DNR issues final Nikaitchuq royalty denial

The Alaska Department of Natural Resources has issued a final findings and determination denying royalty modification for Nikaitchuq. A preliminary finding was issued in September (see story in Sept. 10 issue of Petroleum News).

Kerr-McGee, subsequently acquired by Anadarko Petroleum, applied for royalty relief for the development in January.

Anadarko Alaska spokesman Mark Hanley told Petroleum News in September after the preliminary finding denying royalty modification that Anadarko was moving forward with the 2006-07 winter drilling program “as originally planned by Kerr-McGee.”

The 14 leases in the royalty application include Schrader Bluff and Sag River pools including heavy oil and relatively good reservoir rock in the Schrader Bluff formation and higher-quality oils, but worse reservoir rock in the Sag River formation.

A gravel pad on Oliktok Point (drilling, gathering and production facilities) and a gravel drilling island near Spy Island are planned, along with a 3.8-mile subsea flow line and a 14-mile pipeline from Oliktok Point to a tie-in to the Kuparuk Transportation common carrier pipeline. Extended reach horizontal producing and injection wells will permit a relatively small footprint, with initial drilling from the Oliktok Point pad.

The department said that under the Production Profits Tax passed in August Kerr-McGee would pay “on a discounted basis, about $120 million less in taxes than under the previous fiscal regime,” and “realize very large profits from Alaska production if oil prices stay at current high levels over the next several years.” The high capital expenditures at Nikaitchuq will generate “qualified capex” credits that reduce tax obligations. “Capital investments in Nikaitchuq development offset income and result in a lower net tax liability,” the department said, with the new tax regime improving net present value, internal rate return and the profit-to-investment ratio for Nikaitchuq. At the same time, the State of Alaska is giving up significant tax revenue for the project, an estimated $87 million.

The department also said that Kerr-McGee expressed concern that if the royalty modification was denied, the company might be precluded from applying at a later date based on new information, but the department said a company that has applied for royalty modification is not precluded from applying again.

—Petroleum News