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Vol. 10, No. 39 Week of September 25, 2005
Providing coverage of Alaska and northern Canada's oil and gas industry

BP looking at 50-year future in Alaska

Steve Marshall says Alaska BP’s largest resource base outside of Russia; even in 2050 there will be 2 billion barrels to produce

Kristen Nelson

Petroleum News Editor-in-Chief

Steve Marshall, president of BP Exploration (Alaska), told the Alaska Support Industry Alliance Sept. 8 he wanted to address some of the tough questions being asked about BP and the industry in the media these days, questions about profits, taxation rates, investment, natural gas (part 1 of this story in the Sept. 11 issue of Petroleum News contains Marshall’s remarks on natural gas) and even whether BP is looking at exiting Alaska.

“And that’s an old chestnut that keeps coming back,” although Marshall said he doesn’t hear it quite so much these days.

It was one of the first questions he was asked when he took over as president of BP’s Alaska operations in 2001, and that rumor has circulated since the early ‘90s, he said.

Not only is BP not leaving Alaska, he said, the company is talking about a 50-year future in Alaska.

In BP’s portfolio only Russia has more oil and gas than Alaska. “We’ve got well in excess of 5 billion barrels of oil and gas equivalent sitting on our books, already discovered,” Marshall said.

Much of it is “hugely challenged — technically we don’t know how to do it,” he said, but even with all that’s been produced, what remains is a world-class resource.

BP is just finishing its long-term planning process, “and we’ve got a 50-year future — we talk now about a 50-year future.” Tony Hayward, BP’s chief executive, was in Alaska talking about “that 50-year future here in Alaska,” Marshall said.

2 billion barrels left in 2050

“Even in 2050, we still have 2 billion barrels of oil and gas yet to produce … I would say we’re going to be here for a long time.”

That future only scratches the surface of heavy oil, he said. “We’ve started to produce viscous, but there’s some really heavy stuff out there, called the Ugnu formation — sits just below the permafrost.” Right now BP believes it can get maybe 8 percent of that resource, he said, but in Canada they’re producing close to 50 percent recovery “from that same kind of oil, but they don’t have permafrost, they don’t have the extremes of weather that we do.”

But if the technology issues around Ugnu oil can be solved — with steam, bacteria or CO2 — “that could be a huge business for many, many years to come, well beyond 2050.”

It won’t be easy, Marshall said, “but Alaska’s got a tremendous legacy of innovation.” It’s remarkable, he said, that oil is being produced from the North Slope, but technologies such as coiled tubing drilling used to keep that oil flowing, “gives us the confidence that we’re going to be able to attack those problems in the future.”

Too much money?

Are oil companies making too much money?

The world is about an 80 million barrel-per-day market, Marshall said, with a demand growth rate of 3.4 percent in 2004, two times the 10-year average, primarily driven by the demand for fuel in China and India.

The supply-demand balance is changing: there used to be a cushion of 3 million to 4 million barrels a day, supply over demand, but that cushion is now down to 1 million barrels daily, he said. The Organization of Petroleum Exporting Countries “certainly doesn’t have the capacity just to instantaneously turn on a million, two million, to get back to that comfortable cushion.” Marshall said it will probably take “some time” to reestablish a comfortable supply-demand cushion, so the market is “very tight” right now; “it’s also a notoriously unpredictable market.”

It’s a high-stakes game

With that background, Marshall said, what about the contention that industry is making too much money, and taking that money as profit, not reinvesting?

When the industry makes money, the state makes money, he said. “There are lots of benefits that flow to Alaskans through high revenues, enormously high revenues.”

The industry has invested “far in excess of 40 billion dollars since the 1970s” he said. “The high prices offset many things: the long periods of relatively low prices experienced between the 1970s and today.” And the disappointments that the industry has experienced: in excess of $750 million was invested in viscous oil before there were productive barrels.

“It’s just part of the risk that we take day in and day out: technical risk; commercial risk; price risk. That’s just part of the game,” he said.

There was $300 million invested in Badami, he said, “that turned out to be a significant reservoir disappointment,” although BP is now trying to get production re-started there.

Then there was Northstar, “a project that overran its projected capital cost by three-fold,” and cost well over a billion dollars.

And, he asked: how many remember Mukluk? That early ‘80s dry hole cost well in excess of a billion dollars, Marshall said, noting that he was associated with the project but fortunately not on the exploration side.

“So these are high-stakes, high-cost games” and the industry certainly appreciates the upside of high oil prices.

Investment needed; so are people

“But we are certainly not sitting on those profits: we are reinvesting,” he said. “We’re reinvesting here; we’re reinvesting elsewhere.”

Capital investment in Alaska is in excess of $600 million a year, he said, and BP’s share of operating costs is in excess of $700 million a year. Over the next 10 to 15 years, Marshall said, “we can see a capital spend of about 10 to 15 billion dollars,” including the gas pipeline.

“That’s not what I would call harvesting,” he said. “… We’re investing continuously.

“What you don’t see right now are big projects — the banner projects that we’ve enjoyed in the past that have really tantalized the imagination.

“But what we do see are the 100-plus wells we drill year-in, year-out, just to keep production as stable as we possibly can,” he said. North Slope production is declining, “but we’re doing everything we can to arrest that decline.”

Marshall said capital isn’t the limit on what BP can do right now: “it’s actually people.”

It’s an industry-wide issue, he said, not just in Alaska.

There aren’t enough science and technology graduates coming into the industry.

“Between now and the end of 2006, BP’s going to need somewhere between 100 and 200 people beyond what we need today” due to growth in activities as well as factors such as the continual shift of people moving to different places. “But 200 people is quite a challenge to bring in,” even combining Alaska, elsewhere in the industry and elsewhere in BP. “That’s going to be a real challenge.”

Exploration focus tight

Asked if BP would consider returning to exploration in Alaska, Marshall said not in the short term.

“Why is that? It’s about choices,” he said.

BP’s shareholders have told the company they want to see it stay focused, Marshall said. And that focus includes exploration.

“One of the things we’ve been absolutely ruthless about is where does BP explore.

In 1990, when John Browne had just come in to run exploration and production, the company was “exploring in 35 countries. We were even exploring in downtown Paris … There were actually rigs in downtown Paris. We didn’t find anything. It was a great boondoggle; we spent a lot of money.”

That has changed, with exploration focus now in Angola, Trinidad, the deepwater Gulf of Mexico, Indonesia and Azerbaijan. In addition, Marshall said, BP is looking at some emerging areas.

“So we’re incredibly disciplined. And the threshold for us to get into exploration is incredibly high.”

BP may look at Alaska again, he said, but not right now.

Where the company is focused in Alaska, he said, is “on developing the technologies, the ideas, the capability to unlock the 5.7 billion barrels” of oil and gas equivalent that have already been discovered on the North Slope. “That’s where BP’s focus is.”



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