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Vol. 11, No. 14 Week of April 02, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Kerr-McGee gets okay

DOG issues easement decision for Nikaitchuq pad, pipeline through Kuparuk

Alan Bailey

Petroleum News

On March 23 Alaska’s Division of Oil and Gas approved a proposal by Kerr-McGee Oil and Gas Corp. for an easement within the ConocoPhillips Alaska-operated Kuparuk River unit on Alaska’s North Slope. The easement will enable Kerr-McGee to construct facilities for its Nikaitchuq field. The division has also issued a land use permit for the construction. And on March 29 both Kerr-McGee and the division signed the land use permit, thus enabling construction to begin.

“I find this action is in the state’s best interest and is an appropriate use of state land,” Bill Van Dyke, acting director of the division, said in the decision document. “Granting the proposed easement provides the greatest economic benefit to the state and the development of its resources.”

There is a 20-day appeal period on the easement decision.

The area of the easement runs north approximately four miles from Oliktok Point and south approximately 14 to 17 miles, according to the decision document. The easement will be 50 feet wide along a pipeline route and wider around pad facilities. Access to construction sites will be by ice road via the North Slope gravel road network — Kerr-McGee has received approval from ConocoPhillips for use of the Kuparuk River unit road infrastructure.

Kerr-McGee hopes to begin work at Oliktok Point this winter. The season for work off the gravel road system on Alaska’s North Slope ends in April. But, before starting construction, Kerr-McGee needs permission to operate on land outside the Nikaitchuq unit. The company also wants royalty relief for Nikaitchuq production. As Petroleum News went to press March 30, the state had not made a decision on the company’s royalty relief request.

Complex leasing

Gaining permission for land access is proving especially challenging because of a complex leasing situation in the Oliktok Point area, where Kerr-McGee plans to build a production and processing pad.

“This is a unique permit for us to issue,” Steve Schmitz, natural resource specialist in the division’s permitting section, told Petroleum News, referring to the easement and associated land use permit.

The core of the complications revolves around two tideland leases at Oliktok Point. ConocoPhillips obtained these surface leases from the state several years ago, to enable construction of the company’s seawater treatment plant. Kerr-McGee wants to build its production and processing pad within the area of the tideland leases, Schmitz explained.

Kerr-McGee has been pursuing both of the possible ways of gaining access to the leases. One way is to negotiate a deal with ConocoPhillips for a partial lease re-assignment. The other way is to obtain a state easement through the leases under the terms of Alaska statute 38.05.850 (this type of easement is sometimes referred to as an “850 easement”). Kerr-McGee applied for an easement in July 2005.

ConocoPhillips’ concerns

But according to the state’s easement decision document, ConocoPhillips has expressed concerns about potential interference with existing and future Kuparuk River unit operations and “the authorization of the production pad as part of the easement.” The document continues to say that the state, ConocoPhillips and Kerr-McGee agree that a partial assignment of ConocoPhillips’ tideland lease to Kerr-McGee on mutually agreeable terms “would be a reasonable alternative to an easement for the project on the specific area.

“However, the division’s issuance of an early entry authorization land use permit pending issuance of an easement should not unreasonably interfere with existing KRU operations,” the document states.

As part of the terms of the easement, the state requires that Kerr-McGee provide notice to ConocoPhillips of construction, operations and maintenance plans for the land use plan and easement, and that “activities conducted under the land use plan and easement must be conducted in a manner that avoids unnecessary or unreasonable interference with ongoing KRU operations other than where recognized and provided for by commercial agreements between CPAI and KMG.”

But on Feb. 10 Matt Fox, ConocoPhillips’ North Slope development manager, responded to a draft copy of the proposed easement by indicating that ConocoPhillips would likely appeal the “propriety” of the state issuing an easement and/or file a breach of contract against the state for issuing it.

And in February Petroleum News reported that documents from Kerr-McGee, ConocoPhillips and the division in state files indicated that Kerr-McGee believed it had reached an impasse in access negotiations with ConocoPhillips, but that ConocoPhillips thought that an agreement was still possible.

Easement necessary

But the complications of the situation go beyond just access to the tidelands leases.

Regardless of the solution for access to land within the tidewater leases, any Nikaitchuq facility construction within the perimeter of the ConocoPhillips-operated Kuparuk River unit will require an easement, Schmitz said. For example, the proposed Nikaitchuq gathering line and a proposed gravel production island would both lie within the current boundary of the Kuparuk River unit.

“In any circumstance they would have need of an 850 easement for the connecting line and the offshore island,” Schmitz said.

In fact, Kerr-McGee has proposed developing Nikaitchuq in phases, starting with the coastal pad at Oliktok Point, which will hold 20 wells, and expanding to as many as three production islands, which would each have about 50 wells.

But, with issues relating to the land access and a pending state decision regarding royalty relief, Kerr-McGee has yet to announce the sanctioning of the Nikaitchuq project. And the end of this winter’s construction season is approaching.

On March 29 Kerr-McGee spokesman John Christiansen declined to comment on the project status, beyond confirming that the state had issued the easement decision.

“We’re still working towards sanctioning it,” Christiansen said of the project.

Eni Petroleum is a minority partner in Nikaitchuq with Kerr-McGee.

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