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Vol. 15, No. 47 Week of November 21, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Chukchi would be huge

ConocoPhillips says offshore development would take years, cost multibillions

Kristen Nelson

Petroleum News

A natural gas pipeline from the North Slope to market isn’t the only multibillion-dollar project that could lie in Alaska’s future.

Similarly expensive and challenged would be getting Chukchi Sea oil discoveries, assuming oil is found in commercial quantities, to the trans-Alaska oil pipeline.

Geoff Haddad, ConocoPhillips’ vice president for Alaska exploration and land, said it would be a nice problem to have.

ConocoPhillips, the second-largest leaseholder in the Chukchi Sea, the federal outer continental shelf area off the northwest coast of Alaska, would like to drill an exploration well at its Chukchi Sea Devil’s Paw prospect in 2013, but an oil discovery there, if it proved commercial, wouldn’t add to volumes in the trans-Alaska oil pipeline for 10 to 15 years, Haddad told the Alaska Support Industry Alliance Nov. 11.

And getting Chukchi Sea oil to Pump Station No. 1 on the central North Slope would be a multibillion-dollar project involving an offshore hub, a buried pipeline running 70 or 80 miles to shore, and a 200-mile line across the National Petroleum Reserve-Alaska, he said.

Various potential hubs

There are various large prospects in the Chukchi which are potential hubs, Haddad said, and a hub would be needed.

ConocoPhillips is the major leaseholder (in partnership with Statoil) at Devil’s Paw, where Shell drilled the Klondike well in 1989; Shell has identified prospects at Burger, Crackerjack and Southwest Shoebill. In addition to Klondike, Shell drilled Popcorn in 1989-90, Burger in 1990 and Crackerjack in 1990-91. Chevron USA Inc. drilled the Diamond well in 1991.

Who would build such a hub and pipelines?

Haddad said he thinks Chukchi development would be “a first mover kind of deal, so the first company that found a large oil field would likely take lead on that.”

Other companies would probably be involved, he said, because “I don’t know that any company’s going to want to go alone on such a big project” which would require “multiple tens of billions of dollars here of investment to put this pipeline in.”

The line to shore would need to be buried to protect it from ice gouge, particularly close to shore “where ice stacks up in ridges and forms keels,” gouging the seabed. Once the line comes to shore it would run across NPR-A.

While it would be “interesting” to get required permitting for development, Haddad said it would be “a nice problem to actually have” if commercial discoveries are made in the Chukchi.

In addition to moving Chukchi oil, the pipeline across NPR-A could help smaller prospects in NPR-A which are economically challenged because they are so far from infrastructure.

Not largest leaseholder

ConocoPhillips, formerly the largest holder of oil and gas acreage in Alaska, is now second to Shell, all of whose acreage is offshore, Haddad said.

The company is still the leading producer of oil and gas in Alaska, he said, “and hopes to remain so.”

But on the exploration side, for the second year in a row ConocoPhillips plans no exploration wells in Alaska this winter. Haddad said last year was the first time since 1965 that ConocoPhillips hadn’t drilled an exploration well in Alaska.

ConocoPhillips has relinquished more than a million acres in the last three years, he said, consolidating its NPR-A position close to Alpine and reducing its Beaufort position, dropping the Beaufort acreage because “we really wanted to focus on the Chukchi Sea” and “didn’t feel like there was much chance that we were going to get to that acreage in the Beaufort Sea any time soon.”

NPR-A acreage consolidation was a result of the 30 wells drilled after recent leasing began in 1998, 21 by ConocoPhillips. The “big falloff in interest” occurred, Haddad said, because they haven’t found large oil fields which could act as anchor fields for production, but only smaller fields which the company plans to tie back to Alpine.

Haddad said he “can’t say for sure that there’s no oil out there, but we haven’t found much” and while ConocoPhillips would like to bring its discoveries close to Alpine into production, “we’ve been held up on that recently.”

So far, he said, the company has spent “$300 million, over $300 million in NPR-A; we’ve got not one drop of oil coming in production and it’s just sitting out there waiting for a permit that’s been denied,” referring to the denial by the U.S. Army Corps of Engineers of a permit for a bridge to the proposed well site at CD-5.

ConocoPhillips has appealed that permit denial, but Haddad said he couldn’t say what the results of that appeal would be.

Chukchi hurdles

While it has dropped acreage elsewhere in Alaska, ConocoPhillips added 550,000 acres in the Chukchi Sea in the 2008 OCS lease sale, 98 leases, with positions “on what we consider to be two giant prospects,” one of which — Devil’s Paw — ConocoPhillips controls. Earlier this year Conoco took on a partner, Statoil, in its Devil’s Paw acreage.

The company also has a position on the edges of Burger, one of Shell’s prospects.

ConocoPhillips would like to drill, but doesn’t expect to be able to do so until 2013.

First, Haddad said, the company needs clarification on lease status, since there are two lawsuits pending, one related to the five-year plan and one specific to lease sale 193.

“Neither has been resolved. Both are basically waiting on the Department of Interior to actually get back to the court about what they really want to do in the Arctic.”

Haddad came to Alaska from the Gulf of Mexico and he said he was “naïve and optimistic” because before the tragedy at Macondo earlier this year, “people were drilling and moving ahead at a pretty rapid rate.”

ConocoPhillips picked up Gulf of Mexico acreage and drilled a deep well in deepwater six months later.

He said he thinks “they’re going to get back to drilling in the Gulf of Mexico before we do up here.”

While drilling may be a ways off, ConocoPhillips is working its Chukchi acreage.

“This year we were out for the third year in a row doing a very complete job of environmental baseline work out in the Chukchi Sea,” he said. “We’ve been monitoring oceanography, ice conditions, for years; we’ve been out there doing work collecting air quality data,” and installed an air monitoring station at Wainwright to collect air samples needed for air permits.

He said ConocoPhillips has had a good relationship with Olgoonik, the village corporation at Wainwright. When the Bureau of Ocean Energy Management, Regulation and Enforcement held a hearing in Wainwright earlier in November, “everyone from the mayor to the whaling captains to the Native village to the village corporation testified in favor of OCS from that village,” Haddad said. ConocoPhillips has worked closely with Wainwright and he thinks “there’s a chance that the tide could turn up on the North Slope,” although he thinks that at the end of the day whether drilling is allowed in the Chukchi will not be driven by the North Slope but by “policy makers in Washington, D.C., and their response to environmental groups.”

Moving forward

ConocoPhillips has already filed for an air permit and had planned to file for other permits this year, but it now looks like those permits will be filed sometime next year because the company is “waiting on regulations to come out of the BOEM.”

It’s frustrating, Haddad said, when you want to move ahead “but you’re not really sure what the rules are any more.”

In addition to uncertainty about regulations, and about challenges to permits once they are issued, ConocoPhillips is concerned about “new laws coming out.”

“There’s a dizzying array of different types of laws … or plans that are out there from marine spatial planning to coastal management plan changes to RCACs (regional citizens advisory councils) in the Arctic. We could get all of these.

“And if we get them all … who knows how long the delays are going to be because it’s just a lot more opportunities for challenges, for court action, etc.”

Haddad listed ACES, the state’s production tax system, called Alaska’s Clear and Equitable Share, as one thing that needs to change. Because upside potential is taken away by ACES — taxes increase as the price of oil goes up — it is hard to compete for funding with projects in other areas of the world, he said.

Haddad said there is a lot of potential in Alaska, “but there’s a heck of a lot of roadblocks and a lot of things are going to have to line up and change for anything to move forward. But when it does, we’re ready to go.”

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Air permits a big issue

Air permits are “surprisingly difficult to get in the Chukchi Sea and the Beaufort Sea offshore,” Geoff Haddad, ConocoPhillips’ vice president for Alaska exploration and land, told the Alaska Support Industry Alliance Nov. 11.

That was “a bit of a shock to me, coming from the Gulf of Mexico.,” Haddad said.

Air permits are what have held Shell up in its Arctic offshore drilling projects, he said, “basically going back to when they first wanted to drill in the Beaufort.”

Air permits for offshore Alaska are managed by the Environmental Protection Agency Region 10, Haddad said, “and EPA Region 10 is taking a very extreme view of the Clean Air Act.”

He said EPA Region 10 is regulating air permits for temporary activities from drilling rigs and supporting vessels 80 miles offshore as though those emissions were coming from a factory next to a village or town.

It’s different in the Gulf of Mexico, he said, because the central and western Gulf were carved out of the Clean Air Act and offshore air permits there are handled by BOEM. That agency regulates air emissions by calculating the emissions for a project and then modeling how those emissions will impact the shore.

Haddad said BOEM collects data on emissions from all projects and does a cumulative impact for the shoreline, and emissions from 80 miles offshore are pretty diluted by the time they reach shore.

The biggest problem ConocoPhillips sees coming, he said, is that nearby Chukchi operators could use up any emissions allowance. And that’s inconsistent, he said, with the small size of the leases and the fact that BOEM uses sealed competitive bidding, so a prospective leaseholder has no way of knowing in advance how many operators would have leases in a given area.

Haddad said what EPA is doing now is “first come, first served.”

“So if you’re in there first with your air permit … you’ll get it; and if you’re next, if your lease is next to the other operator (and) you came in second, you probably won’t because the emissions increment is already taken up by the first operator.”

He said ConocoPhillips has “pushed back on that” and thinks it will probably be able to get a permit for its first operation, but is “very concerned about development permits down the road.”

—Kristen Nelson