction at Oooguruk wound down early last fall.
Over the past six months, though, the companies still needed to work out “a lot of complicated operational issues” and determine what consequences the November 2007 increase on oil production taxes might have on the deal, according to Tadd Owens, director of government and public affairs for Pioneer.
Still, he said, Pioneer didn’t consider a backup plan in case the deal fell through.
“We willingly entered into the commercial process with the expectation of success, and at no point did we feel that was in jeopardy,” Owens said.
One of the major issues for any facility sharing agreement involves “back out,” when the facility owner holds production to allow the third party to use spare capacity in pipelines and at plants.
Owens said Pioneer isn’t “on the hook for any length of time” under the terms of the agreement, and should either of the two companies find a large new satellite in the area “the agreement can accommodate changing production profiles at Oooguruk and Kuparuk.”
According to Marilyn Crockett, executive director of the Alaska Oil and Gas Association, the deal might serve as a model for future third-party companies looking to rent space in existing North Slope facilities and pipelines.
“There’s no doubt that it would make things easier for other independents,” said Crockett. “Any time you iron out the details of a new way of doing things, you resolve those things and get them off the table.”
If current exploration efforts by other oil companies do not yield discoveries large enough to justify new processing facilities, some would require facility sharing agreements.
With expected peak daily production of 40,000 barrels, Eni Petroleum recently chose to build its own facilities in support of its offshore Nikaitchuq project just east of Oooguruk.
Deal first with third party Previous facility sharing agreements on the North Slope have been between companies working in the same unit, but the deal announced on Feb. 25 is the first between operators from two different North Slope units and the first working agreement between a facility owner and a third party on the North Slope.
Winstar Petroleum, a tiny independent company run by former ARCO executive Jim Weeks, secured a facility access agreement with the Kuparuk River Unit in 2003 before drilling the Oliktok Point State No. 1 exploration well in 2003, but the deal died after the well proved to be dry. Weeks has advised companies without production facilities on the North Slope to negotiate facility sharing agreements prior to exploration.
Shortly after Winstar’s well came up dry, the state commissioned and released a report on the potentials and roadblocks for facility sharing and access on the North Slope. The landmark report, conducted by Petrotechnical Resources of Alaska, examined the needs of both the facility owners and the independent companies hoping to use those facilities.
The report came as small and independent oil companies began taking on the bulk of exploration activity in Alaska, chasing large, but not epic, oil fields on the North Slope, in nearshore waters and in the foothills of the Brooks Range. Meanwhile, BP discontinued Alaska exploration programs, focusing instead on increasing production of existing fields.
Many described these as a signs the North Slope was becoming a more mature oil basin, where smaller companies could turn a profit on fields in the 50 million to 500 million barrel range by using existing infrastructure.
Pioneer took the lead on this effort by sanctioning the Oooguruk project in 2006 without building its own facilities for processing the crude oil produced at the field, instead planning to tie in to the existing Kuparuk River Unit.
In a statement, Ken Sheffield, president of Pioneer Natural Resources Alaska, called the agreement “another critical achievement in bringing the Oooguruk project online.”
“Oooguruk is a precedent setting project for our company and for the North Slope. The Pioneer team appreciates the productive working relationships we’ve developed with the KRU owners and the state of Alaska,” Sheffield said.
Majors back the deal At a time when enabling more competition in the Alaska oil industry is an important point of debate in state courthouses, legislative chambers and political offices, top officials at ConocoPhillips and BP framed the new agreement as a group effort among oil companies to collectively tackle North Slope production declines.
“It really shows a spirit of cooperation and collaboration in which North Slope producers are working to help stem the decline of oil production,” Jim Bowles, president of ConocoPhillips Alaska, said in a statement. “ConocoPhillips is committed to helping new producers be successful on the slope, and we congratulate Pioneer on their investment at Oooguruk.”
Also in a statement, BP Alaska President Doug Suttles said, “We encourage and welcome new activity on the slope that can help fill the TAPS pipeline and increase competition.”
Deal was final obstacle to Oooguruk production At more than $500 million in gross expenses, Oooguruk represents the largest capital project ever undertaken by the Dallas-based Pioneer. In addition to a six-acre gravel island, the project also includes a 5.7-mile subsea pipeline and a 2.4-mile pipeline on vertical support members.
The company expects to produce first oil sometime before the middle of the year. Pioneer’s 2008 estimate for start-up at Oooguruk was fourth quarter 2007, but when it applied to unitize Oooguruk, Pioneer was “studying” a fast-track development with startup as early as 2004-05.
Pioneer estimates the gross resource potential of Oooguruk to be between 70 million and 90 million barrels of oil, with peak production reaching between 15,000 to 20,000 gross barrels of oil per day from 40 development wells by 2010. The company plans to drill between 13 and 15 wells this year. The expected field life at Oooguruk is between 25 and 30 years.
Pioneer first acquired a working interest in what would become Oooguruk back in late 2002 from Armstrong Resources and drilled three exploration wells the next year.
From its arrival in Alaska, Pioneer promoted faster “cycle times” for development. If the company meets its target of going online this summer, Oooguruk will have taken five years from exploration to production, the same amount of time it took ConocoPhillips and its partner Anadarko Petroleum to bring the 110,000-barrel-per-day Alpine field online. Alpine, which started production in late 2000, is the third-largest field on the North Slope, behind Prudhoe Bay and Kuparuk.
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