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Vol. 14, No. 32 Week of August 09, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

Risk to reward

Exploration takes breather, but project development has North Slope buzzing

Kay Cashman

Petroleum News

If you’ve been to Alaska’s North Slope in the last few months you know that beds and trucks are in short supply and Deadhorse, the center of oilfield activity, looks like a boom town.

“There are more oilfield employees now than ever before in Alaska’s history, even when the pipeline was producing three times what it is today,” Alaska Department of Labor economist Neal Fried told Petroleum News Aug. 6.

In January 2008, the fourth year in a row for significant growth in oilfield activity north of the Brooks Range, the number of employees in the state’s oil and gas industry hit 12,100.

By January of this year that number had risen to 13,100, almost all of whom were associated with northern Alaska.

Fried suspects the gap between 2008 and 2009 numbers might have narrowed in the second quarter (actual numbers will not be in from employers for two more months), predicting June 2009 employment at 13,200 as compared to 12,800 in June 2008.

He attributes part of the swell in employee numbers to aging oil fields and pipelines on the North Slope, which require increasing amounts of inspection and repair. (See related production story on page 5.)

Turning risk into reward

So what is everyone else doing?

It’s a good question because only two companies have plans — tentative ones at that — to drill exploration wells north of Alaska’s Brooks Range this winter.

And most of the infield rigs in the producing fields are down, although Petroleum News sources at BP and ConocoPhillips say that situation will likely change at Alpine, Prudhoe Bay, Kuparuk and other fields later this year, especially if oil prices continue to stay above $40 per barrel.

A large chunk of activity is the result of the hundreds of millions of dollars being spent on the development of four new oil fields, on and offshore the North Slope, where explorers found commercial quantities of oil and are taking steps to reap the rewards of those discoveries.

Exxon can recoup 45%-plus of Point Thomson costs

And Alaska isn’t a bad place to collect those rewards.

For example, under Alaska’s Clear and Equitable Share, or ACES, the oil production tax regime that passed the Alaska Legislature in late 2007, ExxonMobil and its partners should be able to recoup a hefty chunk of the first phase of their drilling and development costs at the eastern North Slope Point Thomson field, which is expected to cost more than $1.3 billion.

“Point Thomson qualified drilling expenses are eligible for ACES credits and deduction,” Alaska Department of Revenue Commissioner Patrick Galvin told Petroleum News in an e-mail Aug. 5. “They are eligible for a 20 percent credit, and they can deduct the capital costs against their earnings to reduce their tax bill an additional amount equal to the tax rate. The tax rate will depend on their net profits and progressivity, but it is at least 25 percent.

“So, in other words, they will reduce their production tax bill by an amount greater than or equal to 45 percent of their qualified expenses. In effect, the State is reimbursing them over 45 percent of their costs,” Galvin said.

With the exception of things like legal and accounting expenses and upper management overhead, most of Exxon’s expenditures for Point Thomson should qualify under ACES, Bill Van Dyke told Petroleum News. Former director of the state’s Division of Oil and Gas, Van Dyke is a member of PRA’s professional staff in Anchorage, assisting the consulting firm’s clients in applying for oil and gas credits, deductions and incentives available from the State of Alaska.

Four fields this year, five next

Fields under development in northern Alaska include the Exxon-operated natural gas cycling project at Point Thomson; BP’s Liberty oil field, an offshore oil accumulation being developed from onshore; and Eni Petroleum’s near-shore Nikaitchuq oil field — all of which are new projects. The fourth development is an expansion of Pioneer Natural Resource’s near-shore Oooguruk oil field, which went online in June 2008 (see related article on page 1).

Excluding heavy oil development inside North Slope units such as Prudhoe Bay and Kuparuk, the number of fields under construction will likely jump to five next year when work starts at Alpine West, the undeveloped Colville Delta 5 satellite along the eastern border of the National Petroleum Reserve-Alaska.

Brooks Range needs partnership dispute settled

The two companies looking at exploration drilling this coming winter are independents Brooks Range Petroleum and Anadarko Petroleum.

Brooks Range, the local affiliate of Kansas-based Alaska Venture Capital Group and operator for joint venture partners AVCG, Nabors subsidiary Ramshorn Investments, and TG World Energy, is hoping to drill a delineation well in its North Shore prospect, which is part of the proposed Beechey Point unit in the Gwydyr Bay area north of Prudhoe Bay.

The 52,877-acre unit would cover state land and water known to hold several smaller oil deposits, but previously considered uneconomic.

Brooks Range is also looking at drilling a well in its Tofkat prospect east of the village of Nuiqsut.

“We would like to revisit that area … whether we do it this year or next is subject to the 3-D seismic we shot. … We’re prospecting that data now. … We’re not sure if we will be ready to drill there in time for this winter or not,” Brooks Range Vice President of Land Jim Winegarner told Petroleum News Aug. 5.

Starting in 1969, at least 15 wells have been drilled by several companies in the Beechey Point unit area, ending with a North Shore well drilled by Brooks Range in 2007 and tested in early 2008.

The company has said previous wells tested at “respectable” rates up to 3,500 barrels per day, but “a cost structure founded on drill sites capable of producing 100,000 bopd was not suitable for ‘marginal’ areas, particularly with commodity prices in the $20 to $30 price range.”

Depending on its drilling results at North Shore, which is contingent on JV partnership approval, Brooks Range is looking at moving immediately into development of North Shore.

But there is one major roadblock: A lawsuit filed in December by AVCG against TG World has to be resolved before drilling can move forward.

She loves me, she loves me not, she …

Sources within industry and state government told Petroleum News in July that operator Anadarko was putting together a two-rig drilling program for this winter in an area its joint venture partners, Petro-Canada and BG Group, have started calling the Gubik Complex.

The complex is a series of natural gas prospects on state, Native and federal land that the three companies have been exploring and delineating as part of a multi-year drilling program in the gas-prone Brooks Range Foothills that began in the winter of 2007-08.

The program is the first to target commercial quantities of natural gas in northern Alaska, its first well testing at rates of up to 15 million cubic feet per day and proving up the previously discovered, but undeveloped, Gubik gas field, one of the prospects in the Gubik Complex.

All three of the wells drilled by Anadarko last year “encountered natural gas,” according to Petro-Canada’s first quarter financial filings.

No pipeline exists to bring that gas to market, but the Gubik Complex is considered a possible supply depot for both a large-diameter pipeline into Canada, and a smaller “bullet” line to Southcentral Alaska. Anadarko has said that 2016 is the earliest date for starting natural gas production from the area.

But Suncor Energy’s recent acquisition of Petro-Canada has brought Anadarko’s drilling plans to a halt.

In the process of analyzing which properties it will keep, and which it will sell, Suncor’s CEO Rick George told the Calgary Herald on Aug. 6 that the company will “definitely have the capital budget for 2010 set by late September or early October” and will have decided which international assets to keep by November.

Petroleum News sources said if this winter’s drilling program doesn’t get approved in the next 60 days by all three partners, Anadarko will likely postpone drilling and instead do additional testing this winter at its Chandler No. 1 well, one of the wells it completed last winter in the Gubik Complex.

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