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February 2006

Vol. 11, No. 9 Week of February 26, 2006

Corps issues permit for Nikaitchuq work

Last hold-ups for Kerr-McGee’s North Slope project are tidelands lease access, processing agreement with Conoco, royalty relief

By Kay Cashman

Petroleum News

The U.S. Army Corps of Engineers has issued the permit for development of Kerr-McGee’s Nikaitchuq oil and gas project in the shallow waters of the Beaufort Sea off Alaska’s North Slope.

The permit, POA-2005,1243, is for five years, involves three production islands and a pad onshore at Oliktok Point, and authorizes the big Oklahoma independent to place up to 952,000 cubic yards of gravel, 319,000 cubic yards seafloor sediments and 1,417,600 cubic yards of overburden into 183.3 acres of U.S. waters to bury pipelines and construct the Nikaitchuq project.

If Nikaitchuq development is approved by Kerr-McGee’s board of directors, its facilities will be built in phases, starting with the coastal pad at Oliktok Point, which will hold 20 wells, and then as many as three production islands, which would each have about 50 wells.

The islands will be built in shallow water south of protective natural barrier islands.

In August when Kerr-McGee filed its first round of permits for Nikaitchuq, the company told regulators that the existing barrier islands “have been avoided to eliminate potential habitat conflicts with local residents and biota.”

60,000 barrels per day

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.

Nikaitchuq will have the first independent-operated production facilities on the North Slope. Only its phase I production from the Oliktok Point pad will be processed at the Kuparuk oil field facilities, which are operated by major North Slope producer ConocoPhillips.

Pioneer Natural Resources’ nearby Oooguruk field will also be independently operated and possibly in production before Nikaitchuq because the company has already approved development, but at Oooguruk all of the production will be processed through Kuparuk.

Waiting on royalty relief

According to State of Alaska officials, one of two main things holding up company approval of Nikaitchuq — and the ability to begin work this winter — is an answer from the Alaska Department of Natural Resources’ Division of Oil and Gas on royalty relief for some of the leases in, and near, the Nikaitchuq unit. (Kerr-McGee applied for royalty relief on Jan.11.)

According to acting division Director Bill Van Dyke, his office is still working with Kerr-McGee on its royalty relief request.

“It’s a work in progress,” Van Dyke said Feb. 23, noting that no preliminary decision had yet been issued.

Van Dyke was referring to a preliminary findings and determination document prepared by the division and signed by DNR Commissioner Mike Menge, initiating a 30-day public comment period.

Three weeks after the end of the public comment period on royalty relief for Oooguruk area leases, Pioneer Natural Resources received its final approval from the state. A similar timetable is possible for Nikaitchuq a division official said.

Deal with ConocoPhillips holding up project

The Oklahoma independent is also still in discussions with ConocoPhillips regarding initial processing for Oliktok point oil, but the major hold up seems to be a tidelands lease access agreement with ConocoPhillips. Kerr-McGee needs access to proceed with Nikaitchuq development because the location of the main production center and the Oliktok Point drillsite would cross over ConocoPhillips’ existing tidelands lease for the Kuparuk sea water treatment plant.

Not having this agreement is place for ADL 403737 has also held up issuance of an air quality permit from the Alaska Department of Environmental Conservation because without the tidelands access agreement Kerr-McGee does not have legal standing to apply for a permit on the Oliktok land.

Documents in state files from Kerr-McGee, ConocoPhillips and the division indicate that Kerr-McGee believes it has reached an impasse in access negotiations with ConocoPhillips, but that ConocoPhillips thinks an agreement is still possible.

Kerr-McGee had already filed for an easement with the division in July on land within the Kuparuk unit under Alaska Statute 38.05.850 for the purpose of constructing pipelines and gravel pads for Nikaitchuq, including possibly the Oliktok Point pad. Because of the breakdown in negotiations between it and ConocoPhillips, Kerr-McGee asked that the division definitely include ADL 403737 in that easement. The state concurred.

In a draft easement released in early February the division wrote, “This easement will be located in part within the Kuparuk River Unit (KRU) operated by ConocoPhillips Alaska Inc (CPA). CPA has expressed concerns regarding the authorization for the (Oliktok) production pad as part of the easement. All parties agree (State, CPA, KMG) that a partial assignment of CPA’s tideland lease, ADL 403737 to KMG would be the best alternative. Commercial negotiations between CPA and Kerr-McGee are ongoing regarding this and other commercial issues. The construction and operational easement will not encroach onto or interfere with existing KRU operations other than where recognized and provided for by commercial agreements between the KRU and KMG.”

The proposed easement runs from the boundary of the Nikaitchuq unit into the Kuparuk unit and “may be up to 21.5 miles in length depending upon the transfer point for the oil, the number of offshore pads constructed, and any commercial agreements with ConocoPhillips,” the draft easement said.

Lawsuit possible, says ConocoPhillips

The division sent a draft copy of the easement to ConocoPhillips. In response Matt Fox, ConocoPhillips’ North Slope development manager, indicated in a Feb. 10 letter that ConocoPhillips would likely appeal the “propriety” of the state issuing an easement and/or file a breach of contract against the state for issuing it.

According to Van Dyke, ConocoPhillips “is concerned about interference with their operations and liability issues. That’s why they want to do a separate deal with Kerr-McGee through the partial assignment so it can address these issues in the tidelands lease assignment document.”

However, paperwork in the Nikaitchuq file shows that the division has done its own assessment and determined that an easement would not interfere with Kuparuk operations. The division has also included language in the draft easement that addresses ConocoPhillips liability and operations concerns.

When asked by Petroleum News in an email if the division expected to issue the easement soon and would it likely contain authorization for the ConocoPhillips tidelands lease ADL 403737, Van Dyke said, “yes and yes.”

Kerr-McGee had hoped to begin work at Oliktok Point this winter. The season for work off the gravel road system on Alaska’s North Slope ends in April.

Eni Petroleum is a minority partner in Nikaitchuq with Kerr-McGee.






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