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Vol. 21, No. 11 Week of March 13, 2016
Providing coverage of Alaska and northern Canada's oil and gas industry

Six rigs to two

Operator BP shutting down drilling rigs in Prudhoe Bay and satellites

KAY CASHMAN

Petroleum News

At the request of the Prudhoe Bay working interest owners, BP Exploration (Alaska) Inc. said March 7 it was cutting back spending in BP-operated Greater Prudhoe Bay by shutting down three out of five drilling rigs.

One of the three rigs the Prudhoe owners are cutting, Doyon 16, was put on standby at the end of last year.

The other two rigs, Nordic Calista 1 and Parker Drilling 273, will go down in the next few months.

As a result of weak oil prices, BP’s partners have asked the company, BP Alaska spokesperson Dawn Patience said March 7, “to plan to reduce the Prudhoe Bay rig fleet over the next few months,” dropping it to two rigs.

Nordic-Calista, Doyon, and Parker are the impacted companies,” Patience told Petroleum News.

A sixth rig drilling for BP was pulled from Prudhoe in January. Doyon 14 was sent to Milne Point, which is half owned by BP, but operated by the other major Milne owner, Hilcorp.

Doyon 14, Petroleum News sources say, will not go back to Greater Prudhoe Bay, which aligns with the March 7 announcement.

That leaves only Parker 272 and Nordic 2 drilling in the Greater Prudhoe Bay area, which includes the giant Prudhoe Bay field, and its satellites Lisburne, Aurora, Borealis, Midnight Sun, Orion, Polaris, Sag River, Schrader Bluff and Ugnu.

BP lost $194 million in Alaska

BP, a working interest partner in Greater Prudhoe Bay with ExxonMobil and ConocoPhillips, has been focused on extracting more oil from Prudhoe and its satellites since it sold the bulk of its other Alaska assets in 2014.

By 2015, the major had relinquished operatorship of everything except Greater Prudhoe Bay.

And while Petroleum News industry sources say BP was against the drastic cuts at Prudhoe, the cost of doing business in the northernmost state has made Alaska an increasingly challenging region for the company to do business during the current extended period of low oil prices.

In 2015, BP lost $194 million in Alaska, with total government take hitting $263 million, $140 million of which was state production tax, the balance royalties and income tax.

Greater Prudhoe output to fall

Total oil production from Greater Prudhoe Bay averaged 270,120 barrels of oil per day in January, according to the Alaska Oil and Gas Conservation Commission. In 2015, gross output averaged 281,000 bopd, Patience said.

Production from Prudhoe Bay and its satellites is expected to go down, she said, but how much is not yet known.

However, operator BP “will make efforts to mitigate production impacts due to changes in activity,” Patience said in an email to Petroleum News.

One way the company has improved output in the area was its success with seismic imaging, which it noted in its 2015 annual report: “Our independent simultaneous source (ISS) technology makes large-scale 3D seismic surveys faster and reduces cost by using multiple surveying sources and receivers at the same time. Our 2015 ISS survey at Prudhoe Bay in Alaska delivered a 10-fold increase in productivity, meaning we could acquire higher-quality images in just one winter season.”

BP, Patience said, is “committed to maintaining a safe and compliant business in Alaska that is sustainable. In the low oil price environment improving our cost base is critical to maintaining a sustainable business at Prudhoe Bay and the long-term viability of an Alaska LNG project.”

Impact on Alaska jobs

When asked to provide specifics on direct and indirect job losses in Alaska related to the shutdown of three drilling rigs, Renée Limoge Reeve, deputy director of the Alaska Support Industry Alliance, said “we estimate 200-300 jobs will be lost with the rig shutdown, but … for every one job in the support industry, we estimate another nine are affected.”

The job loses “will have a ripple effect throughout the community and the state of Alaska,” she said.

“The minute the rig worker loses his job, he may stop getting coffee at the local shop, cancel his gym membership, not eat out as often, etc. In midtown alone we’ve had two popular restaurants close and anecdotally heard the loss of Shell impacted those decisions. I believe things like that will continue,” Reeve said.

Will the governor change his mind?

Following the March 7 shutdown announcement, Alaska Gov. Bill Walker’s said he was “disappointed to hear that BP is scaling back its operations in Alaska and world-wide, but it’s an unfortunate reality of low oil prices.”

Walker said he and his team “will continue to work closely with BP and all producers, the federal government and industry representatives to limit those effects as much as possible,” while working with the Legislature on a “sustainable state budget.”

The governor is behind current legislation to increase the fiscal burden on the oil industry in Alaska, which industry representatives have said will further curtail investment in the state.

So far numerous spending cuts have been made in Alaska by several oil companies, including Apache’s recent decision to halt all operations in the state.

Will this latest announcement by BP cause Walker to reconsider his support for the legislation designed to do away with financial incentives to explore, develop and produce hydrocarbons in Alaska?

Petroleum News asked the administration that question March 9, but as of the morning of March 10, had not heard back from the governor’s office.

But the Alliance’s Reeve doesn’t think so.

“Unfortunately, no,” she told Petroleum News.

“In response to the shutdown, the governor continues to say ‘everyone has to pay’ and is apparently unaware that since statehood the industry HAS paid - to the tune of 85 percent of the General Fund - over $140 billion in total revenue to the state and that is unadjusted for inflation.

“I think what I find most concerning is the complete disconnect with reality - these are Alaskan companies and Alaskan workers that are affected by decisions like the one made by BP. That is money taken directly out of this state’s economy. It doesn’t feel as though those in Juneau care about that as much as they care about state jobs and keeping our budget bloated. There is no recognition that the proposed legislation makes a bad situation worse,” she said.

Alaska’s unstable fiscal regime

There is a perception in the oil industry that Alaska has an unstable fiscal regime for investment, in part because “if HB 247 were to pass, it would be the sixth time in 11 years that we’ve changed the tax structure,” Reeve said.

“They try to tax the companies when prices are high because they want Alaska to get ‘its fair share’ and they try to tax when things are low to help the state with its fiscal obligations. Unfortunately, it amounts to trying to balance the state’s checkbook on the backs of our contractors and the oil companies,” she said.

Other oil provinces have lowered taxes and/or increased fiscal incentives. When asked, what could be done to deter oil companies from pulling out of Alaska or slowing down activities here, Reeve said industry hasn’t discussed lowering taxes.

At this time, she said, they are “simply asking that Gov. Walker honor his promise during his campaign to leave SB 21 alone. That we leave the tax structure as is and not add to the burden already felt by these companies at $30 barrel oil. Adding further burden to a cash-flow negative industry will result in more decisions like this and ultimately, to more layoffs and more bad news for Alliance member companies.”



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