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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

Devon on the brink of reviving Beaufort drilling

But tensions build over access to Mackenzie gas pipeline by independent explorers

Gary Park

Petroleum News Canadian Contributing Writer

All Devon Canada needs now is an Arctic freeze-up to spud the first exploratory well since 1989 in the Canadian Beaufort Sea, in hopes of extending gas supplies for a Mackenzie Valley pipeline.

It embarks on the high-stakes gamble armed with 3-D seismic data that was not available to explorers before the region was consigned to the deep-freeze after logging 26 significant discovery licenses from 41 shallow and 50 deepwater wells.* “We have seen formations that we could not have seen with 2-D,” Michel Scott, vice president of government and industry relations, told Petroleum News.

The company, facing an expected bill of C$55 million-$60 million for the Paktoa well, needs all the certainty it can muster.

That includes “some encouragement” from the well and the assurance of “fair and reasonable” access to the planned Mackenzie Valley gas pipeline, Scott said.

SDC towed to site

For the well, Devon has brought back to life a steel drilling caisson, or SDC, built 23 years ago for now-defunct Dome Petroleum, then mothballed in Alaska for a decade before EnCana dusted it off to drill north of Prudhoe Bay in the 2002-03 winter.

The SDC, now owned by a Norwegian, was returned to storage at Herschel Island off the Yukon coast before being towed about 70 miles by a Russian icebreaker to the Paktoa site in August.

Devon gained its entry to the Beaufort in 2001 when it acquired Anderson Exploration, taking control of four exploration licenses covering 846,000 acres, which carry a work commitment of C$225 million and require four wells by the winter of 2008-09.

The company identified 10 possible drilling locations on Exploration License 420 before narrowing the field down to Paktoa, which sits in 43 feet of water off the western part of Beluga Bay.

The well is expected to be drilled to a depth of about 7,700 feet, starting in the third or fourth week of December and scheduled for completion in mid-February.

Scott said the objective is to find a “large structure” to continue drilling over the following three winters.

Geological Survey estimates 67 tcf, 7 billion barrels

These plans put Devon in the forefront of extending Canada’s Arctic interest beyond the Mackenzie Delta, where most of the efforts to support the Mackenzie Gas Project have been concentrated.

The Geological Survey of Canada estimates the Beaufort-Mackenzie basin has 67 trillion cubic feet of recoverable gas, both discovered and undiscovered, and 7 billion barrels of oil, accounting for more than one-fifth of Canada’s frontier prospects.

But even if Devon posts a discovery in the hoped-for range of 3 tcf, it would likely be 2014 or 2015 before that gas could be fed into the Mackenzie pipeline.

For now the Mackenzie gathering system proposes capacity of 830 million cubic feet per day from the three anchor fields on the Delta and another 245 million cubic feet per day from third-party producers.

Agreement with Imperial elusive

Negotiating an agreement between Imperial Oil, the Mackenzie Gas Project’s lead partner, and the Mackenzie Explorer Group has so far proven elusive, forcing the independents to apply more pressure.

Dissatisfied with their efforts to “work things out we decided to take our case to the National Energy Board,” Scott said. However, he described the move as “the normal course of business.”

Anadarko Canada, BP Canada Energy, Chevron Canada Resources, Devon, EnCana and Nytis Exploration filed a notice of motion earlier this month asking the federal regulator to order Imperial to make public several documents, including the proposed Mackenzie gas gathering and processing facilities development and operating agreement, the DOA, and the proposed transportation and processing agreement, TPA.

The group, with only Petro-Canada declining to participate, believes the board must approve the tolls and the access and tariff provisions for the gathering system if the Mackenzie project is to be accessible to producers other than just Imperial, Shell Canada, ConocoPhillips Canada and ExxonMobil Canada.

Scott said the group wants to settle on an appropriate return on equity, debt rate and expansion policy.

“From an explorers’ standpoint we’re supportive of the project and we want to see it go forward, but in reality we’re dealing with competitors,” he said.

The explorers, in their filing, indicated some displeasure that Imperial will only provide the DOA and TPA to those producers who sign and return a capacity request agreement.

Those applicants will also be required to choose between the DOA and the TPA by Sept. 30 or risk not having their requested capacity included in the initial design for the Mackenzie gathering system, which includes a natural gas liquids pipeline from Inuvik to Norman Wells in the Northwest Territories and a gas processing plant near Inuvik.

Neither document submitted to NEB

The explorer group was rebuffed in its request to Imperial to provide the DOA and TPA by Aug. 26 and neither of the agreements has been submitted to the National Energy Board.

The notice of motion said the projects sponsors have “offered no reasonable justification” for keeping the two agreements confidential and for not making them part of the public record. It argued that the board is simply unable to be satisfied that the access and tariff provisions will “be just and reasonable until it knows what those provisions may be.”

Imperial has countered that the Canadian Oil and Gas Operation Act, under which the gathering system approval will be granted, does not allow for the National Energy Board to regulate fees, tariffs and access matters.

It further said the explorer group should not fear that the Mackenzie proponents will try to exercise market power without regulatory oversight and arbitrarily impose terms and conditions.

The explorers have already made a case to ensure the gathering system is large enough to handle gas discoveries beyond the 5.69 tcf of discovered resources in the Delta anchor fields.

Scott said one of the worries is that a producer finding just 20 million cubic feet per day of volumes would face a sizeable barrier to entry.

The federal regulator expects to decide its next move based on a request for comments.

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