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Vol. 17, No. 48 Week of November 25, 2012
Providing coverage of Alaska and northern Canada's oil and gas industry

Explorers 2012: ConocoPhillips: half full, half empty

Largest Alaska producer ends 2012 in better shape than 2011, but worried about future of investment opps

Eric Lidji

For Petroleum News

For ConocoPhillips, the difference between this year and last year is striking.

In 2011, ConocoPhillips faced delays on its plans to develop the National Petroleum Reserve-Alaska and explore in the waters of the Arctic outer continental shelf. By 2012, federal agencies removed a key obstacle blocking the NPR-A program and showed willingness to allow leaseholders in the Beaufort and Chukchi seas to explore those areas.

In 2011, ConocoPhillips folded Denali — its joint venture with BP Exploration (Alaska) Inc. to market North Slope natural gas resources through a major pipeline through Canada — and planned to close its liquefied natural gas export terminal in Nikiski. By 2012, ConocoPhillips and other producers aligned around a plan to market North Slope natural gas as LNG and unexpected geopolitical issues kept the Nikiski terminal open.

And after two winters without a traditional exploration well on the North Slope, ConocoPhillips drilled the Shark Tooth No. 1 well on its state acreage in early 2012.

But some issues remain unchanged.

ConocoPhillips’ legacy fields on the North Slope and in Cook Inlet still require capital to stem declining production. ConocoPhillips still believes the state fiscal regime is hampering its investment. ConocoPhillips is still earning large profits and paying large tax bills. And ConocoPhillips is still touting investment opportunities in the Lower 48.

A long corporate history

In 2012, ConocoPhillips took another step in its long evolution as a corporate entity, splitting into the upstream ConocoPhillips and the midstream and downstream Phillips 66. But the change meant little for Alaska directly, certainly less than previous changes.

The previous version of ConocoPhillips emerged from the merger of Conoco and Phillips Petroleum in 2002. Those companies and their predecessor companies were responsible for many of the early milestones in the history of the modern Alaska oil industry, including the discovery of Prudhoe Bay and the pioneering Kenai LNG export terminal.

After launching North Slope oil production, those companies initiated a westward expansion campaign on the North Slope that ConocoPhillips continues to pursue today.

Those initial western projects included the Kuparuk River unit in 1981 and the Alpine field at the Colville River unit in 2000, both of which ConocoPhillips operates today.

Since the merger, ConocoPhillips and partner Anadarko brought three Alpine satellites online: Fiord and Nanuq in 2006 and Qannik in 2008. ConocoPhillips also aggressively explored the NPR-A after federal agencies opened the region to leasing again, drilling 20 of the 29 exploration drilled wells in the 23 million acre reserve between 2000 and 2009 and forming the first units in reserve, Mooses Tooth in 2008 and Bear Tooth in 2009.

In September 2012, ConocoPhillips staked nine well locations in the two federal units.

ConocoPhillips staked the Flattop No. 1 and No. 2 wells on the eastern edge of Mooses Tooth, between the ARCO Clover A and the Phillips Alaska Mitre No. 1 wells. It also staked the Cassin No. 1, 3, 3A, 5, 6, 8 and 8A wells in Bear Tooth, to the north.

In February 2008, ConocoPhillips continued westward by spending $506.4 million for 98 tracts in the Chukchi Sea in northwest Alaska, as part of a record federal lease sale.

At the end of 2011, ConocoPhillips leased 1.2 million net undeveloped acres in Alaska.

Kuparuk and Alpine work

ConocoPhillips continues to maintain its North Slope developments.

At Kuparuk River, ConocoPhillips recently implemented a coiled-tubing drilling program that included 12 wells and 46 laterals, designed to generate a peak incremental oil rate of about 2,600 barrels of oil per day, the company told the state in annual filings for the unit.

And this coming year, ConocoPhillips is planning as many as 13 coiled-tubing drilling sidetracks and five rotary drilling sidetracks at Kuparuk River, according to the filings.

In early 2012, ConocoPhillips used Doyon rig 141 to drill the Shark Tooth No. 1 step-out well from an ice pad in southwest portion of the unit. “The well discovered hydrocarbons in the Kuparuk sands, in accordance with expectations, and confirmed mapped volumes. This area is being evaluated to assess further development potential,” the company said.

In 2011, ConocoPhillips produced 58,000 net barrels of liquids per day at the Greater Kuparuk Area — covering the field and four satellites: West Sak, Tabasco, Tarn and Meltwater. ConocoPhillips holds a 52.5 to 55.4 percent working interest in the area.

At the main Alpine field, where ConocoPhillips produced 33,000 net bpd of liquids in 2011, the company is using 3-D seismic acquired in 2010 to find new drilling opportunities.

And at the satellites, responsible for 18,000 net bpd in 2011, ConocoPhillips is focused on bringing the Alpine West, or CD-5, satellite into production after years of delays.

CD-5 permitting resolution

Those delays concerned a utility bridge ConocoPhillips wanted to build across a channel of the Colville River. ConocoPhillips and local Native groups spent years negotiating a path for the bridge, but the U.S. Army Corps of Engineers rejected the idea entirely in early 2010, telling the company to drill directionally underneath the channel instead.

After an appeal, in late 2011 the U.S. Fish & Wildlife Service and the Environmental Protection Agency reached “an agreement in principle” with ConocoPhillips on the bridge proposal and soon thereafter the Army Corps issued a permit for the project, albeit requiring some modifications to the original design to reduce impacts on floodplains.

ConocoPhillips is currently working on engineering and design, and hopes to sanction the project in 2012, begin construction in 2014 and bring the satellite online in late 2015.

Offshore plans progressing

With Shell Oil given clearance to drill in the Arctic OCS after years of delays, ConocoPhillips is following closely in its wake to explore the federal waters off Alaska.

After dropping much of its Beaufort Sea acreage in 2009, ConocoPhillips is now focused on the Chukchi Sea, where it holds an interest in the Devil’s Paw and Burger prospects.

Shell is the lead on Burger exploration this year and was also responsible for drilling early wells at Devil’s Paw in 1989 — calling it Klondike at the time. The prospect is some 120 miles west of the coastal village of Wainwright. ConocoPhillips acquired the Devil’s Paw prospect in a February 2008 federal lease sale. It brought the Norwegian company Statoil on board as a 25 percent partner on 50 leases in the prospect in early 2010 and in 2011 brought a second unnamed partner on as a 10 percent partner in those same leases.

In early 2012, ConocoPhillips filed an exploration plan with the Bureau of Ocean Energy Management outlining plans to drill as many as two wells in the 2014 open water season.

The Devil’s Paw program is far from a sure bet. The initial Klondike well did not encounter commercial quantities of oil and gas, but ConocoPhillips believes there is a good chance of finding an oil field large enough to justify development in the remote region, ConocoPhillips Chukchi Sea exploration project manager Mike Faust told the National Marine Fisheries Service’s annual Arctic Open Water meeting on March 8.

Circling around a pipeline

Alongside those efforts to maintain existing oil developments and find more giant fields, ConocoPhillips continues to work on marketing North Slope natural gas resources.

After more than three years of environmental and engineering work on their Denali joint venture, ConocoPhillips and BP held an open season in 2010. But they discontinued the plan in May 2011, saying they couldn’t find enough customers to justify moving forward.

In his State of the State address in January 2012, Gov. Sean Parnell presented a five point roadmap to get a gas pipeline built: resolving Point Thomson litigation, achieving alignment around a liquefied natural gas project under the Alaska Gasline Inducement Act, working to consolidate two state-sponsored gas pipeline projects and hardening numbers on the LNG project, and starting deliberations on natural gas tax legislation.

The administration reached points one and two on March 30. First, it announced a settlement on Point Thomson. Second, the CEOs of ExxonMobil, ConocoPhillips and BP sent a letter to Parnell suggested they would be willing to consider and possible unite around an LNG project, provided the state provides competitive and stable fiscal terms.

To work with the state, ConocoPhillips and BP would need to participate in the Alaska Pipeline Project sponsored by TransCanada Alaska and ExxonMobil and backed by the state through AGIA. TransCanada launched a solicitation of interest in early September to find parties that might be willing to make future capacity commitments on a North Slope natural gas pipeline, either through Canada or to a liquefaction terminal.

Methane hydrates work

Alongside those efforts to develop conventional gas supplies, ConocoPhillips has been partnering with the government to develop unconventional North Slope gas supplies.

With the U.S. Department of Energy, ConocoPhillips drilled the Ignik Sikumi No. 1 well at the Prudhoe Bay unit in early 2011 to test a method for producing gas hydrates. The extensive deposits on the North Slope trap methane molecules in miniscule cages of ice.

To make methane hydrates a viable energy source, researchers must find a cost effective way to unlock those cages. Toward that goal, the Department of Energy, ConocoPhillips and Japan Oil, Gas and Metals National Corp. performed a production test on the well in early 2012, injecting large amounts of carbon dioxide and nitrogen into the formation.

The test yielded 30 days of continuous production, five times longer than the previous best demonstration (an attempt to depressurize a reservoir in northern Canada in 2008).

Though promising, the results are still a far cry from proving the technical and commercial viability of the technique. The Department of Energy has budgeted $5 million for methane hydrate research, possibly including a longer North Slope test, as well as $6.5 million for other methane hydrate projects, include a subsea research effort.

Holding in Cook Inlet

After spending more than $200 million in Cook Inlet between 2008 and 2011, ConocoPhillips slowed the pace of activity at its legacy fields in the basin in 2012.

Between 2008 and 2010, ConocoPhillips spent more than $80 million drilling four wells at the Beluga River unit. In 2008 and 2009, ConocoPhillips spent $75 million drilling three wells at the North Cook Inlet unit, but called those wells disappointing. In 2011, ConocoPhillips spent $60 million dispersing compressor stations at Beluga to improve the pressure and increase the quality of the machines at the 50-year-old field.

In late 2010, ConocoPhillips Cook Inlet Manager Dan Clark said ConocoPhillips likely wouldn’t conduct exploration in the basin anytime soon because of the lack of a jack-up rig in the region. With two jack-up rigs now in the Cook Inlet, those plans could change.

The biggest development in Cook Inlet in 2012 involved liquefied natural gas.

In February 2011, ConocoPhillips and partner Marathon Oil announced plans to mothball the facility in the spring because they could not secure contracts in the Asian markets.

Because of unexpected demand, largely from increased reliance on gas as the Japanese moved away from nuclear power, the companies postponed the closure several times.

Toward the end of 2011, ConocoPhillips bought out its long time partner Marathon.

“We really believe that the plant has options for the future and we opted to purchase Marathon’s share so that we could maintain those options ourselves,” ConocoPhillips Alaska spokeswoman Natalie Lowman told Petroleum News in October 2011.

Whether those options involved continued exports, future imports, some combination or something else entirely depends largely on the future of gas production in Cook Inlet.

While some companies have announced discoveries and a new third party storage facility will likely help level the strong seasonal swings, regional demand is still expected to outpace supplies by 2015, creating the potential need to import gas to Southcentral.

Meanwhile, ConocoPhillips resumed exports in the spring. In June, Lowman said ConocoPhillips expected the make four to five cargo shipments to Asia in 2012.

The current export license expires on March 31, 2013.

Debating oil tax reform

Meanwhile, a debate continues in Alaska about future investments.

ConocoPhillips and other companies insist the state must revise its fiscal regime if it wants industry to continue the investments needed to stem declining production. In particular, industry wants the state to change the progressivity feature that increases the production tax rate as oil prices increase, saying it takes away too much of the upside.

A bill to reduce production taxes across the board passed the state House in 2011 but died in the Senate. After studying several proposals, the state Senate moved a completely different bill in early 2012, but industry said the changes wouldn’t do enough to make Alaska more attractive than other resource-rich regions. The bill died in the House.

Gov. Sean Parnell called a special session to address a new bill, but withdrew it a week later, saying the Senate “appears incapable of passing comprehensive oil tax reform.”

Over the summer, both sides prepared their cases. The administration hired a consultant to advise it on oil and gas taxes while the public interest group Backbone re-emerged to defend the bipartisan coalition in the Senate that questioned the proposed reforms.

Other opportunities

Although lawmakers won’t return to session until January, the debate continues to rear its head each time ConocoPhillips releases financial information about its Alaska operations.

ConocoPhillips earned $551 million in Alaska in the second quarter, but paid around $1.25 billion in taxes and royalties on its Alaska operations, including $983 million paid to the state of Alaska in severance taxes, royalties, property taxes and state income tax.

Each side found support for their beliefs in the figures. While Sen. Bill Wielechowski, a Democrat, pointed to high profits at a time of high oil industry employment, Sen. Cathy Giessel, a Republican, pointed to high taxes and increased spending outside the state.

As policymakers decide what to do, ConocoPhillips is increasingly involved in Lower 48 unconventional oil plays, including the Bakken, the Eagle Ford and the Permian basin.

For years, ConocoPhillips predominately produced oil from its Alaska operations and natural gas from its Lower 48 operations, but unconventional oil is shifting that balance.

In 2011, ConocoPhillips produced 215,000 barrels of oil and natural gas liquids per day in Alaska and 168,000 bpd of liquids in the Lower 48. In the first half of 2012, the company produced some 216,000 bpd in Alaska and 199,000 bpd in the Lower 48.

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