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Vol 21, No. 22 Week of May 29, 2016
Providing coverage of Alaska and northern Canada's oil and gas industry

Hanging in there

Alaska oil producers outline their response to low oil prices

ALAN BAILEY

Petroleum News

The times are tough for Alaska’s oil industry as low oil prices continue to erode margins and executives have to make painful decisions about cutbacks in staffing levels and drilling activities. But the current environment also focuses attention on finding ways to cut costs through improved operational efficiencies, Alaska managers of companies operating in Alaska told the Society of Petroleum Engineers Western Regional Meeting on May 24.

BP, the company that operates the giant Prudhoe Bay field on the North Slope, has through improved efficiencies been able to reduce the breakeven oil price for the field by $9 per barrel, a level that allows the operations to be sustainable in the current environment, Janet Weiss, president of BP Exploration (Alaska) Inc., told the meeting.

“It has not been easy,” she said.

But oil prices will eventually recover.

“We believe the environment is lower for even longer, but not forever,” Weiss said.

BP has been making sure that work which needs to be done is conducted safely but is also done efficiently, Weiss said. In fact, before the oil price had hit its lowest point, BP had already taken a look at its drilling costs and drilling performance, she said. For example, in late 2014 and early 2015 the company’s drilling team found ways of reducing drilling costs at Prudhoe Bay by 20 percent, a cost reduction that can keep rigs running for longer.

In addition, it has been possible to improve revenues as a consequence of improved plant reliability. And BP has slowed the oil production decline at Prudhoe Bay, Weiss said.

However, the company has had to cut back on the Prudhoe Bay drilling program, eliminating drilling that is not viable at the current oil price. The company also had to take the very hard step of letting some great employees go, Weiss said.

New possibilities

But people understand that the oil price will climb back up at some time. And, with improved efficiencies kicking in, opportunities previously viable at oil prices ranging from $40 to $80 per barrel are now viable at lower price levels, Weiss said. At the same time, those efficiencies open the possibility of developing some of the 38 billion barrels of viscous and heavy oil, or the 15 billion barrels of the more challenging light oil, on the North Slope in a world of $50 or $60 oil, she said.

If fiscal stability in Alaska can be achieved, the state’s oil industry can be viewed as being in mid life. And, advancing the Alaska LNG project, a project for exporting natural gas from the North Slope, would de-risk exploration on the Slope, Weiss said. The ability to export products from the Slope would lead to more players in the region’s industry, more production, more innovation and more oil down the trans-Alaska pipeline, she said.

ConocoPhillips

Joe Marushack, president of ConocoPhillips Alaska, said that, despite a 30 percent drop in revenues as oil prices have plunged, his company still needs to conduct many of the activities, including field maintenance activities, that it had been carrying out when the prices were higher. ConocoPhillips operates the Kuparuk River and Alpine fields. The company has been working with its contractors to figure out how to reduce costs as much as possible, while also recognizing that it is also extremely important that those contractors come through the current downturn, along with ConocoPhillips.

“The relationship with the contractors up here is the best I’ve seen any place in the world,” Marushack said. “Our contractors up here get it.”

Despite the oil industry downturn, ConocoPhillips is still investing more than $1 billion in Alaska this year, Marushack said. The CD5 drill site came on line last year. Drill site 2S has come online in Kuparuk. The company has announced the GMT-1 development in NPR-A. GMT-2 is still to come and ConocoPhillips drilled three new exploration wells this year. However, the Kuparuk drill site 1H NEWS project is on hold for the time being.

“So, we believe there is a lot of potential in Alaska,” Marushack said.

ConocoPhillips has had to make some hard decisions, including a decision to reduce the company’s workforce, primarily reducing the number of Alaskans working in the company’s office in Anchorage. But, as the company reduces its costs, it is becoming much smarter in how it does things, and has a team focusing on how to reduce costs further, Marushack said. The company is also providing its employees with opportunities to take on different roles, to expand their skills, he said.

ExxonMobil

Reflecting on the recent volatility of oil prices, Cory Quarles, ExxonMobil’s Alaska production manager, commented that in a commodity market, such as that of oil, “the low cost supplier wins.” As a vertically integrated oil company, ExxonMobil looks across the full oil industry life cycle to maximize its return. ExxonMobil has been seeking ways of sharing best practices between its upstream and downstream businesses and has established a new campus in the Houston area to facilitate this effort, he said. The company must maintain a positive cash flow through the oil price downturn, he said.

“That vertically integrated model does give us quite a bit of an opportunity to be able to create value throughout the business cycle, especially when prices are low,” Quarles said.

Exxon seeks to create the required margins from its assets by maximizing the value of those assets through a series of strategic directions: achieving operational integrity; maximizing the reliability of facilities; lowering the cost structure; business integration; making investments for the long term; and efficient project execution.

For example, in terms of reducing the company’s costs, the company has reduced its staffing by nearly 40 percent since the merger between Exxon and Mobil in 1999, despite the fact that the company’s asset base has grown during that same time period, Quarles said.

Taken together, the company’s various strategies had significantly reduced the company’s operating costs, even before the oil price downturn, and are now helping the company weather the current low-price environment, Quarles said. In fact, in the current market, ExxonMobil sees opportunities through mergers and acquisitions, he said. And, when it comes to investment opportunities, the company takes a long term view, looking at a range of oil price possibilities and focusing on the fundamentals of the oil market, he said.

Hilcorp

David Wilkins, senior vice president of Hilcorp Alaska, said that his company had 515 employees at the end of 2015 and does not anticipate cutting any jobs.

“We’re going to weather this. Our strategy is we’re lean and mean. … We use our contractors to ebb and flow through times like this,” Wilkins said.

But, seeing the already small scale of the local service industry as a challenge, Hilcorp recognizes that contractors also need to make money, he said.

And, when it comes to safety and regulatory compliance, “we cut costs and bureaucracy but don’t cut corners,” he said. However, while Hilcorp will follow the rules and sees safety and environmental excellence as a key to success, it is necessary to find ways of streamlining the current state and federal regulatory climate, he said.

Since entering the Alaska oil industry Hilcorp has doubled oil production in the Cook Inlet. The company now operates four assets in the North Slope region and hopes to see oil production from those fields grow, he said.

Currently the company’s Cook Inlet gas production is exceeding the capacity of the local gas market, so that the company is in a holding pattern when it comes to further gas development: There are another 50 to 100 wells that the company could drill, Wilkins said. Excess gas production is currently going into storage. The company’s drilling expenditure has dropped in response to the fall in the price of oil, although maintenance activities at the company’s fields continue as normal, to maintain safe and effective operations, he said.

And, despite the lean times in the industry, Hilcorp expects to continue to grow. The cost structure of the industry became inflated during the time of high oil prices and now needs to normalize. And new technologies can achieve efficiency gains, he said.

“If we can make money at these prices, we’ll be fine no matter what happens,” Wilkins said.

On the North Slope there are opportunities to use technology to develop heavy and viscous oil, and to squeeze more light oil from the fields. In Cook Inlet there are opportunities to apply better technologies to the development of laminated gas sands, Wilkins said.

Caelus

Pat Foley, senior vice president for Caelus Energy Alaska, talked about the steps that his company has had to take in response to the oil price situation. Caelus operates the Oooguruk field offshore the central North Slope, this winter drilled two exploration wells at Smith Bay on the Beaufort Sea coast and has conducted seismic surveying in its state leases to the east of Prudhoe Bay. The company has seen very encouraging results at Smith Bay and hopes to drill another well there next winter.

On May 20 Caelus flowed the 25 millionth barrel of oil from the Oooguruk field, Foley said.

Foley said that Apollo Global Management, the company that is investing in Caelus, had, before the drop in the oil price, insisted that Caelus hedge its oil price position. That hedging will see the company through most of next year, he said. But with the low oil price situation the company has had to become thrifty - the company has been obtaining tremendous help from its contractors in weathering the storm, Foley said.

Unfortunately, however, in the current price environment the company has not been able to continue drilling at Oooguruk and has also had to reduce the size of its workforce. And the Nuna project, a new development in the Oooguruk field, is on hold for the time being, in part because of fiscal uncertainty in the state, Foley said. He said that he now knows that his company is going to survive and he is confident that the oil price will come back. The company’s projects have 30- to 40-year field lives, Foley said. It is all about positioning for the future.



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