|
The Explorers 2008: ConocoPhillips searching near and far Biggest producer in Alaska focusing exploration on NPR-A and Chukchi, while pursuing gas pipeline Eric Lidji Petroleum News
In its ongoing effort to develop the resources of northern Alaska, ConocoPhillips has embraced westward expansion with a dual approach: big leaps and tiny steps.
On the one hand, the Houston-based mega-major has progressed slowly, but steadily, from the Kuparuk River unit and its satellites, to the Colville River unit and its satellites and now to the Greater Mooses Tooth unit in the National Petroleum Reserve-Alaska.
On the other hand, the company has tackled some of the most remote targets in the state, from exploration wells near Barrow to current data collection in the Chukchi Sea.
Created through the merger of Conoco Inc. and Phillips Petroleum Co. in August 2002, ConocoPhillips Alaska can trace its lineage through mergers and acquisitions back to the company responsible for the first major oil discovery in Alaska: Richfield Oil.
Today, ConocoPhillips is the leading producer in Alaska, and the second largest state leaseholder with more than 530,000 acres in the Cook Inlet and across the North Slope, as well as significant federal acreage in the NPR-A and the Outer Continental Shelf.
ConocoPhillips is also the operator of five units in Alaska, the Kuparuk River and Colville River units on the North Slope, the Beluga River and North Cook Inlet units in the Cook Inlet basin, and the federal Greater Mooses Tooth unit in the NPR-A.
In early October, the company staked four new oil exploration wells in NPR-A. Of those, three fall inside the new Mooses Tooth unit: Grandview 1 East in lease AA-81785, Grandview 2 in lease AA-81804 and Pioneer 1 in lease AA-81779. The other, Flattop 1 in lease AA-81798, is presumably just outside the eastern border of the unit.
The birth of ConocoPhillips ConocoPhillips’ history of exploration and development west of Kuparuk over the past decade follows the radical changes within the industry during that time.
ARCO Alaska brought the Kuparuk field into production in 1981, and by 1998 had discovered and developed three prominent satellites of the giant North Slope field.
ARCO discovered the Alpine field to the west of Kuparuk in 1994. That same year, Conoco left the state after filing suit against owners of the trans-Alaska oil pipeline over tariffs on the pipeline. Conoco had developed the Milne Point field northeast of Kuparuk.
BP-Amoco acquired ARCO in 1999, but concerns about concentration of the Alaska oil industry spawned opposition to the deal, both among the public and federal regulators.
Through a state-brokered plan, BP-Amoco sold ARCO’s Alaska holdings to Phillips Petroleum in 2000, giving Phillips pieces of Kuparuk and Alpine. BP-Amoco and ARCO announced the sale in mid-March and Phillips completed the acquisition in late April.
ConocoPhillips looks west As that deal was being negotiated, signed and approved, both ARCO and Phillips began pushing exploration boundaries into NPR-A, inspired by the original lease sale in the northeast portion of the reserve in 1999 following decades of promising geologic work.
ARCO spud Clover A about five miles west of Nuiqsut in March 2000 and Rendezvous A another 10 miles deeper into the reserve in early April. During the same time, Phillips spud Spark 1 and the Spark 1A sidetrack just northeast of Rendezvous A in March and April.
Over the following two years, Phillips Alaska focused extraordinary attention on NPR-A, staking dozens of wells, accumulating numerous potential drilling prospects and even announcing the first discoveries in the region. Of the six wells and a sidetrack the company drilled in 2000 and 2001, all but one found hydrocarbons.
“These discoveries mark an important milestone in the Alaska oil industry,” Kevin Meyers, president of Phillips Alaska, told the Alaska Oil and Gas Association at its annual luncheon in May 2001. “Though the results are preliminary, we’re confident the discoveries will prove to be of commercial quantities. We believe that the five successful wells have encountered three separate hydrocarbon accumulations.”
The discoveries propelled the continued flood of activity. Phillips and partner Anadarko drilled four NPR-A wells in the winter of 2002, and staked another eight that summer.
But the drilling came as executives and company boards continued changing the face of the U.S. oil industry. Conoco and Phillips announced plans to merge in late 2001, and finalized the deal in late August 2002, following the approval of federal regulators.
ConocoPhillips drilled only one NPR-A in the winter of 2003, the Puviaq 1. The well was truly a frontier wildcat, located near the Ikpikpuk River nearly 80 miles from Nuiqsut.
For the next four seasons, ConocoPhillips continued to craft exploration programs with a mix of frontier wells and delineation wells near existing infrastructure and discoveries.
In March 2004, the company drilled Carbon 1, Scout 1 and Spark 4, all within 10 miles of the discoveries made in 2000 and 2001. During the winter of 2005, the company drilled Kokoda 1 and Kokoda 5 about 50 miles west of Nuiqsut.
The following winter, ConocoPhillips didn’t drill in the NPR-A at all. But in early 2007, the company drilled two wells in a partnership with Pioneer Natural Resources: Noatak 1 just north of the Kokoda wells, and Intrepid 2 south of Barrow on the far western edge of the North Slope, more than 200 miles from the closest infrastructure at the Alpine field.
Noatak and Intrepid both cost around $60 million to drill. That combined with the considerable distance to the Alpine infrastructure meant either well needed to find large reserves to justify the significant cost of developing the prospects and tying them back to existing facilities. ConocoPhillips deemed both wells “non-commercial” in May 2007.
High-grading the portfolio ConocoPhillips’ ongoing exploration efforts in NPR-A over the past decade have relied on a cyclical process of grabbing, juggling and releasing acreage.
Since the original 1999 lease sale in NPR-A, the Bureau of Land Management, the arm of the U.S. Department of the Interior responsible for managing federal lands, has offered additional acreage through four lease sales. ConocoPhillips participated in each of those sales, including the most recent one held in September 2008.
But during that time, ConocoPhillips also gave back significant chunks of land.
The Noatak and Kokoda well results prompted ConocoPhillips and its partners Pioneer and Anadarko to drop 300,000 acres in NPR-A in September 2007.
“When you take a look at what led us to drop that (acreage), it ended up really being the high cost of exploration coupled with what we found, that basically told us that it was uneconomic to pursue,” Erec Isaacson, vice president of land and exploration for ConocoPhillips Alaska, told Petroleum News in October 2007.
The move marked a change in approach for ConocoPhillips.
The company stayed much closer to existing infrastructure in the winter of 2008, drilling the Char No. 1 well in the Colville River unit, but also drilling the Spark DD-9 well and re-entering and testing the Rendezvous 2, both near those original 2001 discoveries.
ConocoPhillips continued to concentrate its NPR-A acreage in 2008.
In late January, the company formed the Greater Mooses Tooth unit around the cluster of NPR-A wells and discoveries just west of Nuiqsut. The move helped protect leases dating back to the original 1999 lease sale and nearing expiration.
And at a February 2008 lease sale offered by the U.S. Minerals Management Service, ConocoPhillips also picked up new acreage in the Chukchi Sea.
But at the same time, the company relinquished additional NPR-A acreage, this time the 19 federal tracts around Intrepid 2 south of Barrow.
And during the NPR-A lease sale held this past September, ConocoPhillips picked up additional acreage bordering Mooses Tooth to the southwest, as well as additional frontier tracts scattered around existing holdings throughout the reserve.
“It’s all purely part of high-grading your portfolio: exploring, drilling a well, finding what’s in it, evaluating whether you should hold it or release the acreage,” David Brown, Alaska land manager for ConocoPhillips Alaska, told Petroleum News Sept. 25, 2008.
Brown said he didn’t expect the company to release more acreage “in the near future.”
A Mooses Tooth pair in 2009 Those big announcements from January and February — the formation of the Mooses Tooth unit, the successful bidding in the Chukchi and the second NPR-A relinquishment — set ConocoPhillips in a new direction this year, and possibly for years to come.
ConocoPhillips expects to drill two wells in Mooses Tooth this coming winter to look for new oil and gas accumulations and to expand on previous discoveries.
Grandview East and Pioneer 1 are currently in the proposal stage, awaiting partner approval and the finalized companywide budget, typically released each December.
“We do not yet have final partner approval or even our own (Authorization for Expenditure) approval,” Michael Faust, offshore exploration manager for ConocoPhillips, told Petroleum News Sept. 25.
Should plans proceed, ConocoPhillips would build “an ice road that basically extends all the way to Grandview and then a spur off that ice road down to Pioneer,” Faust said.
Faust said ConocoPhillips expects to drill both wells using Doyon rig 141.
Synching with Alpine growth With as many as five possible participating areas at Mooses Tooth, the unit could contain as many as five separate reservoirs. One of those possible participating areas, Lookout, is a proven oil discovery in the northeast corner of the unit, Isaacson said.
The short-term goal for Mooses Tooth is oil production from both Lookout and the Spark and Rendezvous prospects in the center of the unit, with gas production taking over in the longer term if a pipeline is eventually built to take it to market, Isaacson said in February.
Those five participating areas are still a “possibility,” according to Faust.
“Whether it’s all one big feature, or more than one feature, is in many reasons why we want to go out and drill more wells,” Faust said.
During an investors conference in mid-September, ConocoPhillips projected bringing oil production from Mooses Tooth online no sooner than 2013.
The company would most likely process any fluids from the unit at existing Alpine facilities. Those facilities currently have some wiggle-room: only around 115,000 barrels of the 140,000-barrel-per-day capacity is in use.
But the profile of Alpine is always changing. ConocoPhillips brought the satellites Fiord and Nanuq online in 2006, and brought the newest satellite Qannik online this past July. The company is currently working on permitting another satellite, Alpine West.
And so initial production and future expansion of oil and gas production from NPR-A will have to be timed to match the expansion capabilities within Alpine, Faust said.
“It’s safe to say you wouldn’t go out there and develop five things at once,” Faust said about Mooses Tooth. “You’d work on it in a more stepwise logical manner.”
Offshore focus: Chukchi Sea While ConocoPhillips focuses on understanding more about Mooses Tooth closer to home, the company is also gathering information about the Chukchi Sea.
During the Chukchi Sea Sale 193 on Feb. 6, ConocoPhillips drew gasps from a crowd gathered in Anchorage when it placed $506.4 million in high bids for 98 tracts in the remote Arctic sea, making it the second highest bidder of the day after Shell.
The sale was the first in the Chukchi since 1991, and interest in the frontier region has grown exponentially in the nearly two decades since then as rising prices and demand run up against dwindling supplies and calls for increased domestic energy supplies.
Although only five exploration wells have been drilled in the U.S. section of the sea, which sits between northwest Alaska and Siberia, more than 100,000 line-miles of seismic data suggest subsurface geology worthy of a major oil and gas province.
Early estimates from the Minerals Management Service put the potential reserves in the Chukchi at around 15 billion barrels of recoverable oil and 77 trillion cubic feet of recoverable natural gas, according to MMS Director Randall Luthi.
Motivated by those numbers, ConocoPhillips is prioritizing its new Chukchi leases over a pre-existing portfolio of leases in the Beaufort Sea off the coast of the North Slope.
“Chukchi is definitely our offshore focus right now,” Faust said. “We’re spending the bulk of our time offshore working in the Chukchi.”
Two ships sailing in 2008 ConocoPhillips divided its time in the Chukchi this summer between two ships, the M/V Bluefin and the M/V Norseman 1.
Starting in July and running through the start of the ice season, the a crew of about 30 biologists, oceanographers and meteorologists on the Bluefin conducted baseline environmental studies in the Chukchi, trying to learn more about the region.
The program is voluntary, but because ConocoPhillips plans to make its findings public, the information collected should make it easier to put together future environmental impact statements. The company also hopes the data will avert lawsuits by presenting an environmental picture of the region where marine life and drilling can co-exist.
Toward the end of the open water season, the Norseman 1 completed a 45-day shallow hazard survey of portions of the Chukchi Sea, including a search for potentially explosive gas pockets near the sea floor that could be accidentally set off during drilling.
“That’s a permit requirement,” Faust said. “And frankly, if it wasn’t, it would be an in-house requirement because it’s a safety requirement. We need that information.”
ConocoPhillips coordinated its research efforts this summer with Shell.
The two companies created interconnected environmental studies programs, with Shell taking a regional look and ConocoPhillips doing site-specific work around potential drill sites. The companies also shot joint seismic programs last year.
“Because of that, you’ll see (ConocoPhillips) and Shell way out ahead of everybody else,” Brown said.
What role that partnership will take next year is still up in the air. The companies are currently crafting biological studies programs for the summer of 2009.
Profits hit by higher taxes
Over the past year, ConocoPhillips also played a pivotal role in two major policy debates, one over a bill to raise taxes on the industry and another to build a gas pipeline from fields on the North Slope to markets in the Lower 48 and Canada.
Following the indictment of several state lawmakers on corruption charges surrounding the creation of the Petroleum Profits Tax, or PPT, Gov. Sarah Palin called the Legislature into special session in September 2007 to consider revising the tax.
“We agree with the governor’s approach to stay with a PPT-based tax structure, however, we are concerned that the tax rates proposed will make every single project look less attractive for us to re-invest,” Kevin Mitchell, vice president of finance and administration for ConocoPhillips Alaska, said in a September 2007 statement.
The final bill increased the tax rate and a progressive element designed to rise with oil prices, placed standardized deductions on the legacy fields Prudhoe Bay and Kuparuk and expanded the credit program for certain exploration expenses.
Because portions of the tax went into effect retroactively, because the summer of 2008 saw record oil prices and because ConocoPhillips owns a considerable portion of both Prudhoe Bay and Kuparuk, the tax changes hit the company particularly hard. The tax ate $234 million in net earnings over the fourth quarter of 2007.
Following approval of the revised tax code, ConocoPhillips canceled a long-proposed North Slope construction project, blaming the new tax. The project would have upgraded a Kuparuk topping plant to produce ultra-low-sulfur diesel required by federal standards.
The state challenged a connection between the tax and the decision to cancel the project.
ConocoPhillips ultimately budgeted $1 billion for Alaska capital projects and exploration in 2008, a record in nominal dollars, but insisted the tax increases would keep actual spending below that budget.
2 1/2 gas pipeline plans The deliberations on the revised tax code came as the state prepared to receive bids under the Alaska Gasline Inducement Act, designed to promote construction of a gas pipeline through competition and state incentives, including a $500 million matching grant.
ConocoPhillips submitted a proposal outside of the guidelines of AGIA, meeting only some of the 20 “must haves” required by the state, rejecting up to $500 million in matching funds and requesting negotiations for a long-term fiscal package covering the gas and the pipeline.
“While we believe our proposal to advance the natural gas pipeline project is a significant step, the ultimate realization of the project depends upon the establishment of natural gas fiscal terms that will apply to the shippers making long-term shipping commitments during the initial open season,” Jim Mulva, ConocoPhillips chairman and chief executive officer wrote in a letter to Palin at the time.
Palin rejected ConocoPhillips’ proposal in a letter to Mulva the following January.
But both ConocoPhillips and AGIA have progressed since then.
In early April, ConocoPhillips and BP announced a joint venture called Denali—The Alaska Gas Pipeline LLC, which would build a pipeline from the North Slope to the existing hub in Alberta to deliver natural gas into the Lower 48.
Denali quickly announced a $600 million field program, pre-filed an application with the Federal Energy Regulatory Commission and set up a field office in Tok.
Toward the end of the summer, the state Legislature approved TransCanada as the sole licensee under AGIA, setting the company forward on a similar construction project.
Both Denali and TransCanada conducted field programs in Alaska this year, gathering information with the goal of holdings separate open seasons in the latter half of 2010.
A handshake in Cook Inlet While the state and ConocoPhillips clashed on the production tax revision and the gas pipeline, they worked together to sign an agreement hoping to extend the export license for the liquefied natural gas plant on the Kenai Peninsula.
ConocoPhillips owns the 40-year-old plant along with Marathon Oil. The current export license was set to expire in 2009, and the extension, approved by the U.S. Department of Energy in June 2008, runs through 2011.
In return for state support, ConocoPhillips permitted five wells in the Cook Inlet, more than required by the agreement with the state. ConocoPhillips ultimately drilled three wells in North Cook Inlet and two more in Beluga River, making 2008 one of the busiest drilling seasons ever for ConocoPhillips in the Cook Inlet basin.
| 