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Providing coverage of Alaska and northern Canada's oil and gas industry
November 2009

Vol. 14, No. 48 Week of November 29, 2009

BP: More challenges than a few years ago

Minge tells RDC BP’s 50-year Alaska strategy a dream, not a promise; cost structure threatens light oil; costs up 4 times oil price

Kristen Nelson

Petroleum News

BP has talked in recent years about the company’s 50-year future in Alaska.

But that strategy is “a dream: It’s not a promise,” BP Exploration (Alaska) President John Minge told the Resource Development Council’s 30th annual conference Nov. 18.

“To achieve that dream we need to continuously improve our performance in safety; we need to protect the environment; and we need to deliver on our business objectives.”

Investments in the oil and gas industry are made looking “very long term,” he said. “We look at risks and rewards over a 20- to 30-year time period.”

Because of that long view, BP’s strategy in Alaska has not changed because of the recent downturn in the economy.

“We’re going to continue to focus on safe, reliable and efficient operations; building a stronger and more profitable light oil business; and growing the business by unlocking the vast heavy oil and gas resources on the North Slope.”

More challenges

But BP faces more challenges in Alaska than it did a few years ago, he said.

The company is making progress on the first priority, “safe, reliable and efficient operations … but we still have a long way to go.”

Minge said the company’s goal is “to run a business where no one gets hurt and where the integrity of our infrastructure will last.”

In the light oil business — traditional North Slope production from areas like Prudhoe Bay — costs are up, production is down and taxes have increased.

“Our cash flow breakeven point is much higher today than it was five years ago,” Minge said, because “over the last 5 years oil and gas industry costs have increased at the rate of 4 times the price of oil.” Combined with a 29 percent decrease in North Slope business, it is “not a model for a sustainable business.”

As a result, “we are being very, very selective” in the projects the company does and the drilling it does.

“We’re also trying to lower the supply-chain costs.”

Policies and economics

With limited investment capital, the company’s choices are driven by economics and policies, Minge said.

“The best opportunities attract the dollars. So in Alaska policy decisions around taxes made over the last few years have slowed the pace and scale of some of our North Slope development.”

The Gulf of Mexico is more attractive for investment because as the oil price goes up — a $1 change at $90 oil was the example Minge used — the government take on an incremental dollar is 40 cents and the industry share is 60 cents. In Alaska, because of the progressivity feature in ACES, “the government keeps nearly 70 percent, 70 cents of that dollar, and the industry share is 30 cents,” he said.

That makes it more difficult to attract capital to Alaska and as a result BP’s spending in Alaska in 2010 will be reduced by about 15 percent, from about a billion dollars to $850 million.

That investment will be roughly one-third for infrastructure renewal; one-third for drilling; and one-third for growth, he said.

In November 2008, outgoing BP Alaska President Doug Suttles told RDC that the company was budgeting $1.2 billion in capital expenditures in Alaska in 2009, a 33 percent increase from 2008. That figure included a projected 10 percent drop in drilling at Prudhoe Bay; about one-third was targeted to Liberty, Denali, Point Thomson and testing heavy oil. BP and ConocoPhillips originally said they would spend $600 million to bring Denali to a 2010 open season, but that amount has now been reduced to about a quarter of the original estimate, with some $120 million spent to date.

Minge said in May, at the annual Alaska Oil and Gas Association luncheon, that BP would spend less than planned, but wasn’t planning any major cuts in response to lower oil prices.

Infrastructure; light oil; growth

“Our first priority is to invest in the infrastructure to enable a sustainable long-term future and reduce risk in our business,” Minge told the RDC conference.

“We then invest in developing the light oil base, which generates the cash.

“And then we invest in growth — projects like Liberty, Point Thomson and Denali, the Alaska gas line.”

Liberty is a key growth project, he said, made possible by advances in drilling technology, with ultra-extended-reach wells, “two miles down, eight miles out,” from the rig to the reservoir.

Production is expected to begin in 2011 and peak at 40,000 barrels per day; the total investment will be more than a billion dollars.

“Liberty will be the first full federal offshore development in Alaska and the competitiveness of the project is helped because the high technical risk is balanced with higher reward in the federal tax structure.”

Where will the puck be?

Minge used a sports analogy — ice hockey — and quoted Wayne Gretzky, who once credited his success to skating to where the puck is going to be; not to where the puck is now.

“So where’s the puck going to be in the future?” Minge asked.

“It’s not going to be in front of the net; it’s going to be in the corners,” he said.

Alaska’s remaining resources are significant, “but they are technically and commercially challenged and they are harder to reach,” and that means the “barrels are not as profitable,” with more investment dollars required for fewer barrels.

There are 20 billion barrels of heavy oil in place, but “we need a technology solution to figure out how to extract the thick oil in commercial quantities from the wellbore.”

BP has a five-year technology project on heavy oil under way, but, Minge said, the company’s “estimates indicate that even with technological success, heavy oil is not economic … at today’s oil prices and under the current Alaska state tax structure.”

Gas demand needed

The North Slope gas project is challenged by Lower 48 breakthroughs in shale gas and by projections of relatively flat demand over the next 30 years.

“Ultimately for Alaska gas to work into the Lower 48 market I believe demand will have to increase to make the project commercially viable,” Minge said.

“So gas is challenged, more challenged than it was a few short years ago,” he said.

So where’s the puck?

Minge said the puck is in play, “but it’s too far from the net.”

“I believe the future will require all key stakeholders to work together differently than we have in the past. The good thing is we are all aligned on where we want to go; we just need to agree on how to get there.”






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