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Vol. 10, No. 27 Week of July 03, 2005
Providing coverage of Alaska and northern Canada's oil and gas industry

Stranded gas contract by end of the year

Measure to go to Alaska Legislature before end of year, Gov. Murkowski, producers tell AOGA-Chamber luncheon

Kristen Nelson

Petroleum News Editor-in-Chief

Alaska Gov. Frank Murkowski told the annual AOGA-Anchorage Chamber luncheon June 27 that a major new player will be coming into Alaska. But he wouldn’t say who (see Insider).

“I can tell you that there’s going to be a major announcement here very soon on a major player,” he said. “Not that we don’t have major players now,” he added, “but it will get a little crowded.”

Murkowski provided no details: “when they’re ready to announce it, you’ll find out.”

The governor reviewed progress on a gas line, contrasting what’s happening today with efforts in the past: “The difficulty was always the cost of moving that gas” combined with prices of less than $3 per thousand cubic feet. “Well that’s changed dramatically now, so we’ve been able to accomplish more in the last 24 months than we’ve been able to accomplish in the last 24 years” on developing North Slope natural gas, Murkowski said.

He said the state is looking at three proposals — from the producers, from TransCanada and from the port authority — and related that he’s been asked why it’s taking so long; isn’t it simple?

It’s not, he said: “The details associated with the limited liability corporation (the structure for the state’s equity participation), the contract language, the derivatives, the work commitments, the definition of tariffs, the role of FERC …” involve fiscal and financial terms, rights of way and interaction between the companies and the state.

The governor said the administration’s hope is to have a contract negotiated and out for public process so that it can go to the Legislature prior to Thanksgiving.

AOGA: Decisions coming

AOGA Executive Director Judy Brady said decisions over the next two years “are going to change this state.”

Some decisions will be made by the public, some by those interested in public service, she said: the governor’s seat is on the ballot in 2006, along with the entire Alaska House of Representatives. Elections for borough mayors in both Kenai and the North Slope Borough are coming up.

There is the gas contract and an initiative to do away with the economic limit factor, “which would add about $3 billion to the cost in the state.” An initiative for a gas reserves tax would add $700 million a year in costs.

Both the North Slope and the Kenai Peninsula boroughs are developing new coastal zone enforceable policies — as are other districts — “but those two districts make a great deal of difference to us in whether or not we can operate…”

Combined, Brady said, there are “huge permitting issues, huge fiscal issues in the next two years” and the companies represented by AOGA “are all making decisions themselves about whether or not to invest in Alaska.”

BP: world-scale opportunities

Steve Marshall, president of BP Exploration (Alaska) said BP sees “Alaska as having world-scale opportunities: tens of trillions of cubic feet of natural gas; still billions of barrels of conventional oil … albeit in smaller accumulations” and “billions of barrels of viscous oil, heavy oil.”

North Slope gas is “a vital project to BP,” Marshall said. “It’s a huge undertaking. It’s important to get it right.” BP is committed, he said, to getting everything done on the contract so that the governor can take it to the Legislature in the fourth quarter.

Other opportunities include viscous oil, and the 20 billion barrels plus of very heavy oil, “oil in place that rivals Prudhoe Bay in size.” The Canadians, he said, are starting to achieve 50 percent recoveries “and if we can do that, with that resource, that’s twice the USGS estimate for what ANWR could hold.” The oil is known, “we drill through it every day.” The issues are technical: would steam recovery work on the North Slope, through permafrost?

There is work to be done on the base business on the North Slope, Prudhoe Bay and Kuparuk, Marshall said: more accumulations, satellite fields, “still tens of billions of dollars of in-field drilling and tertiary recoveries and waterfloods to keep that business going.” The investment in well-work alone will be more than $100 million at Prudhoe this year, “a 20 percent increase from last year and more to do there,” he said.

To have the confidence to continue to invest in Alaska, BP asks for “clear, unambiguous rules,” he said, “rules that don’t change; rules that give us the confidence that we can get an appropriate return.”

An appropriate return is one that recognizes risks — technical risks, oil-price risk, gas-price risk and “the price of failures.” Industry invested $750 million in heavy oil on the North Slope just to get production started. Badami was a disappointment. Northstar cost three times the initial cost. And exploration programs don’t always deliver on their promise: “some of you may even remember the Mukluk well (in the Beaufort Sea), a billion dollars … spent and nothing there.” Those are risks industry normally takes, he said: “We need to take those risks; we just want to know what we face in the way of fiscal stability so we can continue making those investments.”

Opportunities, challenges in Cook Inlet

John Barnes, Alaska business unit leader for Marathon Oil Co., said Marathon’s focus is on natural gas in Cook Inlet. “We’re currently the leading explorer and developer of gas reserves in the Cook Inlet,” he said, and have had a continuous drilling program for almost five years. Other companies, including smaller independents, have also been drilling for gas in Cook Inlet, and Barnes said the Department of Natural Resources’ report on 2004 showed an increase in Cook Inlet reserves, from 2.03 trillion cubic feet in 2003 to 2.087 tcf in 2004, despite annual consumption of some 200 billion cubic feet. And deliverability has stabilized for 2004 and 2005 at about 700 million cubic feet a day.

“And it’s the result of a lot of hard work and a lot of difficult decisions that were made over the last decade,” Barnes said.

Decisions made in the future will impact Cook Inlet, he said. A decision to build a gas pipeline from the North Slope “is clearly a step towards a spur line to the inlet which will create both opportunities as well as challenges.” Opportunities include new or renewed investment opportunities, surety of natural gas delivery for utilities, integration with existing infrastructure “and possibly right sizing the gas line.” Local producers, he noted, will face the challenge of meeting or beating the price of delivered gas.

Any significant new North Slope development could hurt the inlet if it draws off existing support industry and “results in a net loss of talent” in the inlet, although a stronger business climate in the state could help the inlet.

Barnes said the regulatory and permitting burden is “a very difficult area.”

“Is it possible,” he asked, “for one straw to really break a camel’s back? I don’t know, but the regulatory camel is pretty well loaded.”

Fiscal regime decisions also impact the inlet, he said. The Department of Energy “has recently reported 6 to 8 tcf of potential reserve base,” but developing that reserve base will require “hundreds of millions of dollars” and companies considering those investments will weigh “project risk, subsurface risk, regulatory risk and finally fiscal regime risk.” The state, he said, can have the greatest impact on fiscal regime risk.

Shell: additional investments planned

Gregg Nady, Shell’s Alaska land representative, said it was “gratifying to have Shell so warmly welcomed back to Alaska.” The company, he said, operated almost continuously in Alaska beginning almost 50 years ago until 1998, and was “one of the most prominent explorers in frontier basins” and an operator and major producer in Cook Inlet.

Shell believes Alaska “holds significant remaining exploration potential,” Nady said. The company took a hard look at geologic, technical, commercial, social and political developments in Alaska before it returned. “And we have considerable Arctic operations experience both onshore and offshore in Alaska, Canada, Norway, and particularly in Russia where we operate the Sakhalin 2 project.”

Shell “had to solve many complex social, environmental challenges” on the Sakhalin project, and has “done so openly with the involvement of key local and international stakeholders. It is this level of ambition, technology, expertise and commitment to working with stakeholders that we hope to bring to Alaska,” Nady said.

Shell believes Alaska has “significant untapped potential,” and is “aware of the complex issues in Alaska. But in today’s world there are no easy projects, and bringing material oil and gas to market increasingly involves controlling complex problems in technical, commercial, political and social challenges.”

Shell took a big position in the Beaufort in March, winning 86 tracts in the Minerals Management Service Beaufort Sea oil and gas lease sale and spending $44.4 million.

Nady said Shell hopes “to commercialize stranded discoveries and make new discoveries” in the Beaufort. He said the company plans “to make additional investments in Alaska in both existing basins and new basins.”

He said Shell will work in partnership with key stakeholders in Alaska, and in return needs “a stable fiscal regime, regulatory certainty and predictable permitting, access to acreage including timely lease sales in offshore areas.” Key decisions Shell makes in the next few years “will hinge on these factors,” Nady said, including “the ability to move forward with operations in the Beaufort Sea in a timely and responsible manner and the ability to participate in new sales that offer material new opportunities.”

The Minerals Management Service’s 2007-2012 five-year OCS “will be an important factor in the future of Alaska,” he said.

Pioneer: ‘formidable’ challenges

Ken Sheffield, president of Pioneer Natural Resources Alaska, said independent companies coming into Alaska face “formidable” challenges. Fields that are found now “are nothing like the billion-barrel fields that opened the slope.” Industry is working now “to commercialize smaller, lower-quality oil reservoirs, viscous oil, natural gas, which will not have a market until the next decade, and remote resources in NPR-A and offshore,” he said.

The North Slope is one of the highest cost areas in the world and projects there have long cycle times, five to 10 years from buying a lease to production, “depending upon drilling success and distance to existing infrastructure,” Sheffield said.

But “maybe the largest challenge” companies face on the North Slope is “fiscal uncertainty. Given its heavy dependence on the oil industry for revenue, can the state offer a stable fiscal policy over the life of our large, long-term investments?” he asked.

And in spite of improvements there is still regulatory uncertainty and “permitting remains complex and time consuming.”

Price uncertainty is a factor. Because of the long cycle times of Alaska projects, Sheffield said, “we must make our business decisions against a long-term view of prices.” Even though the current price of oil exceeds $50 a barrel, “the 10-year average price for North Slope prices is about $23 per barrel. For Pioneer’s Alaska projects the price of oil in 2005 is irrelevant. What’s important is what the price is in the next decade and beyond.”

Then there is exploration uncertainty: will the value of the fields that are found “offset the cost of dry holes, land, seismic” and development costs?

Pioneer is looking at participating “in a number of exploration wells next winter season” and within the next 12 months will make a decision on whether to go ahead with development at its Oooguruk discovery. That project would cost hundreds of millions of dollars and decisions by the Department of Natural Resources and the Department of Revenue, as well as regulatory agencies and contractors, will be required before the project moves ahead. “Pioneer must then weigh the cumulative costs and risks associated with this project and decide to move forward with this development or not.”

With oil prices high there has been a lot of discussion about raising taxes on the industry. “For new entrants like Pioneer, the threat of uncertain fiscal environment, coupled with the many existing challenges in Alaska, makes our future tough decisions even tougher.”

ConocoPhillips: Scales tipped for North Slope gas

Jim Bowles, president of ConocoPhillips Alaska, brought a large scale to the podium and used weights to illustrate his talk. “Since the discovery of the giant Prudhoe Bay field in 1968, a vision has existed to develop this huge gas resource base on the North Slope. But the scales have been tipped against this project,” largely due to high costs, regulatory markets and gas prices, which were often less than $2 an mcf.

“However, within the last three years we’re really started to see the shift in balance to develop the North Slope gas reserves.”

He reminded the audience of the feasibility study completed by ConocoPhillips, BP and Exxon in 2002, reauthorization of the Alaska Stranded Gas Development Act in 2003, federal enabling legislation in 2004, the producers’ submittal of a fiscal contract to the state in 2004 and the governor’s active participation in negotiations this year.

But, he said, threats to the project exist.

“The key to moving a $20 billion project like this forward is certainty and fiscal stability,” Bowles said. “The threat of additional taxation, whether in the form of a gas reserves tax or increase in production tax, does nothing to advance the project. In fact it creates greater uncertainty…”

The project is world-class in size and complexity, he said. “The risks inherent in such an endeavor make alignment with the state and the producers absolutely critical. The decisions facing the state are possibly some of the most important decisions it’s faced since statehood. The negotiations are progressing, but they take time.”

The producers’ project, he said, “not only captures the maximum revenue from the gas but it also provides huge job opportunities and an increase in business activities across the state, as well as a supply of clean fuel to Alaskans.”

Bowles said “the vision of developing North Slope gas reserves is closer than it’s ever been” and “ConocoPhillips is committed to providing its full weight and strength behind this project to make it a successful project.”

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