Providing coverage of Alaska and northern Canada's oil and gas industry
October 2007

Vol. 12, No. 42 Week of October 21, 2007

Nikaitchuq OK’d

Expansion approved; Eni applies for royalty reduction, needs project sanction

By Kristen Nelson

Petroleum News

Eni US Operating Co. has received state approval for expansion of its Nikaitchuq unit and has applied for royalty modification for a dozen leases in the expanded unit.

The Alaska Department of Natural Resources Division of Oil and Gas approved Nikaitchuq unit expansion Oct. 5, more than doubling the size of the unit which is north of the Kuparuk River unit in the shallow waters of the Beaufort Sea off Alaska’s North Slope.

On Oct. 16 Eni applied for royalty modification on Schrader Bluff and Sag River production for 12 leases in the expanded 18-lease unit.

Nikaitchuq development is expected to include the first independent production facilities on the North Slope as Eni has said it intends to construct a processing facility for Nikaitchuq within the boundaries of the expanded unit at Oliktok Point. Existing processing facilities are owned by the major North Slope leaseholders — BP, ConocoPhillips and ExxonMobil.

Eni expects to go for management sanction of development by the end of this year and to see first production in 2009.

The Nikaitchuq expansion merged Nikaitchuq with the former Tuvaaq unit — adjacent to Nikaitchuq — and added a lease segment formerly in the Kuparuk River unit and two adjacent leases.

Nikaitchuq formerly had 12,968 acres; the expanded unit has 33,870 acres.

Acting Division Director Kevin Banks told Petroleum News Oct. 12 that unit expansion was a “good sign” that Eni will move into development of Nikaitchuq. “It looks like things are moving ahead,” he said.

Eni acquired 100% this year

The Nikaitchuq and Tuvaaq units were formed by Kerr-McGee and Armstrong Oil & Gas. Eni acquired Armstrong’s North Slope interests in 2005; Anadarko Petroleum acquired Kerr-McGee in 2006; and Eni acquired Kerr-McGee’s interests in the prospects earlier this year.

“Successful appraisal drilling has been completed, confirming the potential viability of the development project,” Eni said in April in announcing its acquisition of Kerr-McGee’s 70 percent interest in Nikaitchuq. “Plans for a phased development are currently being evaluated with the target of sanctioning the project by year end and first oil to flow by the end of 2009.”

Eni said in the plan of exploration which accompanied the expansion application that it will use results from on-ice seismic shot in 2006-07 to determine appropriate 3-D seismic acquisition for the expanded unit.

It has committed to acquire 74 square miles of 3-D seismic by September 2010.

Because a producible resource has been delineated on the acreage, the division proposed benchmarks requiring Eni to commit specific leases in the expanded unit to participating areas by specific dates.

The division said that as part of Eni’s expansion application and an earlier royalty modification application (the state turned down that application from then-operator Kerr-McGee in October 2006), Eni “has stated their intent to construct a processing facility within the boundary of the expanded Nikaitchuq unit at Oliktok Point.” Initial drilling would be from the 313,000-square-foot gravel pad housing the production facilities, which will be built near the ConocoPhillips Alaska seawater treatment plant. Future drilling will be from a small gravel island shoreward of the barrier islands.

New royalty application

The new royalty modification application was received Oct. 17, Division of Oil and Gas commercial analyst Tim Ryherd told Petroleum News. Ryherd said Eni is asking for royalty modifications on Schrader Bluff and Sag River production.

The application wasn’t for the whole unit, but for 12 leases in the center-south. The very northwest and very northeast corner leases of the reconfigured unit are excluded from the application, he said, as is one lease in the very southwest corner.

Leases included in the royalty application are: ADLs 388571, 388572, 388574, 388575, 388577, 388580, 388581, 388582, 388583, 390615, 390616 and 391283.

Ryherd said there is no statutory time requirement for evaluation of royalty modification applications, other than the 30-day public comment period on the preliminary decision. He said the division hopes to issue this decision in a shorter time than the previous two.

The state received an Oooguruk royalty modification application in May 2005; and an amended application in November 2005, after Armstrong sold its leases to Eni; the preliminary decision went out for a 30-day public comment period Dec. 20; the final decision was issued Feb. 1, 2006.

The previous Nikaitchuq royalty modification application, which the state rejected, was received Jan. 11, 2006; the preliminary decision went out for a 30-day public comment Sept. 1; the final decision was issued Oct. 30, 2006.

Earlier modification denied

The Department of Natural Resources denied the Kerr-McGee application for royalty reduction in October 2006, stating that under the new petroleum profits tax passed that August the company would pay, over the life of the project, on a discounted basis “about $120 million less in taxes than under the previous fiscal regime.”

DNR said high capital expenditures for Nikaitchuq “serve to offset other statewide income streams and lower the overall tax obligations for the corporation” and its parent Anadarko Petroleum Corp.

Anadarko is a partner in and has production from the ConocoPhillips-operated Alpine field. DNR projected that Anadarko would “realize very large profits from Alaska production if oil prices stay at current high levels over the next several years.”

Since that decision was issued, Anadarko has sold Kerr-McGee’s interest in Nikaitchuq to Eni, which currently has no production in Alaska.

Unit formed in 2004

The original Nikaitchuq unit, formed in April 2004, included eight state oil and gas leases north of the Kuparuk River unit and east of the Tuvaaq unit.

Eni proposed including an additional 10 leases in the Nikaitchuq unit, seven of which composed the Tuvaaq unit and three additional leases, ADL 390615, 390616 and segment 2 of ADL 355024.

ADL 355024 was committed, in part, to the Kuparuk River unit in 1985 and in 1988 was committed in its entirety to the KRU in that unit’s third expansion. There are two aerially differentiated segments of this lease, the division said, and the southern portion of the lease is not part of this application. Kuparuk working interest owners previously agreed to a farm-out of segment 2 to Eni as 100 percent working interest owner. Segment 2 is commonly referred to as the Kigun portion of the lease. It received a new ADL, 391283, was contracted from Kuparuk and committed to the expanded Nikaitchuq unit.

As a result of assignments of working and royalty interest shares, 100 percent of the working interest in each of the existing Nikaitchuq unit leases and the expansion leases are held by Eni.

Schrader Bluff, Sag River

There are two different formations at Nikaitchuq, heavy oil at the shallower Schrader Bluff formation and light oil at the deeper Sag River.

The division said in its decision that “potentially commercially recoverable reserves” have been tested in both the Cretaceous Schrader Bluff and the Triassic Sag River formations.

Kerr McGee, the original operator at Nikaitchuq, drilled six wells in the Nikaitchuq and Tuvaaq units between 2004 and 2005. Three of the six tested oil from the Schrader Bluff or Sag River formations; Kerr McGee drilled two additional Schrader Bluff wells in 2006.

The Nikaitchuq No. 4, the Tuvaaq No. 1 and the Kigun No. 1 all penetrated the Schrader Bluff formation, the division said. Only the first was tested: using an electric submersible pump to aid in production of the 16-17 degree API crude, the well tested at rates of up to 1,200 barrels per day.

The Nikaitchuq Nos. 1 and 2 encountered both Schrader Bluff and Sag River formations. The Nikaitchuq No. 3 had some 1,834 feet of net pay in the Sag River sandstone in a 3,000-foot horizontal section.

The No. 1 production tested at more than 960 bpd of 38-degree API crude in the Sag River and the No. 3 tested, with a pump, a range of 1,327 bpd to 760 bpd, of 32-degree API oil. The No. 2 was not tested.

Two additional wells were drilled from Oliktok Point in the 2006-07 winter season.

Horizontal wells planned

The division noted that Eni has stated its intention to develop the Nikaitchuq Schrader Bluff formation with horizontal wells, and said there are some five years of Schrader Bluff well performance from initial completions at the Milne Point and Kuparuk River units. Eni “appears to assume” its development at Nikaitchuq will improve on previous Milne Point and Kuparuk River Schrader Bluff completions “by using the latest technology — horizontal and multilateral completions,” the division said.

Sag River has been developed on a standalone basis at Milne Point and those “wells consistently show initial flush production followed by steep decline within the first year to less than 50 percent of the initial rate” the division said. Tests done by Kerr McGee “showed similar initial production rates and comparable if not more pronounced decline,” the division said, adding that stimulation and innovative enhanced oil recovery techniques might improve recovery from the Sag River at Nikaitchuq.

Future exploration possible

Eni said in its exploration plan that it conducted an “on-ice seismic experiment” in the vicinity of Nikaitchuq with Shell Offshore “at a cost of several million dollars.” The results of the experiment “may result in substantial benefit to the Nikaitchuq Unit and other State of Alaska offshore leases in shallow waters by allowing parties to acquire seismic data on such leases during the winter season in a manner that should have greater stakeholder acceptance.”

Eni said further unit evaluation would follow “in reasonable steps. The timeframe and activities will be determined by results.”

Following the expected submittal of a plan of development to Eni’s management for project sanction prior to the end of 2007, Eni said it would approach the State of Alaska soon after project sanction for approval of the plan of development and one or more participating areas.

“The results of the drilling of the initial unit wells will provide information necessary to evaluate potential development of other areas” of Nikaitchuq, the company said.

Eni said the schedule is to use results of the on-ice seismic to develop a plan by July 2008 for “potential 3-D seismic acquisition covering parts of the expanded” unit with approximately 74 square miles of 3-D seismic to be acquired by September 2010.

Eni also said it would closely monitor improvements in drilling technology over the next few years “to determine if additional areas can be reached for development from then existing facilities.”

Newly acquired seismic would be used — along with prior seismic and drilling information — to develop future exploration plans by October 2011.

Development benchmarks added

The Nikaitchuq development was summarized in the division’s 2006 royalty modification decision and includes construction of a gravel pad with drilling, gathering and production facilities on Oliktok Point near the ConocoPhillips Alaska seawater treatment plant; construction of a gravel drilling island near Spy Island tied back via a 3.8-mile subsea flow line and utility bundle to Oliktok Point for fluid processing; construction of an approximately 14-mile pipeline from Oliktok Point to a tie-in near Kuparuk drill site 1Y for connection to the Kuparuk Transportation common carrier pipeline; and future modifications as required to accommodate actual results of well performance.

The division said Eni’s studies indicate “extended reach horizontal producing and injection wells required for pressure maintenance were needed to economically recover the hydrocarbons in place.”

Initial drilling would be from a 313,000-square foot pad at Oliktok Point. The small gravel island would be constructed shoreward of the barrier islands for future drilling.

Because Nikaitchuq has a “producible resource” that has been delineated, the division proposed — and Eni agreed — to a series of development benchmarks.

The division said in its Oct. 5 decision that Eni “intends to produce at Nikaitchuq by 2009” and requiring formation of a participating area by 2009 commits Eni to development of the expansion leases.

The segment of ADL 355024 committed to Nikaitchuq has the new ADL 391283. On Oct. 5, 2009, any portion of ADL 391283 not committed to a participating area would be segregated and the portion not committed would automatically contract from the unit unless that area is covered in an approved plan of exploration or plan of development.

Other leases would contract out of the unit on Oct. 5, 2011, and Oct. 5, 2012, unless committed to a participating area covered by an approved plan of exploration or plan of development.

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