Kerr-McGee files for royalty relief

Oklahoma-based independent rolls Tuvaaq, Kigun and Nikaitchuq leases into application; DNR official says independent hopes to lay gravel this winter; Corps permit, ConocoPhillips deal last hurdles company has to clear to start work on Nikaitchuq

Kay Cashman

Petroleum News

Kerr-McGee submitted its formal application to the State of Alaska on Jan. 11 for royalty modification on 14 leases in and around its proposed Nikaitchuq oil development in the shallow waters of the Beaufort Sea off Alaska’s North Slope. The Oklahoma independent asked the state to drop the royalty rate on all the leases to a flat five percent.

The application for royalty relief was submitted by Kerr-McGee on behalf of itself and its primary minority co-lessee Eni Petroleum Exploration, which bought out Armstrong Alaska’s North Slope interests last year.

Twelve of the 14 leases carry a 16.66667 percent royalty rate and two Net Profit Share (30 percent) leases carry a 12.5 percent royalty rate.

Included are four leases from the Nikaitchuq unit, two leases not currently in the unit but adjacent to it, six of the seven leases in the Kerr-McGee-operated Tuvaaq unit which borders Nikaitchuq, one lease in the nearby BP-operated Milne Point unit, and one lease in the ConocoPhillips-operated Kuparuk River unit that includes Kerr-McGee’s Kigun well, a 2005 discovery the company said confirmed the Tuvaaq discovery.

The 14 leases included in the application are: ADL 388581, ADL 388580, ADL 388583, ADL 388582, ADL 355021, ADL 390615, ADL 390616, ADL 388571, ADL 388572, ADL 388574, ADL 388575, ADL 388577, ADL 388578 and ADL 355024.

“Clear and convincing,” says Kerr-McGee

The big independent drilled three exploration wells and three appraisal wells on the 14 leases in 2004 and 2005.

Kerr-McGee said it has “made a clear and convincing showing (through the application and previously submitted confidential information) that the proposed modification of royalty is in the best interest of the state and meets the requirements of Alaska Statute 38.05.180 (j),” establishing the following:

• The oil field or pool underlying the 14 leases has been sufficiently delineated.

• The oil field or pool has not previously produced hydrocarbons for sale.

• Oil production from the field or pool would not be economically feasible without royalty relief from the state.

Will KMG get what it wants?

In mid-December DNR Commissioner Mike Menge said the state had decided that royalty relief for Pioneer’s proposed North Slope Oooguruk oil development was in the best interest of the state. Oooguruk is adjacent to the Tuvaaq unit, which sits between it and Nikaitchuq north of Kuparuk.

Menge approved a flat five percent royalty rate on nine of the 18 leases in Pioneer’s application. Those leases had royalty rates of 12. 5 and 16.6667.

But Oooguruk operator Pioneer had also asked that the 12.5 percent royalty rate be dropped to 5 percent on four Net Profit Share leases within the unit and that the NPS distinction be dropped.

Then Pioneer amended its application to include five more leases, asking that the royalty rate of 16.6667 percent on those leases also be reduced to 5 percent, the lowest allowed under the statute.

But Menge did not drop the NPS distinction from the four leases and he converted the five leases that were not NPS leases into NPS leases, which meant Pioneer has to share 30 percent of its profits from Oooguruk after operating costs have been deducted — and after $80 million in exploration costs have been recovered, which Pioneer told the state was what it had spent to date. Menge did agree to a 5 percent royalty rate for the nine NPS leases, however.

Still, Pioneer was pleased with the commissioner’s decision and is moving ahead with the project, although it still needs a U.S. Army Corps of Engineers permit to start construction this winter.

How soon will KMG get a decision?

One thing “in their favor is that theirs will be the second royalty modification out of the box,” he said referring to the recent preliminary findings and determination document signed by DNR’s commissioner for Pioneer. “We know what steps have to be taken to get the thing out and get it published. We have our thought processes in place on how to evaluate leases as well so we should be able to come to a decision fairly quickly.”

“We’ve also been talking with Kerr-McGee for awhile so we’re familiar with all the data we have to evaluate,” Banks said.

NPS leases interesting

The net profit share leases, which Kerr-McGee picked up from other North Slope leaseholders, “are interesting insofar as it’s only a portion of both for which they’re asking for royalty relief,” Banks said. “Their ownership is limited by depth on one (ADL 355021) — and part of a lease on the other one” (ADL 355024) where ExxonMobil has retained less than a one percent working interest ownership.

Kerr-McGee said its “application is limited to production from the stratigraphic equivalent of the interval from 3,470 feet to 8,600 feet TVDSS on the Kigun No. 1 PB01 log. As to ADL 355021 it is further limited to those depths below the stratigraphic equivalent of 100 feet below 7,426 feet TVDSS as drilled in the Conoco NW Milne No. 1 well. As to ADL 355024 this application is limited to that portion of the lease described on Exhibit B,” where the Kerr-McGee described its portion of the lease as T14N, R8E U, Sections 24, 25, 36 and T14N, R9E U, Sections 19, 30, 31.

Nikaitchuq holds 100-200 million BOE

The big independent said the gross estimated resource range is 100 million to 200 million barrels of oil equivalent.

Kerr-McGee said it continues to work toward sanctioning and is also working with the State of Alaska and its partners on issues including royalty relief, permitting and unitization.

The company has said Nikaitchuq facilities would be built to handle peak flow of 60,000 barrels per day and to produce through 2026.