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The Explorers 2008: For Anadarko, exploration is a gas In Alaska since early 1990s, Anadarko expands oil production as it continues the search for gas Eric Lidji Petroleum News
Of all the companies currently exploring for oil and gas in Alaska, none has garnered more interest among the general population than Anadarko Petroleum.
The reason? Anadarko was the first and is still the only company to publicly and explicitly search for natural gas in northern Alaska. All previous natural gas discoveries have either been by accident, or incidental to larger oil finds, or for local community use.
Besides its historic nature, though, Anadarko’s extensive multi-year exploration campaign across the western foothills of the Brooks Range is notable for another reason.
Those gas resources are currently stranded in the foothills because no major infrastructure exists to connect the fields to pipeline grids across the Lower 48 and Canada, or to ship massive volumes overseas to East Asian markets as liquefied natural gas.
In-state markets remain limited by similar constraints: the gas fields in the foothills sit hundreds of miles from the major population center along the Alaska road system.
None of that has tempered Anadarko’s public enthusiasm for the program, though.
“We’re the people that will be supplying the pipeline that Gov. (Sarah) Palin is trying to get built,” James Hackett, chairman, president and chief executive officer of Anadarko, told CNBC’s Larry Kudlow on Sept. 4.
Based in the Woodlands just outside Houston, Anadarko is one of the largest independent exploration and production companies in the country, with extensive operations in the deepwater Gulf of Mexico and the midcontinent region around the Rockies.
Anadarko is also the third largest state leaseholder in Alaska, after ConocoPhillips and Chevron, with nearly 530,000 acres spread across the northern half of the state. Add to that the additional acreage on Native and federal lands, and Anadarko has access to more land in Alaska than any other company, around 4.7 million acres altogether.
Gubik, Chandler, Wolf Creek Anadarko started its search for natural gas this past winter, completing the Gubik No. 3 well and drilling halfway to target depth on the Chandler No. 1 well.
Both wells sit on Arctic Slope Regional Corp. land east of the Colville River near Umiat, and both wells targeted gas, but from different formations.
Using Nabors rig 105-E, Anadarko drilled Gubik No. 3 to around 4,300 feet in January and “encountered natural gas in two zones.” The company then moved the rig to the south in late March to start Chandler No. 1, planning to drill to about 10,200 feet.
“We knew it was pretty unlikely we’d get the whole thing done,” said company spokesman Mark Hanley. “So we did an insulated ice pad and that Nabors rig is sitting there on the insulated ice pad.”
The insulated pad allowed Anadarko to avoid the time consuming process of taking down the rig at the end of last season and putting it back up at the start of this season. Anadarko hopes to make good use of the time it saved. The company is planning an ambitious schedule this winter, using two rigs for three wells, all targeting natural gas.
Using the Nabors rig 105-E already on site, Anadarko will start this season by finishing work on Chandler No. 1. After that, the rig will move north to drill the Gubik No. 4 well about two miles southeast of the Gubik No. 3 site.
“We’d like to finish it, but … the plan right now is that the rig will stay there at Gubik 4 over the next summer on an insulated ice pad,” Hanley said.
At the same time Anadarko works on those two wells, the company also plans to use the Doyon Arctic Fox rig to drill the Wolf Creek No. 4 well in the National Petroleum Reserve-Alaska, about 40 miles west of Umiat on the other side of the Colville River.
Anadarko staked three Wolf Creek well locations in early September with the Bureau of Land Management, the arm of the U.S. Department of the Interior responsible for managing the preservation and development of federal lands.
Anadarko expects Wolf Creek No. 4 to be a shallower well, similar in depth to Gubik No 3, testing the Nanushuk formation at around 4,000 feet.
“This is our plan. It’s pretty solid. … We don’t see any showstoppers right now,” Hanley said.
Program dates to 1951 wells The current Anadarko program in the foothills dates back to the vast exploration efforts of the U.S. Navy and the U.S. Geological Survey in the late 1940s and early 1950s.
During that time, crews working for the two federal agencies drilled dozens of test wells throughout NPR-A, known at the time as the Naval Petroleum Reserve No. 4. Those wells included Gubik No. 1 and Gubik. No 2, and the first three Wolf Creek wells.
The Navy drilled Wolf Creek No. 1 in the spring of 1951, finding gas in the Chandler formation at 1,500 feet. The well flowed at a rate of 881,000 cubic feet per day of gas, but the Navy never quantified the resource potential of the prospect.
Using information collected on scouting missions, aerial surveys and seismic shoots between 1945 and 1950, the crews drilled Gubik No. 1 in late May 1951 to a total depth of 6,000 feet through “tight” rocks, and found “commercial quantities” of gas at depths between 890 feet and 1,750 feet, according to the USGS report on the program.
Following a strenuous haul across soggy tundra, the crews drilled Gubik No. 2 in mid-September 1951, finding both oil and gas and plugging the well at 4,620 feet. As the crews prepared to re-enter the well, a blowout destroyed the rig, sending flames into the air for days. The crew abandoned the well on Dec. 14, 1951.
Early Alaska partnerships The foothills exploration program now approaching its second season follows through on many of the promises Anadarko made since it first came to Alaska nearly 15 years ago.
Most independents come to Alaska hoping to develop relatively small fields overlooked by the majors, but Anadarko arrived in Alaska in the early 1990s looking for big finds, which the company would later call “anchors,” that would make it a major player.
Anadarko started looking for companies to form mutually beneficial partnerships with, hoping to learn the unique skills of Arctic development first hand, and in return offering to teach those techniques exclusive to the agile nature of an independent.
“We learned a lot from the development side of things, as well as the exploration side,” Hanley said about those early partnerships.
Cook Inlet, Alpine successes Over the past decade, most of the successes from those partnerships have come from the ongoing relationship between Anadarko and ConocoPhillips around the state.
The biggest success has been the Alpine field, discovered in 1994 with ARCO Alaska, a predecessor to ConocoPhillips Alaska. The field sits on state and Native land near the delta of the Colville River and the eastern boundary of the NPR-A. ConocoPhillips is the operator of the unit, with Anadarko owning a 22 percent working interest.
Anadarko and Phillips Alaska, which had acquired ARCO, brought the field into production in 2000. The field gave Anadarko its first production in Alaska, and gave the state its first new production base on the North Slope in years.
In the eight years since the field came online, ConocoPhillips and Anadarko have systematically worked to bring Alpine satellites into production, including Nanuq, Fiord and, most recently, Qannik, which came online this past July.
Concurrent with those efforts at Alpine, Anadarko drilled the Lone Creek No. 1 exploration well in 1998 at what is now the Moquawkie unit, onshore west of the village of Tyonek along the western banks of the Cook Inlet.
Anadarko drilled the well through a “strategic alliance” with ARCO Alaska.
At the time, Anadarko said the well flowed at a rate of 10.6 million cubic feet of natural gas per day. The company called it “one of the best shallow gas tests in the vicinity for a reservoir of this age and type.”
Within the next two years, ARCO Alaska became Phillips Alaska, and along with Anadarko announced plans to develop Moquawkie. But Anadarko ultimately sold the field, along with the rest of its Cook Inlet acreage, to Aurora Gas in 2002.
Over the past decade, Anadarko and ConocoPhillips have also tried to become the first companies producing resources in commercial quantities in NPR-A.
During the winters of 1999 and 2000, the companies drilled six wells and a sidetrack in the northeastern portion of the reserve, finding hydrocarbons in all but one.
The companies returned to drill exploration wells in the region over subsequent winters, and this past January formed the Greater Mooses Tooth unit, about 20 miles southwest of Alpine. ConocoPhillips operates the unit with Anadarko as a minority partner.
With ConocoPhillips in the lead, they plan to return this winter with the hope of bringing the oil resources at the unit into production sometime after 2013.
Altamura and Jacobs Ladder Since learning the ropes in those early exploration and development efforts, Anadarko attempted two exploration wells of its own apart from those in the foothills program, but neither well reached the level of success hoped for by the company.
The first was the Altamura No. 1 well, a wildcat in the northeastern planning area of NPR-A. Anadarko drilled to 9,041 feet and hit pay, but the well encountered low permeability, meaning liquids would have a tough time flowing through underground rocks up to the surface, suggesting the field would have produced at lower rates.
Anadarko returned to Altamura this past winter to plug and abandon the well, but the well is currently included in the Greater Mooses Tooth unit.
The second Anadarko effort came on the other side of the central North Slope, with the Jacob’s Ladder unit, 10 miles southeast of Prudhoe Bay.
The state formed the unit in 2005 to give Anadarko a shot at exploring a unique geologic formation in the region: Karst topography, a type of terrain where near-surface limestone gets eroded by water to form extensive underground caves. These caves can be excellent for trapping oil and gas, as proven by the similar features in the epic Permian Basin.
After bringing on BG Group and ASRC as partners in 2006, Anadarko began drilling the Jacob’s Ladder exploration well in the winter of 2007, but didn’t finish by the end of the season. The company returned this year with a newly winterized Akita 63 rig.
The company started drilling in February and achieved a total depth of 14,416 feet. But after reviewing logs and finding “no commercial hydrocarbons,” Anadarko Petroleum plugged Jacob’s Ladder this winter, the company announced in May.
The search for foothills gas Around the time Anadarko began pursuing Jacob’s Ladder, the company publicly spoke about its strategy to “anchor” its Alaska operations in large oil and gas accumulations.
One of the biggest and earliest moves toward that goal came in 1998, when Anadarko acquired exploration rights to more than 3.3 million acres in the foothills of the Brooks Range from Arctic Slope Regional Corp., the Native corporation for the North Slope.
That year, Anadarko also picked up nearby acreage during a state lease sale in the area.
Originally some questioned the purchases. The acreage sat on challenging terrain far from existing oil infrastructure, and nearly 100 years of geologic mapping and a scattershot of exploration wells showed little hope for another Prudhoe Bay or Kuparuk.
And while geologists have long considered the region to be gas prone, the short-term prospects for a major natural gas pipeline in Alaska seemed nearly impossible in 1998.
But with revived talk of a pipeline in the early part of the decade, Anadarko announced it would look for both oil and gas on its acreage in the foothills. And soon, the focus shifted almost entirely to gas, as Anadarko began shooting seismic over five separate gas plays.
Between 2002 and 2005, the average wellhead price of natural gas in the U.S. increased nearly 250 percent. During that time, Anadarko began releasing early estimates suggesting the foothills could match the gas resources of Prudhoe Bay and Kuparuk.
After some short-lived partnerships in the foothills with BP and Alberta Energy, which later became EnCana, Anadarko finally teamed up with Petro-Canada in 2005, acquiring access to more acreage in the process, and BG Group in 2006.
The three companies now split ownership of the prospect equally.
With the new partnership in place, Anadarko announced in September 2007 it would drill the first exploration wells to explicitly target gas in northern Alaska.
“There’s some skepticism. There has been in the past,” Hanley said. “I think you’re seeing it change a little bit with movement on the gas line. And I think more and more people are becoming aware that there’s a potential shortage in the Southcentral region.”
Pipeline options multiply Those factors have created several possibilities for Anadarko over the past year.
Over the first half of 2008, the administration of Gov. Sarah Palin chose and the state Legislature approved TransCanada as the sole licensee under the Alaska Gasline Inducement Act, or AGIA, a process meant to open the pipeline to competitive bidding.
The Calgary-based company is currently gathering field data to support a 2010 open season, which will likely include both an overland and liquefied natural gas option.
In April 2008, BP and ConocoPhillips announced a new joint venture, called Denali—The Alaska Gas Pipeline, to pursue a similar project outside of AGIA. Not bound by legislative approval, Denali completed a full field season this summer.
Those competing efforts both seek to connect prolific Alaska gas fields to the massive interconnected pipeline grid covering North America, but over the past year another gas pipeline project in Alaska gained significant traction in the public imagination.
Facing shrinking supplies and growing demand for natural gas in the population center around Anchorage, the local utility Enstar Natural Gas announced a $6 million field season to study a possible “bullet” line from Southcentral to the Anadarko Gubik field.
The $3.3 billion small-diameter pipeline would run nearly 700 miles through the two largest population centers, Fairbanks and Anchorage.
Even though a state agency continues to press forward on building a spur connecting Anchorage to a mainline, Enstar believes it can no longer afford to wait on a big pipeline to avoid potential supply shortages expected to hit the Cook Inlet basin as early as 2014.
Anadarko sees many options This confluence of pipeline activity, though still far from actual construction, could create numerous transportation options for Anadarko over the next 10 years.
“We see both of those as potential options for gas, if we find it in commercial quantities,” Hanley said about the in-state and overland options. “And … the sooner we can delineate this thing and figure out what we have, the better off we’ll be for taking advantage of whatever the scenario is that makes the most sense.”
Hanley said Anadarko believes it needs 500 million cubic feet a day to make the foothills economic, but the project might be able to work with daily volumes as low as 250 million.
“It depends on timing. It depends on a lot of things. It depends on what we find and how we need to develop the field,” Hanley said.
Some geologists believe the extensive gas resources in the foothills are most likely spread over many relatively smaller fields, rather than focused in a few big giants like the oil fields on the North Slope. If that assessment proves correct, Anadarko would need to craft a strategy for tying fields together, or phasing in development, to justify the project.
In announcing its exploration program, Anadarko said proving up the resources in the foothills would probably take two or three field seasons. The program is now entering its second winter, and Hanley believes “it’s probably going to be a couple more winters before we have a feel for what we’ve got.”
Which means Anadarko “probably wouldn’t be ready for” the first open season on either a TransCanada or Denali pipeline, both currently scheduled for the second half of 2010.
“By 2010, we’re hoping to understand what we’ve got a lot better and be able to make some commercial decisions. … So, yeah, it’s going to take us a couple more seasons. You can always hit a home run in one season, or strike out, you know?” Hanley said.
Anadarko continues to bolster its foothills position. At a federal lease sale in September, the company picked up additional NPR-A acreage between the Wolf Creek and Gubik leases. The progress in the foothills combined with the lack of success at other prospects has focused Anadarko’s exploration efforts, but it hasn’t limited them, Hanley said.
“That’s always on the horizon,” Hanley said about other prospects. “We’ve got people looking at things all the time. But clearly we are focused on the foothills right now.”
Open access, tariffs, taxes
As Alaska matures as an oil and gas province, policy debates have begun addressing ways to “open the basin,” or entice more companies to explore and develop the resource potential of Alaska. As the largest independent operating in the state, Anadarko is often put forth as the primary example of the needs of non-majors in Alaska.
When it comes to a gas pipeline, the biggest need in many respects is “open access,” or making sure space will be made available in the future at a reasonable price to exploration companies looking to ship gas in the years after the initial open season on a pipeline.
Tariff issues on the trans-Alaska oil pipeline led to protracted and complicated legal and regulatory battles on both the state and federal levels.
The Palin administration included provisions within AGIA guiding the future expansion of the pipeline, but many opposing the bill cited new provisions from the Federal Energy Regulatory Commission, the agency charged with final approval of the project.
“We liked the provisions in AGIA that TransCanada agreed to. We think they give us more comfort on the access issues that are important to us,” Hanley said. “But, you know, there are provisions in FERC rules as well. … We proposed some of that.”
Another major issue was whether a state tax code could be used to both increase state revenues and prompt companies to explore previously untapped corners of Alaska.
Following a major structural change to the tax code in 2006 through the Petroleum Profits Tax, which shifted accounting from gross production to net revenues, state lawmakers revisited the tax code during a special session called by the governor in 2007.
Ultimately, lawmakers passed Alaska’s Clear and Equitable Share, or ACES, which not only increased the basic tax rate on production, but also a progressive tax element tied to oil prices and the tax credits associated with exploration expenses.
“Generally, we felt the tax rate went too high. … There were some additional credits that were added during ACES that were helpful for exploration companies. … We’re out drilling. Clearly, ACES didn’t improve our exploration prospects, but we’re still drilling so they didn’t kill them either,” Hanley said.
The final decision about sanctioning widespread development across the foothills of the Brooks Range will ultimately come down to prices and volumes, Hanley said.
“But, frankly, the big thing is to get a pipeline built,” he said.
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