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Vol. 12, No. 49 Week of December 09, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Eni wins Nikaitchuq royalty reduction

Second time’s a charm: earlier Kerr-McGee request denied; this time around 11 leases get 5 percent rate, based on price of oil

Kristen Nelson

Petroleum News

Eni has succeeded where Kerr-McGee failed and has won royalty reduction for leases in the Nikaitchuq unit off Alaska’s North Slope.

When Kerr-McGee Oil and Gas Corp. applied for royalty reduction at Nikaitchuq in 2006 the request was denied, based on what the Alaska Department of Natural Resources called “materially improved” economics for the project following the passage of the state’s new petroleum profits tax in August 2006. DNR said high capital expenditures for Nikaitchuq would “serve to offset other statewide income streams and lower the overall tax obligations for the corporation” and its parent Anadarko Petroleum, resulting in a tax reduction of some $120 million compared to the previous fiscal regime. Anadarko has production from the ConocoPhillips Alaska-operated Alpine field in which it is a partner; it acquired Kerr-McGee in 2006.

Circumstances are different for the new Nikaitchuq operator, Eni US Operating Co., which has no production in Alaska, and its proposal has won a royalty reduction on 11 leases in the 18-lease unit, tied to a number of requirements and to the West Coast price for Alaska North Slope crude oil.

In 2007 Anadarko sold its majority interest in the area to Eni, which had come in as a minority partner when it acquired the Alaska interests of Armstrong Oil & Gas in 2005.

The unit has also changed in the interim.

Kerr-McGee applied for royalty relief on a group of tracts, some of them in the Tuvaaq unit, as well as the Nikaitchuq tracts.

The Tuvaaq unit is now part of Nikaitchuq, which more than doubled in size when DNR approved expansion of Nikaitchuq this October, rolling in leases from Tuvaaq as well as a portion of a lease formerly part of the Kuparuk River unit and two adjacent leases. Nikaitchuq is north of Kuparuk in the shallow waters of the Beaufort Sea off Alaska’s North Slope.

Project must be sanctioned by end of February

DNR said first oil from Nikaitchuq is expected in 2010.

The planned development includes a gravel pad with drilling, gathering and production facilities on Oliktok Point near the existing ConocoPhillips Alaska seawater treatment plant. Because the project includes production facilities, this would be the first development on the North Slope with facilities not operated by BP Exploration (Alaska) or ConocoPhillips.

There will also be a gravel drilling island constructed near Spy Island with production tied back to Oliktok Point for processing.

Sales-quality oil from Oliktok Point will be sent to the Kuparuk Transportation common carrier pipeline via a new pipeline some 14 miles long. Seventy-three wells are expected to be drilled between 2008 and 2011, 31 of which would be producers.

Eni has said it expects to sanction Nikaitchuq development by the end of this year; if the project is not sanctioned by Feb. 28, 2008, DNR said the royalty modifications will be rescinded.

Leases must be committed to an approved participating area within six years of project sanction to be eligible for royalty modification. After six years any lease or portion of a lease not committed to a participating area for the Nikaitchuq Schrader Bluff reservoir will revert to the individual lease royalty rates in effect prior to the royalty modification.

If project spending beginning Dec. 1, 2007, does not meet $822 million in nominal dollars by six years from project sanction, the royalty modification is rescinded. If project spending does not reach $1.398 billion in nominal dollars 11 years from project sanction, the royalty modification is rescinded.

Royalty reduction will be for the first 25 years following the date of first sustained production, and requires that the ANS West Coast delivered crude price be below the threshold price, which starts at $42.54 per barrel and is adjusted annually for inflation.

For the 18th through the 120th months following first commercial production from the Nikaitchuq Schrader Bluff OA reservoir, if production from all subject leases averages below 4,000 bpd for any previous 12 month period, full royalty modification rates of 5 percent will be in effect for production from that reservoir, regardless of oil price.

DNR also required that if any third-party petitions to use Nikaitchuq unit facilities, “the cost of use shall be based on market rates” and resulting contract data will be shared with DNR, which will keep the information confidential.

Thirty-day public notice

In the preliminary findings and determination issued Nov. 30, DNR said Eni, the Nikaitchuq operator, applied for royalty modification on 12 leases and the state is proposing to grant royalty relief on 11 of the leases.

The 30-day public comment period began Nov. 30. Within 30 days of the end of the public comment period DNR will prepare a summary of public comments and make a final findings and determination.

Eni, 100-percent working interest owner in the leases, originally applied for royalty modification on the Schrader Bluff and Sag River reservoirs, but later requested that the Sag River reservoir be withdrawn from the royalty modification application.

The company requested fixed royalty rates of 12.5 percent on a net profit share lease and 16.67 percent on the 11 other leases be reduced to the minimum rate allowed, 5 percent, with an annual sliding-scale royalty percentage adjustment based on the level of the ANS West Coast crude oil price.

DNR said the 30 percent net profit share rate on ADL 391283 will remain unchanged.

DNR approved royalty modification for ADLs 388571, 388572, 388575, 388574, 388577, 388581, 388582, 388583, 390615, 390616 and 391283. It denied royalty modification for ADL 388580 “because there was no apparent resource allocated to this lease.”

There are 18 leases at Nikaitchuq. Those proposed for royalty reduction form the central core of the unit; leases not included in the application — and the one lease which didn’t get state approval for royalty reduction — are on the eastern, northeastern and western boundaries.

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