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Vol. 14, No. 10 Week of March 08, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

Slowing Nikaitchuq

Low oil prices and weak economy believed to be behind Eni’s decision

Eric Lidji

Petroleum News

Eni Petroleum is “slowing down” the pace of development at the Nikaitchuq unit in the nearshore waters off the North Slope, according to a top state oil and gas official.

Division of Oil and Gas Director Kevin Banks told Petroleum News that the American subsidiary of the Italian oil giant planned to move the project from the “fast track” to a “normal pace,” which could delay startup of the oil field by six months to a year.

Management at ASRC Energy Services, a major North Slope contractor, reportedly told employees in late February that Eni planned to defer, but not cancel, its operations at Nikaitchuq, in the face of lower oil prices and the global economic environment.

An Eni representative in Anchorage declined to comment about plans for the unit, and an Eni spokeswoman in Houston was out of town and could not be reached for comment.

Eni sanctioned the $1.45 billion Nikaitchuq project in January 2008, announcing plans to develop the field from both onshore and offshore, and to build new processing facilities.

An Eni official last fall spoke about producing first oil from onshore pads at Nikaitchuq in late 2009, and bringing offshore pads at the unit into production starting in late 2010.

As of early January, Eni had completed at least one development well from Oliktok Point, according to records from the Alaska Oil and Gas Conservation Commission. The company previously announced plans to drill seven producer wells from the onshore pad.

Spending with an eye on costs

Eni does not appear to be on a cost cutting spree.

Presenting 2008 year-end results and laying out a four-year strategic plan on Feb. 13, Eni executives said they planned to spend 14.1 billion euros (around $18 billion) in capital expenses this year, part of a 48.8 billion euro (around $62 billion) four-year capital expenditure program, down only 1 billion euros from the budget for 2008 through 2011.

In the strategic plan for 2009 through 2012, Eni still lists the North Slope as a “key area” of exploration for the company, and slated Nikaitchuq to come into operation for 2010, peaking at 26,000 barrels per day of oil. The company previously announced plans to build onshore processing facilities capable of handling 40,000 bpd.

In a question and answer session following the presentation, Paolo Scaroni, chief executive officer of Eni S.p.A., offered nuanced thoughts about the company’s strategy for expensive and unconventional exploration ventures in the current economic climate.

Scaroni said a January 2007 decision not to enter the Canadian oil sands was “one of the wisest decisions I’ve ever taken in my life,” but added that the company’s unconventional oil prospects in Venezuela and the Congo should remain viable even at lower oil prices, saying, “Our unconventional oil is much better than some other unconventional oil.”

Scaroni also said Eni likes its position in the Gulf of Mexico and hopes to remain a presence there, but added, “Other areas of the world might be under scrutiny to make sure that either they are material, or we have enough perspectives in order to make them material one day.” He did not elaborate or mention any specific areas under review.

Royalties change economics

Eni is projecting oil prices to average $43 a barrel this year and $55 a barrel in 2010, and said a “vast amount” of its international portfolio would break even at $35-a-barrel prices.

Of the 525,000 barrels of oil equivalent in new production Eni hopes to bring online by 2012, some 57 percent would break even at an oil price of $35 a barrel; some 76 percent would break even at $40 a barrel; and 100 percent would break even at $60 a barrel.

Eni is presumably, though not explicitly, including Alaska somewhere in those figures.

Eni sanctioned Nikaitchuq after the state modified its royalty structure on several leases at the unit, allowing Eni to pay lower royalty rates to the state if oil prices began to fall.

Under the agreement, the royalty rate on oil produced from those leases rises and falls on a sliding scale connected to the delivered price of Alaska North Slope crude oil.

Up to an inflation-adjusted price of $42.54 per barrel, Eni pays 5 percent royalties to the state. As oil prices increase, so does the royalty rate, topping out at 16.667 percent, the original royalty rate attached to most leases in the unit. The scale is based on a Minerals Management Service program for deepwater federal leases in the Gulf of Mexico.

When the state changed the royalty structure in December 2007, those lower oil prices looked unlikely in the near future. Alaska North Slope crude traded at about $90 a barrel at the time, on its way to nearly $150. But oil prices dropped more than $100 a barrel in the fall.

Since the start of 2009, oil prices have moved between $32 and $48 a barrel.

In requesting a change to the existing royalty structure back in October 2007, Eni said the economics of Nikaitchuq would otherwise be only “marginal” at low oil prices. The state agreed to the changes on the condition that Eni sanction development by Feb. 28, 2008, and meet spending commitments: $822 million by 2014 and nearly $1.4 billion by 2019.

The royalty modification remains in place for 25 years after sustained production begins.

The royalty modification only covers oil produced from the Nikaitchuq Schrader Bluff OA reservoir, a shallower pool believed to contain heavier oil. The Nikaitchuq prospect also contains a deeper reservoir in the Sag River formation believed to bear light oil.

Heavy oil is often harder and more expensive to produce than light oil, but because the Sag River formation is “plagued with poor quality reservoir rock,” development of it is “marginal at best unless there are significant advances in stimulation or enhanced oil recovery technology,” state oil and gas officials wrote in the decision to modify royalties.

Eni estimates Nikaitchuq contains 180 million barrels of recoverable oil.

Sole owner at Nikaitchuq

Nikaitchuq has changed hands numerous times over the past decade.

Eni picked up a minority interest in the unit in 2005 and assumed the rest in 2007.

Banks speculated that might have something to do with the company decision to slow development, saying Eni would have more leeway to change timelines at Nikaitchuq than it would at projects around the world where it is partnering with other producers.

One of those projects is the Oooguruk unit, which neighbors Nikaitchuq in the nearshore waters of the Beaufort Sea. Pioneer Natural Resources brought the unit into production last summer and holds a 70 percent working interest. Eni holds the remaining 30 percent.

Nikaitchuq comes from an Inupiat word meaning “to persevere.”

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