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Conoco: Alaska exploration not competitive For first time since 1965 company will not explore in the state; Archibald says state’s access, permitting OK, not fiscal system Kristen Nelson Petroleum News
ConocoPhillips said in November that it planned no exploration drilling in Alaska this year.
Larry Archibald, the company’s senior vice president for exploration and business development, told the Alaska Support Industry Alliance Meet Alaska conference Jan. 22 that, “it’s the first time since ’65 that ConocoPhillips or one of its predecessor companies hasn’t actively explored in Alaska.”
That’s saying a lot because those companies have been the state’s most active explorers for many years.
Investment on state lands in Alaska isn’t competitive with investment opportunities the company has elsewhere, Archibald said, comparing Alaska’s competitiveness rank under the tax system initiated when ACES, Alaska’s Clear and Equitable Share, was passed in 2007 with Alaska’s rank prior to the passage of ACES.
Prior to ACES, he said, the Alaska fiscal regime was about “in the middle of the pack” as consultancy Wood Mackenzie ranked the profitability of fiscal regimes for investors.
But after ACES, Alaska moved to the right on the chart, where regimes “take so much of royalty, taxes and other fees there isn’t really much left for the investor in the success case,” excluding the capital the companies put at risk in exploration and appraisal before any production occurs, Archibald said.
Areas attracting investment Australia and the Gulf of Mexico federal outer continental shelf are areas that attract ConocoPhillips’ investment, he said, with Australia offering “adequate fiscal terms and giant potential.”
While ConocoPhillips is investing a lot of money in the Gulf of Mexico, “we consider the fiscal terms in the OCS going in the wrong direction but still adequate,” he said. Threats to the situation there include shorter lease terms. And royalty rates have already increased from 12.5 percent to 19 percent, and rental rates from $7.50 an acre to $11 an acre, with an additional increase in the second half of the lease term.
“So while the terms have been adequate and we’re still exploring … in terms of the direction it’s going you can’t drill some of the world’s most technically challenging and expensive wells into challenged reservoirs without adequate fiscal terms,” Archibald said.
Hurdles at existing fields And it isn’t just Alaska exploration that is challenged, he said.
While there is adequate access around existing giant fields on the North Slope — Prudhoe Bay and Kuparuk — and an adequate regulatory regime, the fiscal regime is a challenge.
“There’s a lot of near-term jobs, cash flow (and) production we could be getting out of existing giant fields,” Archibald said, with a lot of “running room with new technologies.” But that work has a cost disadvantage because expensive waterflood and miscible injection is needed, he said.
“We need incentives for investment in well work and other activities and we could really be upping the game in the near term” at those existing fields.
NPR-A challenges Looking at undeveloped onshore areas of the North Slope, “NPR-A is particularly challenged,” Archibald said.
The company has been exploring in the National Petroleum Reserve-Alaska for a long time, and has drilled 22 wells since 2000. Unfortunately, he said, “we’ve found no standalone fields; we’ve got nothing in NPR-A that is currently producing.”
ConocoPhillips has made discoveries in the eastern part of NPR-A, but has “faced repeated permitting and regulatory delays in hooking those up” to Alpine. The company would like to get CD-5, the Alpine West discovery in NPR-A, permitted, because “that’s the gateway to tying in more discoveries in NPR-A.”
Archibald said there are more things in the area the company would like to explore for, “but we’re going to slow the pace since we can’t hook up our existing discoveries.”
Not for the faint of heart And then there is the Chukchi, where ConocoPhillips spent more than half a billion dollars on 98 leases in a 2008 federal OCS lease sale.
There are many offshore Arctic basins that are “grossly underexplored and the Chukchi in particular is underexplored,” Archibald said.
He called the Chukchi a “world-class petroleum system” and said ConocoPhillips would really “like to get out there and do an exploration program.”
The company is pleased with the leases it won, which include control of a prospect called Devil’s Paw and some acreage on a prospect Shell calls Burger.
But the Chukchi is “not for the faint of heart.”
ConocoPhillips has a lot of money tied up in leases “and we’re burning a lot of capital doing environmental and stakeholder engagement in the next several years,” he said, and the company is still waiting for clarification of its lease status from the courts and the Department of the Interior.
“I think we’re confident we’ll get there eventually, but there’s a lot of money tied up that we’d like to be moving forward with,” Archibald said.
What’s needed? Federal policies, he said, are poor when it comes to access to acreage and poor when it comes to permitting, but OK — although tending down — on fiscal terms.
It’s the reverse with the state, which is OK on access to acreage and permitting, but poor on fiscal terms.
“It’s within the control of the federal and state government to change a lot of those” conditions, he said.
“We need improved legal and regulatory environment for exploration on federal land; we need better fiscal terms and less onerous regulation for exploration on state land.
“And frankly after we get that we need stability” on both fiscal and regulatory issues.
“We see more stability in many of the third-world countries we explore in than we’ve seen lately in this state,” Archibald said.
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