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Vol. 14, No. 33 Week of August 16, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

Big money going offshore

Kay Cashman

Petroleum News

With oil and gas employment in Alaska at an all-time high for the fourth year in a row, crude prices bumping $70 per barrel, four northern Alaska oil fields under development, and the world’s majors lined up to invest billions more offshore the North Slope, the future of Alaska’s oil industry looks rosy, with or without a natural gas pipeline.

Except that BP says it might not have developed one of those four fields, its Liberty discovery, if the Beaufort Sea accumulation was under state, not federal, waters and therefore subject to Alaska’s new production tax, Alaska’s Clear and Equitable Share, commonly known as ACES.

The feds levy a flat 12 percent production tax on oil, whereas under Alaska’s tax rules, “you’re denied the upside because the tax rate gets up around 80 percent,” Doug Suttles said in 2008, while he was president of BP in Alaska.

Suttles was referring to the progressivity feature in ACES, under which the tax rate increases when oil prices are high and decreases as oil prices come down.

The State of Alaska also offers some generous incentives and tax credits for exploration and development projects, which have been highly praised by smaller oil companies exploring in Alaska. And because ACES assesses only the net amount producers receive for their oil, companies can deduct most of their drilling and related expenses before the state tax is levied.

But even though, under ACES, ExxonMobil and its partners should be able to recoup more than 45 percent of their $1.3 billion cost of developing their phase 1 Point Thomson project, it is doubtful the Point Thomson partners would have made the decision to move forward with the high pressure gas cycling project under ACES if they were not in danger of losing their leases to the State of Alaska. (See sidebar to this article on page 9 of this issue.)

Petroleum News asked one executive, whose company is a detractor of ACES and a major partner in the Point Thomson project, why the Point Thomson leaseholders wanted to hold onto leases in a state with what he described as an “onerous” production tax.

He said, “We want to be a major part of a gas pipeline from the North Slope. And Point Thomson has close to 25 percent of the known natural gas reserves on the slope. We think its gas is needed to make the project viable.”

ACES works for one major producer

Still, at least one of the two major Alaska producer-operators, ConocoPhillips, is making a nice profit under ACES. (BP, the other major operator-producer, does not break out its Alaska numbers in financial reports.)

Alaska oil and gas production makes up about 12 percent of ConocoPhillips’ worldwide output. In the first quarter of this year, Alaska operations earned the company $240 million, or 29 percent of its worldwide exploration and production income.

In an April 23 analyst presentation, ConocoPhillips’ top executives in Houston made a point of acknowledging Alaska production tax credits as being a significant component in the company’s profit.

In the second quarter, ConocoPhillips had $725 million in E&P worldwide earnings, more than 55 percent of that, $404 million, came from its Alaska business.

ConocoPhillips’ Alaska executives contend, however, that ACES places too heavy a burden on the oil companies and deters investment from the state. Most of Alaska’s resource organizations agree.

Offshore: where the big money is

Whether you like ACES or not, the state’s tax regime won’t be a factor for most of the money aimed at Alaska E&P in the next few years because a large chunk of that investment is earmarked for offshore, in the Beaufort and Chukchi seas.

In fact, three of the oil fields currently under development in northern Alaska are offshore — BP’s Liberty in federal waters, and Pioneer’s Oooguruk and Eni’s Nikaitchuq in state waters.

Although it sits in federal waters, because Liberty is less than 6 nautical miles offshore the State of Alaska will receive 27 percent of the federal royalties from Liberty production.

Shell has been a leader is re-opening exploration in both the Beaufort and the Chukchi.

But Alaska’s premier onshore explorer, ConocoPhillips, is right behind the Dutch major, having allocated $506 million of its $1.4 billion capital budget for Alaska in 2008, to picking up 98 leases from the U.S. Minerals Management Service in the undeveloped Chukchi Sea.

Footnote: In the last year ConocoPhillips has almost entirely pulled out of the Beaufort Sea, surrendering 41 state and federal leases, citing the economic difficulty of developing the remote, isolated and challenging region.

The company retained three federal leases in the waters of the Beaufort northeast of the Milne Point unit. The leases, which cover 15,000 gross acres, are the site of the Sandpiper prospect, estimated to hold between 20 million and 70 million barrels of oil.

In September 2008, Michael Faust, offshore exploration manager for ConocoPhillips, told Petroleum News that the company prioritized the Chukchi acreage over its pre-existing portfolio of Beaufort Sea leases.

“Chukchi is definitely our offshore focus right now,” he said.

Shell spent $2.1 billion on acreage in the Chukchi Sea in MMS’ 2008 lease sale, and the company has an exploration drilling program it hopes to kickoff in the Beaufort and Chukchi seas during 2010’s open water season.

Shell is reportedly working hard with agencies — and dealing with court challenges — to get its permits in hand by December; or to be reasonably confident it can get the permits in time for the open water season that begins in late July.

In order to get all the associated vessels to Alaska in time for drilling and necessary contractors and supplies lined up, the company has to make a $100 million commitment in December. Otherwise drilling has to wait until 2011, company officials have said.

Shell made that commitment to vessels and contractors in both 2007 and 2008, and lost a great deal of money in the process, but the company bailed on 2009 when it became obvious court challenges were going to prevent it from moving forward with drilling.

Aug. 10 announcement hailed

Part of the problem has been the Obama administration’s failure to declare its intentions toward drilling offshore Alaska, which leaves federal agencies, such as the Environmental Protection Agency, unsure of whether to proceed on permit applications.

The Aug. 10 press release from MMS, saying it had deemed Shell’s exploration plan to explore two leases in the Beaufort Sea as “complete,” was hailed by pro-drilling advocates as a major step forward because it was the first indication that the Obama administration was not going to stand in the way of oil drilling (see story on page 6).

Advocates say they still do not know the full limit of the administration’s support — whether Obama is going to simply tolerate drilling or give it a lot of support — and they do not know if that support includes the Chukchi Sea.

ConocoPhillips is looking at drilling in the Chukchi in 2011.

Project updates

The four projects currently under development in northern Alaska all carry a price tag of $1 billion-plus.

One of those four, Eni’s Nikaitchuq field, is written up in this issue of Petroleum News (see page 1).

Following are summaries of the other three projects.

One of these fields, Oooguruk, is already in production but development drilling has not yet been completed.

On Aug. 13 Petroleum News asked Oooguruk operator Pioneer if it intended to drill more than the 40 wells its development plan with the State of Alaska calls for.

Pioneer’s public relations director in Alaska emailed this reply: “While we continue to evaluate expansion opportunities, we have not altered our plan of development with the Department of Natural Resources.”

When asked if Pioneer was planning to build its own processing facility, Owens said, “We successfully negotiated a commercially acceptable agreement with the owners of the Kuparuk River unit (ConocoPhillips) to process our production from Oooguruk. Nothing in that agreement precludes Pioneer from pursuing another arrangement for processing in the future. We continuously look for ways to improve the economics of all our projects.”

Project name: Point Thomson field, phase 1

Description: High-pressure gas cycling project, including central production facility, upgrade of three drill pads, pipeline capable of handling 70,000 barrels per day, five wells, related infrastructure and camps (see map on page 8). Delineation drilling and construction began winter 2008-09. Expected to be complete by year-end 2014. Subsequent field development (more phases) will be determined, which could include expanding injection capacity, oil production, pursuing natural gas sales if a pipeline from the North Slope will be built, or a combination.

Location: 60 miles east of Prudhoe Bay and trans-Alaska oil pipeline, 22 miles east of Badami, on east abuts 1002 area of ANWR.

Operator: ExxonMobil

Phase 1 recoverable hydrocarbons: Exxon has not said publicly or told the State of Alaska.

Phase 1 investment: approximately $1.3 billion-plus

Jobs: 2009 through 2013: 400

Production start: year-end 2014

Production: Exxon says 10,000 barrels per day of liquid condensate and has mentioned an additional 10,000 bpd of oil. Two hundred million cubic feet of natural gas per day will be re-injected.

What’s different about Point Thomson: World’s highest pressure gas cycling project (>10,000 psi injection pressure, 15,000 psi at wellhead).

Drill rig on site: Nabors 27E

Majority partners (rough estimates): Exxon 36 percent, BP 32 percent, Chevron 25 percent, ConocoPhillips 5 percent

Status as of Aug. 12, 2009: Surface casing set in one of two wells expected to be drilled by end of 2010. Rig spud second well in early August, surface casing will be set by end of August. Drilling window opens Nov. 1. Have begun contracting process for all front-end engineering work necessary to build surface facilities. RFP out for ice road and air strip.

Project name: Liberty

Description: Beaufort Sea oil field being developed with four to six ultra-extended reach wells (up to four producers and two injectors) from near-shore Endicott oil field (see map on page 9). Existing satellite drilling island and processing facilities at BP-operated Endicott field causeway, which connects field to shore, will be used for drilling Liberty, negating need for offshore platform, drilling island or sub-sea pipeline. Liberty wells, guided by 3-D seismic imagery, will extend two miles deep and as far out as 8 miles. Pad expansion and improvements needed at Endicott and special Arctic drilling rig designed.

Location: Reservoir under federal waters 6 miles offshore, 15 miles east of the Prudhoe Bay field. Water depth over Liberty leases shallow, about 20 feet.

Operator: BP

Discovery date: 1997

Recoverable oil: 100 million barrels

Cost: approximately $1.5 billion

Jobs: To date (Aug. 12) more than 1,000 people involved in project. BP and contractor employment for next several months, until the end of 2009, expected to be 200-250. In 2010 will begin to climb, ramping up as high as 300 when drilling starts in spring 2010.

Production start: 2011

Production: BP says 40,000 bpd once field ramps up in 2013.

What’s different about Liberty: Will produce from world’s longest wells, which will be drilled by world’s most powerful onshore drill rig.

BP’s Liberty project manager: Darryl Luoma

Drill rig: BP Alaska commissioned Parker Drilling to build powerful top-drive drill rig that could drill ultra-extended-reach wells; BP characterizes as world’s most powerful onshore drill rig. Cost $215 million. When assembled will weigh 8,500 tons, stand 240 feet tall. Key component is massive top drive, which will apply 105,000 foot-pounds of torque to drill pipe while rotating pipe at 130 revolutions per minute. Typical North Slope rig top drive provides torque in range of 30,000 to 45,000 foot-pounds. Rig owned by BP, operated by Parker.

Majority partners: BP sole owner.

Status as of Aug. 12, 2009: Extension of Endicott Satellite Drilling Island, or SDI, camp and facility fabrication, upgrades to the Sagavanirktok (Sag) River bridge completed in early summer. Barges hauling unassembled pieces of drill rig arrived at Endicott ahead of schedule on two Crowley barges in late July. Rig assembly, testing and training scheduled for fall.

Project name: Oooguruk

Description: Development drilling continues at Oooguruk oil field offshore Alaska’s North Slope, developed from a manmade gravel island drill site some six miles offshore in Harrison Bay, with crude oil moving to shore via a subsea flowline and then on to Kuparuk River unit processing facilities. First wells went online in June 2008. Continuing program of development drilling for total of 40 wells.

Location: About 5 miles offshore northern Alaska in Beaufort Sea, in about 5 feet of water. Inside barrier islands offshore eastern Harrison Bay, northwest of Oliktok Point.

Operator: Pioneer Natural Resources

Discovery date: 2003

Recoverable oil: Originally slated as 70-90 million barrels of oil equivalent, but not long after June 2008 startup, higher than expected well flow rates and additional 3-D seismic, led to February 2009 statement by Pioneer, raising estimates of recoverable oil equivalent to between 120 million and 150 million barrels.

Cost: approximately $1 billion. (Pioneer plans to spend between $250 million and $300 million in 2009 with largest share, around 35 percent, directed toward drilling.)

Jobs: In 2009 will average between 100-140 field personnel on North Slope.

Production start: June 2008

Production: Expected to peak in 2011 at 15,000-20,000 bpd. Expected to outperform expectations for second half 2009, averaging 6,000 to 7,000 bpd.

What’s different about Oooguruk: First producing North Slope oil field to be operated by an independent oil company. First subsea pipeline in northern Alaska utilizing pipe-in-a-pipe concept.

Drill rig: Nabors 19E

Majority partners: Pioneer 70 percent, Eni 30 percent

Status as of Aug. 12, 2009: Although field production started from Kuparuk formation, with oil flow rates from zone proving very robust, Pioneer considers the Nuiqsut to be Oooguruk’s main production horizon — company is in process of drilling a pattern of horizontal production and water injection wells in this horizon. In current plan of development filed with State of Alaska for Oooguruk unit, Pioneer says it will use knowledge gained during development to assess “our exploitation opportunities in the acreage immediately outside our development areas and at varying horizons.”

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