Even though Alaska is an expensive place to work, with a history of quick political changes and a resource base generally thought to be in decline, ConocoPhillips Alaska Inc. has become increasing enamored by the North Slope region over the past few years.
The largest oil company in Alaska believes it can more or less offset production declines from aging fields through improved technologies and a conservative exploration strategy.
“Over the past couple of years, we’ve been able to change the profile of our Alaska business,” ConocoPhillips Chief Executive Officer Ryan Lance said at the end of 2015, as he unveiled the 2016 capital budget and operating plan. “We’ve transformed the declining production base into one that can deliver stable production for a decade.”
This optimism even surprised analysts. Considering recent history, Paul Sankey of Wolfe Research asked, “What changed there? It’s being perceived obviously to be a decline area.” ConocoPhillips’ Executive Vice President for Exploration and Production Matt Fox attributed the change to improved technology, successful exploration and a favorable fiscal regime before summing up the company’s outlook for Alaska: “a slight increase in production next year for less capital and we believe that we can sustain that for 10 years.”
The promise of a decade with little or no production decline comes as the falling oil price has forced companies large and small to reconsider their recent trajectories. But while ConocoPhillips slashed its current budget by 25 percent over 2015 levels, the company cut Alaska spending by only 5 percent to $1.3 billion. Given that the company completed two major capital projects in Alaska in 2015, those cuts are negligible.
Chukchi disappointments
The current strategy can be seen in two recent incidents: ConocoPhillips abandoned its Chukchi Sea exploration program and permitted a two-well exploration program at the western end of its Greater Mooses Tooth unit in the National Petroleum Reserve-Alaska.
After spending some $504 million on 98 tracts in a federal lease sale in the Chukchi Sea in early 2008, ConocoPhillips sold a 25 percent working interest in its Devil’s Paw prospect to Statoil of Norway and farmed out a 10 percent working interest in its leases in the Chukchi to the U.S. subsidiary of the Chinese National Offshore Oil Corp.
ConocoPhillips subsequently conducted fieldwork in the region but never successfully arranged a drilling program and eventually cancelled its efforts for the time being. “While we are confident in our own expertise and ability to safely conduct offshore Arctic operations, we believe that more time is needed to ensure that all regulatory stakeholders are aligned,” ConocoPhillips Alaska President Trond-Erik Johansen said at the time.
A discovery in the Chukchi Sea would have needed to be massive in order to justify the considerable expense of bringing those resources to market by pipeline or by tanker.
Greater Mooses Tooth
By comparison, the NPR-A is cheap.
This winter, ConocoPhillips permitted a two-well exploration program in the reserve. In early January, the U.S. Bureau of Land Management and the Alaska Oil and Gas Conservation Commission issued drilling permits for the Tinmiaq No. 2 and Tinmiaq No. 6 exploration wells in the federal unit extending due west from the village of Nuiqsut.
Tinmiaq No. 2 would be at the southern end of lease AA 81807, northwest of the Grandview No. 1 well. Tinmiaq No. 6 would be at the north end of lease AA 81808, west of the proposed Spark No. 7 well. Both wells would be vertical holes, targeting oil.
The Tinmiaq wells are farther west than any previous drilling in the unit. In May 2001, before forming the unit, Phillips Alaska Inc. announced oil discoveries from the Spark No. 1, Spark No. 1A, Moose’s Tooth C, Lookout No. 1, Rendezvous A and Rendezvous No. 2 wells. Except for the Lookout well in the northeast corner of the unit, all of those wells were clustered in the center of the unit. In subsequent years, the company drilled various exploration wells in the east and south of the unit, including Pioneer No. 1 and Grandview No. 1 in early 2009 and Rendezvous No. 3 and Flat Top No. 1 in early 2014.
ConocoPhillips recently sanctioned a $900 million GMT-1 development at the eastern end of the unit, at lease AA 81798. The project includes construction of a drilling pad, a 7.7-mile road and associated facilities and pipelines and an initial nine-well drilling program with the capacity for 33 wells. The timeline calls for production by late 2018.
At the same time, ConocoPhillips is permitting the GMT-2 development in the south-central portion of the unit, near lease AA 81781. In late August 2015, the company applied for a federal permit to drill the GMT2-R112 oil well on lease AA 81800. While the projects are prone to change over time, ConocoPhillips previously outlined a GMT-2 project with a base plan of 10 wells and the potential for as many as 19 wells.
Cook Inlet sale
All the exploration funding in ConocoPhillips’ budget is focused on the North Slope.
After ConocoPhillips spent more than $155 million drilling seven wells at the Beluga River unit and the North Cook Inlet unit between 2008 and 2010, and another $60 million dispersing compressor stations at Beluga River, the company reduced its spending at the two legacy Cook Inlet fields to standard operational and maintenance activities.
In late summer 2015, ConocoPhillips put those assets on the auction block.
“While historically significant to the company’s investment in Alaska, the North Cook Inlet and Beluga River units are mature fields that are no longer considered core to Alaska operations. The focus will be on the company’s current North Slope operations, including the Alaska LNG project,” the company said in a statement on July 28.
In early February 2016, the Anchorage-based electric utilities Municipal Light & Power and Chugach Electric Association announced that they would jointly acquire ConocoPhillips’ stake in Beluga River for $152 million. ConocoPhillips transferred 70 percent of its stake to ML&P and 30 percent to Chugach Electric, which gave ML&P a 56.67 percent interest and Chugach Electric a 10 percent interest. Hilcorp Alaska LLC would continue to hold the remaining one-third interest, but would become the operator.
The deal was expected to close in the spring, as The Explorers went to press.
As of late March, ConocoPhillips had yet to announce plans for North Cook Inlet.
The sale only covers the two fields. ConocoPhillips decided to keep its pioneering liquefied natural gas export terminal in Nikiski. The terminal was on the verge of closure several years ago, until changing markets conditions both in Alaska and in East Asia gave the company a reason to continue export operations from the facility on a reduced basis.
