Providing coverage of Alaska and northern Canada's oil and gas industry
January 2004

Vol. 9, No. 2 Week of January 11, 2004

Happy New Year, Alaska

Armstrong brings new player, independent Kerr-McGee, to North Slope

Kay Cashman

Petroleum News Publisher & Managing Editor

Alaska Gov. Frank Murkowski has made bringing new players to the oil rich North Slope a priority for his administration. Last year, Bill Armstrong brought Pioneer Natural Resources to the slope as operator and majority owner of Armstrong Alaska’s Northwest Kuparuk prospect. On Jan. 8, Armstrong snagged big independent Kerr-McGee Oil & Gas as operator and majority partner in its Northwest Milne prospect northwest of Prudhoe Bay where Armstrong has said it would drill one to three wildcats this winter.

Oklahoma-based Kerr-McGee Oil & Gas said it has signed a deal with Armstrong to acquire a 70 percent working interest in the 12,000 acre Northwest Milne prospect, which is located in shallow waters offshore BP’s Milne Point unit some three miles north of Oliktok Point. The agreement includes the right to acquire interest in 13 additional leases in the area, totaling 54,000 acres.

“The governor wants more players on the North Slope. … Opportunities are opening up in Alaska. The state has been great to work with. It’s good to be able to bring a company to the slope that hasn’t been there before. Kerr-McGee is the kind of company we need up there. They are big enough to operate on the North Slope and they’re great operators,” Bill Armstrong, president of Armstrong Alaska and its affiliate, Denver-based Armstrong Oil & Gas and Armstrong Resources, told Petroleum News Jan. 8.

Gustafson has POA, Stockinger not new to slope

Armstrong and Kerr-McGee are in the process of getting Northwest Milne drilling and operational permits transferred to Kerr-McGee.

Alaska Interstate Construction has already begun ice road construction to the prospect.

To insure a smooth transition between the two operators, Kerr-McGee has given Armstrong Vice President Stu Gustafson power of attorney to direct this winter’s exploration operations at Northwest Milne, Michael Stockinger told Petroleum News Jan. 8. Stockinger, vice president of drilling for Kerr-McGee, worked as drilling manager for Conoco in 1991 at the Milne Point unit on Alaska’s North Slope.

Kerr-McGee office in ASRC building

Kerr-McGee has set up an Alaska office in suite 702 of Arctic Slope Regional Corp.’s office building at 3900 C Street in Anchorage. Two Kerr-McGee employees will be working rotation shifts from that office — Charles Summers and Todd Durkee.

In its press release Kerr-McGee said it would drill at least one well during the first quarter. Stockinger said the exploration plan with the state “requires one well but we can farm into additional acreage to drill additional wells. We’ll likely sit two wells this winter unless we’re totally disappointed with the results from the first well. … There is a possibility of drilling three but it’s fairly unlikely because of our start up time.”

Drilling from Spy Island

The wells will be drilled by Nabors Alaska Drilling Rig 27E from ice pads at two locations on Spy Island — one near the middle of the island and the other at the east end of the island.

Gustafson said in August that the proposed wells — Nikaitchuq No. 1, No. 2 and No. 3 — “will target multiple objectives. One of the primary objectives is an attempt to extend the favorable productive Jurassic sand fairway,” which tested commercial at Pioneer and Armstrong’s Northwest Kuparuk prospect in the North Slope’s Oooguruk unit.

ASRC Energy Services is project manager

ASRC Energy Services is the engineering support operations service company that will oversee drilling at Northwest Milne for Kerr-McGee. Skip Coyner, the ASRC drilling superintendent who oversaw Pioneer’s exploration program at Oooguruk last winter, is the project manager, Gustafson said.

Alaska Chadux was selected as the spill response contractor.

The initial Northwest Milne acreage was acquired by Armstrong from BP earlier this year. Armstrong has also picked up other leases in the area from “other entities and lease sales,” Armstrong’s vice president of land, Ed Kerr, told Petroleum News Jan. 8.

Kerr-McGee Oil & Gas is an upstream affiliate of Oklahoma City-based Kerr-McGee Corp., an energy and inorganic chemical company with global operations and assets in the neighborhood of $10 billion.

Editor’s note: Kerr-McGee ranked number 12 for 2002 upstream capital and exploration spending in the United States on Petroleum News’ Top 70 E&P companies list, having invested $721 million that year in capital and exploration projects. Pioneer placed 16 on the same list with expenditures of $534 million in the United States.

Kerr-McGee transforms into deepwater player

Petroleum News

Oklahoma’s Kerr-McGee, a $10 billion enterprise and the latest major independent to enter Alaska’s oil patch, has remade itself so many times over the past 70-plus years that its founders would be hard pressed to recognize the company today.

Its roots date back to Ada, Okla., and the Great Depression of 1929 when Robert Kerr and James Anderson formed the Anderson & Kerr Drilling Co. In 1937, Dean McGee joined the company that would change its name to Kerr-McGee in 1946, just before the new company made history in 1947 by drilling the world’s first commercial oil well out of sight of land in the Gulf of Mexico.

The company, now based in Oklahoma City, actually expanded its exploration activities into the Gulf of Mexico in 1945, the same year it decided to move into the downstream business with the purchase of a refinery in Oklahoma. The 1950s brought an expansion of Kerr-McGee’s refining and marketing businesses, followed by a move into industrial chemicals in 1967 with the acquisition of operations that included a pigment plant in Hamilton, Miss.

Company moves into North Sea in 1976

With a mind to expanding its international exploration and production activities, Kerr-McGee participated in a 1976 oil discovery in the North Sea, which along with the Gulf of Mexico and onshore Texas, Oklahoma and Colorado, remains a core area for the company. The company also has producing fields in Louisiana and New Mexico, as well as the South China Sea.

Meanwhile, Kerr-McGee was building coal mines in anticipation of renewed demand for the fuel. Coal was shipped from the company’s Jacobs Ranch surface mine in Wyoming in 1978, followed by the Galatia Mine in southern Illinois in 1984.

Kerr-McGee’s world begin to change radically in the 1990s as market globalization and competitive pressures led the company to focus on its strongest businesses and divest others, including its offshore contract business during 1990 and 1991, its refining and marketing businesses in 1995, and its coal business in 1998.

Kerr-McGee decided to keep and expand its chemical business, launching a new titanium dioxide pigment project in Western Australia in 1991 and establishing the company as a global producer and marketer of white pigment. In 1998 and 2000, the company acquired pigment plants in Europe and currently has operations in Germany and the Netherlands. It also increased production at Hamilton.

Kerr-McGee becomes a major offshore player

But it was a series of strategic mergers and acquisitions that transformed Kerr-McGee into a major offshore player and premier deepwater explorer, particularly in the prolific Gulf of Mexico, where the company amassed a huge acreage position while turning up impressive oil and gas discoveries.

Kerr-McGee’s 1999 merger with Oryx Energy significantly increased the company’s worldwide inventory of oil and gas prospects. And its acquisition of HS Resources in 2001 boosted the company’s U.S. gas reserves by 77 percent and its worldwide production by 15 percent. The company’s North Sea operations also expanded with the 1998 acquisition of the U.K. assets of Gulf Canada Resources and the 2000 acquisition of Repsol’s U.K. upstream business.

Within a period of two and one-half years, Kerr-McGee tripled its exploration and production base and expanded its deepwater acreage by an astounding 1,200 percent. At year-end 2002, the company held an average interest of about 72 percent in roughly 64 million undeveloped acres worldwide. Of the total, about 51 million acres were in deepwater trends greater than 1,000 feet.

Biggest move in Gulf of Mexico

Perhaps Kerr-McGee’s biggest move came in the Gulf of Mexico, where the company has more than doubled its position and now holds an interest in more than 550 blocks, more than 350 of which are located in deep waters. The company also became an aggressive participant in federal lease sales.

But it was the deepwater discovery and development of the nine-block Nansen-Boomvang complex at East Breaks that established Kerr-McGee as a legitimate deepwater player and in the Gulf of Mexico. The company also scored another technological first, using the world’s first truss spar at Nansen, which both enhances production and lowers costs.

Other noteworthy deepwater discoveries in the Gulf of Mexico include Neptune, Gunnison, Baldpate, Conger, Merganser and, Constitution, Hornet and Red Hawk.

Industry leader in joint ventures

Kerr-McGee also became an industry leader in forming joint ventures and developing the so-called hub concept, or central production facility that ties in production together from several fields involving partners. One of the company’s biggest partners was Ocean Energy, which later was acquired by fellow Oklahoma-based independent Devon Energy. In 2001, Ocean agreed to take interests in 181 undeveloped leases held by Kerr-McGee. In 2002, Kerr-McGee and Ocean teamed up with Australia’s BHP Billiton to amass an acreage position near the Merganser discovery in the eastern Gulf of Mexico.

At year-end 2002, Kerr-McGee had total reserves of about 1 billion barrels of oil equivalent, with net daily production of 191,000 barrels of oil and 760 million cubic feet of natural gas. In the third quarter of 2003, the company reported net income of $29.1 million and strong cash from operations totaling $1.2 billion for the first three quarters of the year, up 14 percent from the previous year.

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