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Vol. 20, No. 44 Week of November 01, 2015
Providing coverage of Alaska and northern Canada's oil and gas industry

GMT-1 gets go-ahead

BLM approves drilling permit and right of way for NPR-A development

ERIC LIDJI

For Petroleum News

The first full-scale development program in the National Petroleum Reserve-Alaska came two big steps closer to realization on Oct. 22 when the U.S. Bureau of Land Management approved a drilling permit and an associated right-of-way grant for the GMT-1 project.

The approvals allow operator ConocoPhillips Alaska Inc. to drill at the Greater Mooses Tooth unit, near the eastern edge of the federally managed land on the North Slope.

While ConocoPhillips and its working interest partners have yet to sanction the GMT-1 development program, the permitting decision clears a large hurdle toward construction of an 11.8-acre drilling pad and associated pipelines and power systems in the reserve.

The permits are also the first major decision under an Integrated Activity Plan approved in 2013 to balance the twin desires to develop and conserve the 23 million acre reserve.

Following a string of worrisome news for the Alaska oil patch - including Shell’s decision to abandon exploration in the Chukchi Sea, the federal government’s decision to cancel upcoming Arctic lease sales and Repsol’s deferred exploration work (albeit amid talk of a big discovery) - the announcement brought sighs of relief form officials. “As Alaska grapples with a $3.5 billion deficit due in part to low oil prices and production, we applaud the hard work by ConocoPhillips to obtain this drilling permit and right-of-way grant for the Greater Mooses Tooth Unit,” Gov. Bill Walker said in a statement.

The proposed project could also be a boon for the Arctic Slope Region Corp., which owns some of the acreage marked for development. “After a long and trying permit process, BLM has now lifted a couple of the last regulatory roadblocks to allow ConocoPhillips to move forward to develop ASRC minerals from GMT1. GMT1 is an important next development of ASRC’s oil and gas resources by ConocoPhillips west of the Colville River Unit,” ASRC President and CEO Rex A. Rock Sr. said in a statement.

Sanctioning soon?

When ConocoPhillips initially proposed the GMT-1 project, permitting might have been the biggest hurdle. Today, though, economics would seem to present a greater challenge.

The $900 million project would extend the existing grid of development infrastructure into the NPR-A, connecting back to the Colville River, Kuparuk River and Prudhoe Bay units and moving a peak of 30,000 barrels of oil per day to the trans-Alaska oil pipeline.

In April 2013, when ConocoPhillips decided to launch the regulatory and permitting phase of the GMT-1 development program, the prevailing value of Alaska North Slope crude oil delivered to the West Coast was $104.57 per barrel, according to the Alaska Department of Revenue. By January 2015, when the company decided to “slow the pace of investment,” the prevailing value of Alaska crude oil had fallen to $48.87 per barrel.

Although the price of Alaska North Slope crude climbed through the spring, it fell over the summer. As of September 2015, the prevailing value had fallen to $48.83 per barrel.

When ConocoPhillips delayed the project earlier this year, it cited “permitting delays and requirements, as well as the current lower oil price environment.” Around that time, the U.S. Army Corps of Engineers issued a record of decision for the project that matched the alternative preferred by ConocoPhillips and also issued a wetlands permit. While BLM initially preferred a different approach, it ultimately sided with ConocoPhillips.

Instead of sanctioning the project immediately, the company said it would spend this year shooting seismic across the region and continuing engineering for the proposed project.

Speaking to the Alaska Support Industry Alliance in May 2015, ConocoPhillips Alaska President Joe Marushack said his company was working through some final issues with BLM and, if successful, expected a “final investment decision” by the end of the year.

At that time, Marushack also provided some insight into how ConocoPhillips saw the future. The company had expected increased supplies from unconventional oil development in the Lower 48 to pull down oil prices, although only as far as $60 per barrel, he said. While ConocoPhillips was expecting “some tough times over the next couple of years,” the company was forecasting prices to rise to between $70 and $80 per barrel within a few years, although with far greater volatility. As a result, ConocoPhillips would be able to spend but “we’re only going to be able to do the very best projects.”

ConocoPhillips released its third quarter earnings on Oct. 29, after Petroleum News went to print. In the past, the company has used earnings calls to announce investments.

Shortly after Alaska changed its tax code for oil production, ConocoPhillips announced three major projects: the DS-2S pad at the Kuparuk River unit, the 1H pad at the “NEWS” development at Kuparuk and the GMT-1 project. To date, the company has sanctioned all of those projects except for GMT-1. And in late 2012, ConocoPhillips also sanctioned the CD-5 pad at the Colville River unit, which recently came online.

IAP proceeds

When the U.S. Department of the Interior finalized its Integrated Activity Plan for the NPR-A in early 2013, Secretary Ken Salazar touted it as a balanced approach - a way to expand leasing for oil and gas activities while protecting particularly fragile regions.

At the time, environmental groups generally praised the decision while industry groups and elected officials generally expressed concerns. Although the decision made some 11.8 million of the 23 million-acre reserve available for oil and gas leasing, not all acreage is created equally. The plan restricted some regions considered to be the most prospective in the entire reserve, specifically the Teshekpuk Lake Special Area.

“We have long supported the Integrated Activity Plan as a model for balanced land management,” Nicole Whittington-Evans, Alaska regional director for The Wilderness Society, said in a statement. “Industrial development always results in negative effects, and we look forward to continuing to work with BLM and other stakeholders to finalize a strategy that will help offset a wide array of impacts. This collaborative effort will ensure that important natural values and subsistence are protected.”



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