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Providing coverage of Alaska and northern Canada's oil and gas industry
February 2011

Vol. 16, No. 7 Week of February 13, 2011

Facility access rears head in Juneau

Guttenberg introduces bill that would make processing facilities into public utilities to ensure access for new independents

Eric Lidji

For Petroleum News

Democrats are calling it one of the most important issues of the year. Republicans are calling it a solution without a problem. It’s not taxes or production. It’s facility access.

Rep. David Guttenberg, D-Fairbanks, has proposed legislation that would make oil and gas processing facilities into public utilities, like power lines and telephone service.

“What this bill does is very simple. It allows a regulatory process to be in place that allows new producers to have the certainty of getting their product to market,” Guttenberg said in a video statement. He said the bill is specifically geared toward making the North Slope more attractive to new independent producers looking to explore.

While the bill is slim, simply adding one new category to the list of infrastructure defined as a “utility” by Alaska statute, it would have broad implications for the oil and gas industry by adding regulation to the management and economics of non-pipeline facilities. Guttenberg chose to make facility access a regulatory matter because of the complexity of the issue, he told the Alaska Public Radio Network on Feb. 2. “To get into the finite of the minutia of it would be something I think only the governor can do or the RCA can do because they have the agencies at their beck and call,” Guttenberg said.

House Minority Leader Beth Kerttula, D-Juneau, one of the co-sponsors of the legislation, House Bill 138, called it “probably one of the most important bills of this session,” saying it would increase competition, jobs and production on the North Slope.

The potential for new regulations worries some, including Gov. Sean Parnell. In a Feb. 3 press conference, he acknowledged that facility access is an increasingly important issue for Alaska, but showed reluctance to add regulations on commercial activity. Others say the issue isn’t pressing yet. “I don’t know where one can point at any proven reserve of oil that has not been produced on the account of not having access to these facilities that this bill proposed to regulate,” Rep. Mike Hawker, R-Anchorage, told APRN.

“ConocoPhillips is not aware of any company that has oil production available and waiting to be processed through existing North Slope facilities, therefore this legislation tries to solve a problem that does not exist,” ConocoPhillips Alaska spokeswoman Natalie Knox Lowman told Petroleum News by e-mail. “Most importantly, the proposed legislation does nothing to slow the decline of oil production and would add more government regulation and litigation that would impede any efforts to do so.”

BP declined to comment, other than to say that it was reviewing the bill.

The bill is awaiting a hearing in the House Labor and Commerce Committee.

Access goes back decades

Facility access isn’t a new issue.

More mature basins like the Gulf of Mexico and the North Sea already have systems in place for third parties to use the existing facilities built by early developers. In Alaska, the state and independents like Anadarko Petroleum have been fighting the North Slope majors in court for decades over shipping rates on the trans-Alaska oil pipeline.

The difference in HB 138 is that it would expand oversight beyond pipelines.

The bill would regulate separation centers, natural gas dehydration, compression, reinjection systems, natural gas liquid production facilities and water treatment plants.

The North Slope is home to nine production facilities: Alpine, Badami, Endicott, Kuparuk, Milne Point, Nikaitchuq, Northstar, Point McIntyre/Lisburne and Prudhoe Bay.

Operators built those facilities to support their discoveries. Third parties exploring across the North Slope want to be able to rent that infrastructure at a reasonable price to keep from having the build new facilities that might make small prospects uneconomic.

In the Charter for the Development of the North Slope, signed in December 1999 as part of the merger of BP and ARCO, the Alaska Department of Natural Resources claimed that it could require facility access if it served the best interests of the state. BP and ARCO agreed to offer access to third parties on “reasonable commercial terms.”

Those ideas went untested for nearly a decade, though.

Aside from deals between partners on jointly owned fields, only two facility sharing agreements have been negotiated in the 33-year production life of the North Slope.

Winstar Petroleum, a small Alaska independent, negotiated an access agreement with the owners of the Kuparuk River unit in 2003, but unsuccessful drilling made the deal moot.

Texas independent Pioneer Natural Resources negotiated the first working agreement a few years later, also with the owners of Kuparuk, as it developed the Oooguruk unit.

That agreement remains the sole working model on the North Slope.

The deal wasn’t easy coming. Once the parties reached an agreement in principal in mid-2006, it took another year and a half to sign the final deal. The companies blamed some of that delay on changes in the production tax code in late 2007, but much of it involved handling the complications of running two fields through one processing center.

Capacity and back-out

Those complications are greatly detailed in a May 2004 report from Petrotechnical Resources Alaska, an engineering firm focused on the Alaska oil and gas industry.

The first is space.

The report measured the spare capacity for oil, gas and water at each facility. Of the eight facilities online at the time, the report found all to be at capacity for at least one stream.

That brings up the second complication: back-out.

To rent space at a full facility, a third party can reimburse the operator for production that is kept out of the system. Determining the value of unproduced oil and gas is difficult, though. It must consider future commodity prices, the difference in quality between the production streams at different fields and the changing production profile of aging fields.

Even when facilities have spare capacity, access isn’t simple. Owners want to charge fees and surcharges to help recover their investment, operations and abandonment costs.

The report concluded that facility owners needed to be open about explaining back-out calculations and access costs, and that third parties should start negotiations early.

More building than sharing

It’s unclear how well the Pioneer deal is working.

Despite oil patch rumors of high back-out fees, Pioneer has never criticized its agreement with the Kuparuk River unit owners, other than to occasionally note that Oooguruk production might be higher if not for planned and unplanned shutdowns at Kuparuk.

In the time since Pioneer and the Kuparuk owners signed that agreement, though, developers have leaned toward building new facilities rather than renting existing ones.

Eni Petroleum, Pioneer’s minority partner at Oooguruk, chose to build a 40,000-barrel per day processing facility at Nikaitchuq rather than rent space at Kuparuk, but that decision could be connected with the challenges of developing heavy oil at Nikaitchuq.

Brooks Range Petroleum Corp. recently said that it would likely build a micro-processing facility at North Tarn if it eventually developed the Kuparuk area prospect, because the ConocoPhillips-operated facilities at the Alpine field didn’t have enough spare capacity.

While Pioneer doesn’t have any plans to build its own facilities or to rent space on Eni’s newly commissioned facilities, company spokesman Tadd Owens told Petroleum News in December that “the option remains available to us if at some point in the project’s future we determine the economics justify constructing our own processing plant.”

A unique role for the State

While it’s impossible to know how many companies are keeping away from Alaska until facility access is streamlined, it’s clear that the issue hasn’t kept discoveries offline.

“I don’t really think that exploration is being held up by the lack of facility sharing agreements right now,” Tom Walsh, a managing partner of PRA, told Petroleum News.

He believes the lack of facility sharing agreements stems from the lack of recent exploration successes. The two newest fields on the North Slope, Oooguruk and Nikaitchuq, trace their lineage to exploration drilling in the late 1990s and early 2000s.

Walsh believes HB 138 would add a layer of regulation that would slow down development. He also noted that the bill could harm many of the players it hopes to help if independents and third parties willingly decide to build rather than rent, like Eni.

Although the main issues haven’t changed since 2004, Walsh said it might be helpful to update the report to give more up-to-date capacity measurements for each facility.

“The state could be helpful,” said Jim Weeks, managing member of Winstar Petroleum and its sister company UltraStar Exploration. While Weeks believes additional regulation would make the North Slope prohibitively complicated, he said that the state is in the unique position to back out its royalty production to make space for new producers.

“It’s in the state’s interest to get new barrels in the system,” Weeks said.






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