On Dec. 17 Mike Menge, commissioner of the Alaska Department of Natural Resources, announced DNR had decided that royalty relief for the proposed North Slope Oooguruk oil development was in the best interest of the state.
As part of an approval process that dropped royalties from 12. 5 and 16.6667 percent to 5 percent on nine of the 18 Oooguruk leases, Menge signed a preliminary findings and determination document, initiating a 30-day public comment period on the proposed reduction.
Located in the shallow waters of Harrison Bay north of the Kuparuk River unit, Oooguruk’s recoverable reserves are in the Kuparuk C sandstone and the Jurassic Nuiqsut sandstone, which are expected to yield 18,000 to 20,000 barrels of oil per day at peak production.
Oooguruk operator Pioneer Natural Resources formally applied to DNR’s Division of Oil and Gas for modification of royalty rates under Alaska Statute 38.05.180 in late May, initially asking that the 12.5 percent royalty rate be dropped to 5 percent on four Net Profit Share leases within the Oooguruk unit (ADL’s 355036, 355037, 355038 and 355039).
In early November, Pioneer amended its application to include five more leases (ADL’s 389950, 389952, 389954, 389958 and 389959), asking that the royalty rate of 16.6667 percent on those leases also be reduced to 5 percent. (The five leases are not in the Oooguruk unit, but Pioneer is working on a unit expansion application involving those leases and one other, bringing total unit leases to 18.
Both sides pleased
Pioneer did not get everything it asked for from the commissioner. He gave them a 5 percent royalty on all nine leases, the minimum rate allowed, but converted the five leases that were not Net Profit Share leases to NPS leases, which means Pioneer will share 30 percent of its profits from Oooguruk after operating costs have been deducted — and after $80 million in exploration costs have been recovered, which Pioneer told the state was what it had spent to date.
The company also requested that Oooguruk be “treated as separate and distinct” from nearby Kuparuk where Oooguruk liquids would be processed “for ELF factor calculation, resulting in a severance tax that is effectively zero.”
But Menge said no, tax issues being the jurisdiction of the Department of Revenue.
Still, both sides seemed pleased with the outcome of their negotiations.
“I believe we’ve crafted a decision that strikes a good overall balance between the risks and rewards for both the state and the leaseholders,” the commissioner said.
Ken Sheffield, president of Pioneer’s Alaska subsidiary was equally satisfied with the outcome: “We were pleased that the state was willing to work with us. In any negotiation you never get exactly what you want and I think what the state and Pioneer agreed to is fair for both parties.”
Facilities capex estimated at $246 million
DNR’s approval of the royalty reduction was conditional on several things, including Oooguruk development being sanctioned by its owners by Dec. 31, 2007.
Also, DNR’s finding said “if facilities capex — to include island, surface equipment, flowline bundle, etc. — costs less than 75 percent of the amount presented with application,” which was $246 million, royalty relief would be rescinded.
The state said Pioneer demonstrated Oooguruk was “extremely marginal, and has considerable risk of low investor returns” without royalty relief.
As part of its justification for the royalty reduction DNR pointed to “inadequacy” of 3-D seismic data related to the Nuiqsut accumulation, increasing the risk for Pioneer.
Primary seismic data used for Oooguruk evaluation was a 3-D survey acquired by Western Geophysical for ARCO in 1997. Although the 3-D dataset was adequate for determining the distribution and potential thickness of the Kuparuk formation, “the Jurassic Nuiqsut sands are, so far, poorly expressed on any available seismic dataset,” the state said.
The state also said “the characteristic low porosity, permeability, and relatively low gravity 20-25 degree API combine to make it difficult to predict Nuiqsut oil productivity from the wells drilled to date.”
Pioneer initially looked at a waterflood project to improve production rates at Oooguruk, eventually switching to the more expensive enhanced oil recovery technology, the state said. The company found that the production gains by EOR would still not result in an economic project without royalty relief.
Royalty rates bump up after payout
After ADL 355036 initially reaches payout the royalty rate on the leases will increase over a four-year period, ramping-up to the original lease royalty rates and net profit sharing will no longer apply to the five leases with the higher royalty.
Seventy percent of the working interest in the nine leases is held by Pioneer, 30 percent by Eni Petroleum.
Kevin Banks of the division said this would be the first time the state has used its authority to provide royalty relief to a field before production began.
