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40 Years at Prudhoe Bay: Owners work to unitize Prudhoe Bay State-approved agreement creates participating areas for oil, gas; divides field Petroleum News
The State of Alaska required that the Prudhoe Bay oil field be developed as a unit, and not individually by the companies holding leases. The 16 initial owners agreed to two operators carrying out the development: BP-Sohio for the western side and ARCO the eastern side.
The agreement was very unusual because it formed two separate participating areas within the Prudhoe field, one for oil and one for gas. Also, two companies being chosen to be field operators was an unusual arrangement. Ordinarily, one company chosen as field operator would be considered the most efficient procedure.
The separate gas and oil rim participating areas came about because the upper portion of the reservoir where most of the natural gas is located, the gas cap, was not directly above the part of the reservoir where the oil was located. The gas cap was partially offset, toward the northeast, compared to the lower part of the reservoir that held the oil.
In many reservoirs, the gas cap would be directly above the oil pool, so leases covering a field would have similar shares of the gas and oil reserves. But because Prudhoe’s gas was not directly above the oil reservoir, and because the reservoir was so large, the location of the various lease holdings resulted in widely differing ownership percentages of the gas and the oil among the field’s owners.
Valuing natural gas Many of ARCO’s and Exxon’s leases were over the gas cap, in the northeast, while most of BP’s leases were over the oil rim. As a consequence, ARCO and Exxon had most of the gas with BP having more than half of the oil. This wouldn’t have posed a problem if the gas could have been immediately marketed so that a commercial value would be put on the gas along with the oil. But because it was not economical to build a pipeline to carry the gas to market, no commercial sales of gas were possible and the parties could not agree upon a value for the gas.
How to value the gas became a big issue in the lengthy, complex unit negotiations. John Reeder, a former chief counsel with BP, now retired, recalls that the decision to form two participating areas, one solely for gas, effectively put the decision off to the future, when a gas pipeline or some other way of marketing the gas would be available.
It also allowed the costs and benefits of production to be allocated among the oil and gas rim owners. For example, under the unit agreement, natural condensate — natural gas that became liquid at the surface — was allocated to gas cap owners. But because it was produced with the oil, most costs were borne by the oil interest owners.
As these liquids were produced and shipped to markets along with crude oil through the trans-Alaska pipeline, the unit agreement provided the formula as to how revenues and cost would be allocated among the oil and gas cap owners.
The decision to have two operating companies was made partly for the same reason, so that the major gas cap owners, ARCO and Exxon, would be, in essence, represented by ARCO as one of the field operators.
BP wanted adequate manpower Another reason, Reeder said, was that at the time BP and Sohio felt they might not have adequate staff available in the United States to operate a very large field like Prudhoe on their own.
BP had experience running large fields in the Middle East, but at that time BP was heavily committed to North Sea development. Sohio was primarily a marketing company, although the company did have a small amount of U.S. production. Having two field operators was a way to bring the full range of expertise among the major owners into the operating organizations.
Reeder feels the arrangement of separate oil and gas participating areas worked well in the early years of the field’s life.
But as Prudhoe Bay entered its more mature phase, with oil production declining and more liquid hydrocarbons being produced as condensate or natural gas liquids, it became more efficient to finally unify the gas and oil under a common operation. This is why the alignment of BP, Phillips and Exxon interests in the Prudhoe field made sense.
George Abraham, a retired BP executive with more than 30 years oil industry experience, was among a small group who worked on the Prudhoe Bay Unit Operating Agreement. Others included John Reeder, David Lybarger, David Pritchard, George N. Nelson, David Walker, Richard Newton and Glen Taylor.
“The basic reason for ‘unitizing’ the Prudhoe field was to optimize recovery and equitably divide costs among working interest owners and avoid duplication of facilities,” Abraham recalled. “By limiting surface facilities you would also minimize possible environmental impacts.”
The document covered how interest owners would divide expenses and how oil produced would be shared in proportion to each company’s equity interest in the field. Abraham said the agreement was the most complex document he ever worked on.
“We started in 1975 but made the biggest push from January to April 1977, prior to field startup. We held our 15-hour, seven-day-a-week marathon sessions in San Francisco.
“As far as I know, the Prudhoe Unit was the largest oil field ever unitized,” he added. “We had 16 interest owners involved. The sheer size of the Prudhoe field and the allocation of reserves in the oil rim/gas cap made the task more difficult. We finally ended up with two volumes containing 1,200 pages.”
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