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Vol. 16, No. 19 Week of May 08, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

Gas line is the key

USGS says new oil exploration in NPR-A depends on viable gas exploration

Alan Bailey

Petroleum News

In October the U.S. Geological Survey published a new assessment of the National Petroleum Reserve-Alaska in which the agency slashed its estimate of technically recoverable, undiscovered oil in the reserve from 10.5 billion to 896 million barrels. And on May 4 the agency followed up with the announcement of a new economic analysis of the reserve, characterizing the reserve as a gas province and essentially saying that viable development of both oil and gas in the reserve depends on the construction of a North Slope gas line to transport gas to market.

Price and pipe line access

But as well as needing a gas line for the delivery of gas to market, the viability of NPR-A gas development obviously depends on the market price of gas in the Lower 48. And with more than 25 trillion cubic feet of known North Slope gas already earmarked for delivery through a potential gas line, the viability of NPR-A gas would also depend on how many years would elapse before pipeline capacity would come available for the shipment of gas from the reserve.

If a gas line comes to fruition and gas can be delivered from NPR-A to the new line within 10 years of gas discovery, about 18 tcf of NPR-A gas might be viable at a price of $8 per thousand cubic feet, the new USGS report says. At a price of $12 per thousand cubic feet, 40 tcf of gas might become viable. If access to a North Slope gas line were to be delayed by a further 10 years from gas discovery, those economically viable volumes drop to 7 tcf and 28 tcf respectively, the USGS report says.

With USGS now predicting the existence of quite small oil fields in NPR-A, the agency assumes that oil exploration in NPR-A would only occur as a spinoff from gas exploration. However, if NPR-A exploration proceeds, 273 million barrels of as-yet undiscovered oil might viably be developed at an oil price of $72 per barrel, with that volume increasing to about 500 million barrels at $90 per barrel, USGS says.

USGS conducted its economic evaluation in 2010 dollars, assuming that a 12 percent after tax rate of return would be required on exploration investments, with gas prices based on gas delivered to market in the U.S. Midwest.

And as part of its economic evaluation USGS had to estimate the exploration and development costs of potential NPR-A oil and gas fields, using whatever cost data are available from the North Slope oil industry. In doing this cost estimating the agency partitioned NPR-A into eight economic zones, each with different cost parameters relating to factors such as the distance from the central North Slope infrastructure.

Accumulation size

A critical factor in assessing the economic viability of developing an oil or gas field is the quantity of hydrocarbons in the field: the larger the field, the better the economies of scale in field development. And this size factor becomes especially significant in a remote region such as NPR-A, where a substantial support infrastructure would need to be built in conjunction with field development.

The results of the 2010 assessment of technically recoverable resources suggest the likely presence in NPR-A of a relatively large number of modest sized gas accumulations, the economic report says. The average size of an accumulation would likely be about 750 billion cubic feet, with perhaps 6 percent of the assessed gas existing in accumulations exceeding 3 tcf.

Although at first blush the likely scarcity of especially large gas accumulations might not bode well for the viability of NPR-A gas, the 2010 assessment also found that a relatively large number of expected gas accumulations are expected to have sizes in the range 250 billion to 768 billion cubic feet. This factor leads to the possibility of some of these accumulations being relatively close to each other, thus opening the possibility of improving the development economics by joint development of several gas fields at the same time.

Major uncertainty

However, there is major uncertainty inherent in the results of the assessment.

The USGS analysts determined a potential range of 5 tcf to 39 tcf in the volumes of viable gas at an $8 gas price and with delivery 10 years from discovery, with the corresponding range of volumes at a $12 gas price being 18 tcf to 62 tcf.

A major component of this uncertainty is major uncertainty in the volume estimates for technically recoverable resources, on which the economic assessment is based. And these volumes only pertain to conventional oil and gas fields, rather than unconventional resources such as tight gas sands, or shale oil and gas.

In addition, the prices of oil and gas, key parameters in the economic calculations, are unpredictable and in a constant state of flux.

“USGS estimates are based on 2010 costs and technology, and these results could change over time as they are dependent on multiple factors,” said USGS scientist Emil Attanasi, the lead author for the economic assessment. “For example, USGS economic recoverability estimates could vary in the future depending on the timeframe and costs to construct a gas pipeline to the NPRA, technological advances that make resource extraction and development easier and less expensive, and fluctuating market prices for oil and gas.”

And then there is the thorny question of whether a North Slope gas line will be constructed, an uncertain factor that USGS now sees as the key to NPR-A development.

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