From the way ConocoPhillips talks, you’d never know the company is heavily invested in an expensive region with an aging resource base at a time of persistently low oil prices.
“Over the past couple of years, we’ve been able to change the profile of our Alaska business,” ConocoPhillips Chairman and Chief Executive Officer Ryan Lance said at a Dec. 10 event detailing a 2016 capital budget and operating plan. “We’ve transformed the declining production base into one that can deliver stable production for a decade.”
As the company drastically scales back its global spending and trims its workforce - including in Alaska - and as some of its peers in Alaska seem to be reducing their immediate ambitions, ConocoPhillips is touting Alaska as a bright spot in its portfolio - a reliable resource with an acceptable taxation regime and opportunities for the future.
That vision greatly contradicts the general attitude in the state in recent years, which has been marked by worries over declining production and debates over government take.
The budget ConocoPhillips approved for its global operations next year is a 25 percent reduction from its budget for this year. But its Alaska budget fell only 5 percent.
The small drop becomes even smaller in light of that fact that the company completed two major projects this year, which removes those costs from the upcoming plan. The $1.3 billion budget ConocoPhillips approved for Alaska next year will “mostly target development drilling, base maintenance and the progression of several major projects.”
Even odder, the startup of those two projects could likely result in a year-over-year increase in oil production from Alaska operations after some 15 years of steady declines.
And with several projects in the hopper - some underway, some sanctioned and some under consideration - the company believes it can keep production steady for a while.
The Alaska spending plan represents 17 percent of the total $7.7 billion budget. The company also plans to spend $2.6 billion in the Lower 48, $1.4 billion in the Asia Pacific and the Middle East regions, $1.3 billion in Europe and $800 million in Canada.
During the event, Paul Sankey of Wolfe Research noted the optimism over Alaska and 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 situation 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.”
Two factorsThe current situation - a decrease in spending and an increase in production - is the result of two simultaneous factors: infield drilling and infrastructure-led exploration.
By bringing a dedicated coiled tubing drilling rig to the Kuparuk River unit, ConocoPhillips has been able to expand a technique deemed successful in recent years.
That activity will continue under the upcoming budget.
At the same time, ConocoPhillips sanctioned four major development projects in recent years: the CD5 pad at the Colville River unit, Drill Site 2S and the Drill Site 1H NEWS project at Kuparuk and the GMT-1 development in the Greater Mooses Tooth unit.
The projects are all near existing infrastructure, which is a shift from the strategy ConocoPhillips seemed to be pursuing a decade ago, when it drilled several wildcat exploration wells in distant corners of the National Petroleum Reserve-Alaska and collected an expensive portfolio of leases in the Beaufort Sea and Chukchi Sea.
While the NEWS project is an expansion of existing infrastructure to target heavier oil deposits in the West Sak formation at the Kuparuk River unit, the other three projects represent a similar type of strategic advance. Like a billiards player using spin to attempt one shot while positioning for the next shot, ConocoPhillips appears to be selecting exploration and development opportunities on the basis of their future possibilities.
ConocoPhillips has been using this strategy in Alaska since at least 2000, when it created a staged development scheme for developing the Colville River unit. That program has allowed the company to bring satellites into production every few years without expanding pipeline and processing capacity. The CD5 project is the latest stage of that long-term effort, and the GMT-1 project will carry the program into the NPR-A.
But now, having abandoned its offshore programs and avoided any risky exploration ventures, the stepping-out strategy appears to be much more central to operations.
Steady advanceWith CD5 now online, ConocoPhillips is slowly crossing the Colville River, which will make it significantly easier to pursue development on federal leases in the NPR-A.
There are many. The GMT-1 project will be along the eastern edge of the Greater Mooses Tooth unit. The proposed GMT-2 project would be in the center of the unit. And in early December, ConocoPhillips applied for two drilling permits at the far western end of the unit. From there, ConocoPhillips could easily head north to develop its Bear Tooth unit.
At one time, ConocoPhillips referred to the GMT-1 project as “CD6,” meaning the next Colville River unit satellite. The other Greater Mooses Tooth unit projects are similar. The current proposal for the GMT-2 pad is a variation of previous proposals for a CD7.
While the projects are prone to change over time, ConocoPhillips previously suggested a GMT-2 project with a base plan of 10 wells and the potential for as many as 19 wells.
Earlier this year, in late August, ConocoPhillips began permitting the project when it applied for the GMT2-R112 oil well on lease AA081800, in the center of the unit.
At the same time, the company was looking even farther out. The company staked seven potential well locations deeper into the unit and beyond the western and southern borders.
Staking is merely an indicator of interest. But in early December, the U.S. Bureau of Land Management posted notices for two ConocoPhillips drilling applications: the Tinmiaq No. 2 well on lease AA081808 and the Tinmiaq No. 6 well on lease AA081807.
Those two leases are at the western end of the federal unit, in the general vicinity of the previously drilled Grandview No. 1 well and the proposed Spark No. 7 well.
Seismic shiftSimilarly, the recent Kuparuk River projects could be models for future development.
The Kuparuk West Sak 3-D seismic survey in 2005 gave ConocoPhillips “a significant number of leads for infill or sidetrack drilling,” as the company explained in its 2014 plan of development for the Kuparuk River unit. A custom built coiled-tubing drilling rig has been steadily working through that portfolio of drilling candidates since May 2009.
In 2011, ConocoPhillips commissioned the Western Kuparuk 3-D seismic survey, which prompted an “infrastructure-led exploration strategy” focusing on drilling opportunities near existing infrastructure. For instance: the company drilled the Shark Tooth No. 1 well in the southwest corner of the unit in early 2012 to appraise an ARCO Alaska discovery from the late 1980s. The successful appraisal was the basis for the Drill Site 2S project.
Similarly, in the winter of 2012-13, the company conducted a pilot test on DS 3S-19, one of its original development wells for the Palm satellite of Kuparuk in 2003. The test involved adding a perforation to the well and performing hydraulic fracturing operations to gauge the potential of developing the overlying Cretaceous Brookian Moraine interval.
Earlier this year, the company drilled the 3S-620 Moraine well from Drill Site 3S and the Moraine No. 1 well from an ice pad in the northwest corner of the unit. The company has yet to release any results, but the wells present an opportunity to replicate Drill Site 2S.
The 1H NEWS project could also become a model. The nine-acre expansion of the existing drill site is expected to come online in early 2017. At an analyst conference earlier this year, ConocoPhillips floated the idea of 1N and 1P NEWS developments.