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Providing coverage of Alaska and northern Canada's oil and gas industry
February 2008

Vol. 13, No. 5 Week of February 03, 2008

ENI sanctions $1.45 billion Nikaitchuq development

The Italian oil major Eni announced plans on Jan. 25 to spend $1.45 billion developing the Nikaitchuq oil field in the Beaufort Sea.

The development plan for the field includes drilling around 73 production and injection wells between now and 2011.

Of those wells, about one third will be drilled from an onshore pad at Oliktok Point and the remainder from an offshore artificial island situated about three miles from the coast in the shallow waters near Spy Island in the Beaufort Sea. The average water depth at Nikaitchuq is around 10 feet.

Eni will build a 3.8-mile subsea pipeline connecting the island to a new, dedicated onshore processing facility at Oliktok Point capable of treating as much as 40,000 barrels of fluid per day — the first such facility in northern Alaska that will be operated by a company other than the BP and ConocoPhillips.

Eni will send the fluids along a 14-mile pipeline connecting this facility to the ConocoPhillips-owned Kuparuk network, which in turn will take the fluids to the trans-Alaska oil pipeline.

Nikaitchuq will be the first development project in Alaska for the Italian mega-major, which has exploration and production activities on six continents.

Eni estimates Nikaitchuq contains 180 million barrels of recoverable reserves and hopes to produce first oil by 2009.

Justified royalty modification

The announcement to sanction the project follows a recent state decision to modify the royalties on 11 leases in the Nikaitchuq unit.

The decision drops the royalty rate of those leases to the minimum 5 percent during periods of low oil prices or low production.

Testifying before the Legislative Budget and Audit committee on Jan. 29, Division of Oil and Gas Director Kevin Banks said the royalty modification made Nikaitchuq an economically viable project for Eni.

But back in 2006, the state denied a request for royalty modification at Nikaitchuq made by the previous owners, Kerr-McGee Oil and Gas Corp.

Banks said the Eni plan differed in many ways from the Kerr-McGee plan, including having a larger scope for the project and the increasing costs of labor and materials. Banks also said Kerr-McGee would have been able to use the assets of its parent company, Anadarko Petroleum, to offset the initial costs on Nikaitchuq.

“We’re not just interested the average rates of return or the net present value to the owner ... but we’re also concerned about how the project will behave when things are going badly: when they don’t get the kinds of reserves they expected, when costs are higher than anticipated, when prices are lower than anticipated,” Banks said. “So we’re kind of looking at a distribution of outcomes, the average of which may be uneconomic.”

Eni applied for royalty modification alone on Oct. 16, 2007, and the state issued its preliminary findings in favor of Eni on Nov. 30.

The final decision made on Jan. 11 stands for 25 years. It drops the royalties at Nikaitchuq when the price of Alaska North Slope crude oil drops below $42.64 or production falls below 4,000 barrels per day.

The state approved this royalty structure for 11 leases in the Nikaitchuq unit, but Eni request relief on all 12 leases in the unit.

Banks said the division chose to deny royalty modification for that one lease because data suggested “no resources under that 12th lease.”

“It would be our expectation that as a participating area was formed that that lease would contract out of the unit anyway,” Banks said.

Going forward after much swapping

Nikaitchuq comes from an Inupiat word meaning “to persevere,” a fitting name for a project that has traded hands numerous times over the past decade.

Using previous data suggesting oil in the region, Armstrong Alaska began exploring the region in 1997, eventually partnering with Kerr-McGee on a drilling program.

In 2007, Eni announced a takeover of Kerr-McGee’s 70 percent interest in Nikaitchuq, giving the Italian company full ownership of in the unit. At the time, Eni announced its intentions to spend $900 million developing the field.

Eni also maintains a 30 percent interest in the Oooguruk unit, operated by the Irving, Texas-based Pioneer Natural Resources and expected to go into production later in 2008.

Oooguruk, like Nikaitchuq, is a near-shore operation working under royalty relief from the state, but unlike Nikaitchuq, Oooguruk’s petroleum will actually be processed at Kuparuk.

—Eric Lidji






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