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Conoco sees opportunities, challenges Company concerned about investment impact of potential oil tax changes; access to federal lands, federal permitting also issues KRISTEN NELSON Petroleum News
ConocoPhillips Alaska sees both opportunities and challenges on Alaska’s North Slope, Scott Jepsen, the company’s vice president for external affairs and transportation, told the Resource Development Council Nov. 16 at its annual conference.
Challenges include taxes and land access, he said, and a concern that decisions the state makes will determine whether it can take advantage of opportunities, or whether those decisions will push Alaska to the back of the pack for investments for oil and gas developments.
Jepsen broke out activities since tax reform, Senate Bill 21, passed in 2013.
ConocoPhillips added two rigs to its Kuparuk fleet from 2013 to 2015 and two additional new-build rigs were delivered this year - Doyon 142 and Nabors CDR3.
For Kuparuk and Alpine combined, ConocoPhillips has five rigs working this quarter, Jepsen said, compared to three rigs in the Lower 48 for most of this year where the company has much more extensive operations.
Drill Site 2S, a new drill site at Kuparuk, came onstream a year ago with an estimated gross peak production rate of some 8,000 barrels per day and CD5 is onstream, producing 20,000 bpd, well above the estimated rate of 16,000 bpd. An 18-well addition for CD5 was approved in April, he said, based on results the company has seen so far.
Overall, North Slope production declined by less than 1 percent last year and is on track for a similar performance this year.
Safety focus Among accomplishments Jepsen highlighted the company’s focus on safety. ConocoPhillips Alaska’s OSHA recordable incident rate was 0.59 in 2009, 0.67 in 2010 and 0.53 in 2011, he said, rates the company was not happy with. So it developed a program making the individual responsible for safety decisions - with some good results - and is now in line of sight to see zero incidents, he said.
The rate dropped to 0.22 in 2012, to 0.33 in 2013, 0.32 in 2014, 0.32 in 2015 and to 0.2 in 2016, putting the company on track for its safest year ever.
New opportunities ConocoPhillips has permits for GMT1 at Greater Mooses Tooth in the National Petroleum Reserve-Alaska, and construction has started. This development is a separate accumulation from Alpine, Jepsen said. The final investment decision was in late 2015 and first oil is expected in 2018.
Permitting is underway for GMT2, but Jepsen said there are some issues with the federal Bureau of Land Management over permitting, and first oil, projected for 2020, may not happen that soon.
The GMT1 investment was some $900 million gross; GMT2 is expected to be in excess of $1 billion, he said.
Viscous oil expansion in Kuparuk is also underway with the 1H NEWS project, with gross production for the $450 million project expected at 8,000 bpd. Some facility work is starting up, he said, with first oil expected in 2018.
On the exploration side, ConocoPhillips drilled two exploration wells in 2014, acquired GMT1 seismic in 2015 and drilled three wells in NPR-A this year. One well is planned there next year, along with a seismic program.
On the drilling side, Jepsen talked about the extended reach drilling rig the company announced in October, calling it a bit of a game changer. The ERD rig is being built by Doyon and will allow development of 125 square miles from a single pad, compared to 55 square miles with current rigs.
The North Slope spend Jepsen itemized the combined capital spend - by all companies - for the Prudhoe Bay, Kuparuk River, Alpine and Point Thomson fields from 2012 through 2016.
Some $12 billion has been sent since 2012, he said, an amount which includes the work at Point Thomson and CD5.
The gross capital spend was higher in 2016 than in 2012, the last year under the ACES tax regime, in spite of oil prices being higher in 2012 than in 2016.
AKLNG ConocoPhillips remains optimistic about the Alaska LNG project, Jepsen said.
But the traditional approach is uneconomic at current and forecasted LNG prices. Market prices have stalled all past efforts, he said.
Success in the market will require being competitive and ConocoPhillips is supportive of the state pursuing low cost financing and tax-exempt status because those are things the company can’t do. He said he couldn’t say what the state’s chances of success are, but if it is successful it could potentially lower the cost of the project.
State oil tax issue On the pessimistic side, Jepsen said an increase in oil taxes would be a challenge because at oil prices below $50 the industry has negative cash flow. Revenue to the federal government is also down.
The state’s share, however, remains positive even at low prices. Jepsen showed a chart of net cash flow to industry, state and federal government. It excluded tax credits other than production tax credits.
As prices go up, the state’s share goes up. The state always takes the lion’s share of revenue, he said.
Jepsen called Alaska’s current tax regime a reasonable balance and said if the state changes that balance it runs the risk of upsetting investment.
Federal, investment challenges On the federal side he said access to federal lands was an issue and cited the prevalent rumor, confirmed later the same day, that President Obama would remove Arctic OCS acreage from the upcoming five-year lease sale schedule.
He said there was significant potential on the OCS, as well as in NPR-A, where some 11 million acres are unavailable for leasing.
But access isn’t the only issue: Once federal acreage is secured, permitting can be lengthy and difficult, Jepsen said.
With GMT2, the federal government is developing rules and regulations as they permit GMT2 and those rules and regulations which are under development will apply to the project, he said.
The other issue is competition for investment dollars. The Lower 48 has turned into a real center of gravity for oil and gas investment, he said.
The state challenge is the fiscal gap and reaching a solution. Jepsen called making sure taxes incentivize investment a real challenge.
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