Anadarko OKs pilot wells

Drilling two wells at Nikaitchuq this winter as part of development evaluation

Kay Cashman

Petroleum News

Any concerns state officials have had about the acquisition of Kerr-McGee by Anadarko Petroleum slowing down plans for development of the North Slope Nikaitchuq prospect should be alleviated by Anadarko’s decision to proceed with a planned pilot program this winter.

“We’re moving forward with the winter drilling program as originally planned by Kerr-McGee,” Anadarko’s Alaska spokesman Mark Hanley told Petroleum News Sept. 7.

The news came on the heels of the Alaska Department of Natural Resources commissioner denying a royalty modification request from Kerr-McGee for 14 state leases in the proposed Nikaitchuq oil development area, including four in the Nikaitchuq unit, six in the Kerr-McGee-operated Tuvaaq unit, one in the Kuparuk unit, one in the Milne Point unit and two leases just outside the Nikaitchuq unit boundary.

“The original plan was to go forward with a pilot program regardless of royalty relief,” Hanley said, noting that in evaluating Nikaitchuq for development, Anadarko will take into account everything from the results of this winter’s drilling, to royalties, to the impact the state’s new production tax will have on project economics.

Earlier in the year DNR Commissioner Mike Menge indicated he believed Kerr-McGee’s royalty modification application qualified under the fiscal system in place at the time. This was after the state had approved a similar request from independent Pioneer Natural Resources for its nearby Oooguruk oil field development.

New production tax changed decision

But circumstances changed when a new production tax structure for the State of Alaska was introduced in the Alaska Legislature in May.

Menge told Kerr-McGee he was not comfortable making a decision until he knew what the new fiscal regime would look like because in order to qualify for royalty modification an applicant must show a project is not economic without a royalty reduction.

As it turned out, the production tax signed into law Aug. 22 “materially improved” the economics of the Nikaitchuq development, DNR said.

In its decision DNR said that “under the PPT and over the life of the project” Kerr-McGee will pay, “on a discounted basis, about $120 million less in taxes than under the previous fiscal regime.”

Hanley said Anadarko is putting together its own economic model involving the impact of the new production tax to see if it comes to the same conclusion as the state.

“If we come out with different numbers, then we’ll go back into discussions with the state.”

Using Rig 245 to drill two wells

“Gravel is being moved right now at Oliktok Point for the pad,” Hanley said.

“My understanding is they will be testing both their drilling technology and their completion and production assumptions” in the pilot program, Bill Van Dyke said. Van Dyke is the acting director of the state’s Division of Oil and Gas.

The vast majority of oil in the field is viscous oil in the Schrader formation, Van Dyke said.

Anadarko will be drilling Alpine-like wells, he said, “but the Nikaitchuq wells will be a lot shallower, at a much bigger angle than Alpine.”

Van Dyke said, “The last we heard was that if the pilot wells are successful, then they’ll probably sanction the project and go forward.”

Kerr-McGee told the state that formation of a new unit involving a combination of the Nikaitchuq and Tuvaaq units, as well as surrounding acreage, including the previously mentioned Milne Point and Kuparuk leases, was possible.

If Anadarko ultimately approves development, Nikaitchuq will have the first independent-operated standalone production facilities on the North Slope. Only its phase I production from the Oliktok Point pad involving as many as 20 wells will be processed at the nearby Kuparuk oil field facilities, which are operated by ConocoPhillips.

Three other production islands, which would each have about 50 wells, were part of Kerr-McGee’s U.S. Army Corps of Engineers permit and unit paperwork. The islands would be in the shallow waters of the Beaufort Sea south of the protective natural barrier islands.

Discovered in 2004, at its peak Nikaitchuq is expected to produce 60,000 barrels of oil (and small amounts of natural gas) per day from two formations, the Schrader Bluff and the Sag. The field, which is thought to hold between 100 million and 200 million recoverable barrels of oil, is expected to produce for 30 years.