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Explorers 2011: Conoco challenged in Alaska Largest producer in state says it is challenged by economics, geology, permitting and regulation Eric Lidji For Petroleum News
ConocoPhillips is the largest producer and, historically, the most active explorer in Alaska. Several years ago it dropped almost all of its State of Alaska exploration acreage, in favor of larger targets in federal lands and waters. But since 2009 the company has faced roadblocks as it attempts to explore, develop and produce its federal leases.
ConocoPhillips’ plan to develop the National Petroleum Reserve-Alaska is stalled by permitting delays while its plan to explore the Alaska outer continental shelf is stalled by legal and regulatory delays. On state lands and waters, meanwhile, ConocoPhillips’ legacy fields on the North Slope and in Cook Inlet are continuing to require capital to stem declining production.
Its midstream operations haven’t fared any better. Denali — The Alaska Gas Pipeline LLC, its joint venture with BP Exploration (Alaska) Inc. to market North Slope natural gas resources through a major pipeline, folded because of a lack of shippers, while its liquefied natural gas export terminal in Nikiski is set to close because of a lack of buyers.
On top of that, ConocoPhillips claims that the State of Alaska’s fiscal regime is hampering its investment, pointing to two seasons without any traditional exploration wells. And the company continues to find new opportunities for investment outside Alaska.
Despite all that, ConocoPhillips remains the backbone of the Alaska oil industry.
It operates six units and leases more than 1 million acres of state and federal lands and waters. It produced 230,000 barrels of oil per day and 82 million cubic feet of natural gas per day in 2010. The company directly employs more than 1,000 people in Alaska.
Westward expansion on Slope Although ConocoPhillips is only a decade old, dating back to the merger of Conoco and Phillips Petroleum in 2002, its predecessor companies are responsible for many of the major milestones in the history of the modern Alaska oil industry. In the 1960s its predecessor ARCO joined with Humble Oil to drill the Prudhoe Bay State No. 1. And Phillips, in partnership with Marathon Oil, built the pioneering Kenai LNG export terminal in 1967, the first in the country and largest such facility in the world at that time.
Starting in the 1980s, the companies that became ConocoPhillips began a strategy of westward expansion on the North Slope that continues to this day. In late 1981, ARCO Alaska brought the Kuparuk River unit into production. In 2000, ARCO and partner Anadarko Petroleum brought the Alpine field at the Colville River unit into production.
In the 2000s, ConocoPhillips and Anadarko brought three Alpine satellites online: Fiord in August 2006, Nanuq in December 2006 and Qannik in 2008. ConocoPhillips also took advantage of renewed lease sales in the NPR-A. ConocoPhillips is responsible for 20 of the 29 exploration drilled wells in the 23 million acre reserve between 2000 and 2009.
While that drilling included expensive and remote wildcats, such as the Kokoda and Intrepid wells, the majority took place (somewhat) closer to existing infrastructure, such as Pioneer No. 1 and Grandview No. 1. Based on that exploration work, ConocoPhillips formed the first units in NPR-A, Mooses Tooth in 2008 and Bears Tooth in 2009.
In February 2008, ConocoPhillips expanded its reach by taking part in a record federal lease sale in the Chukchi Sea in northwest Alaska, spending $506.4 million for 98 tracts.
Onshore activities on Slope In northern Alaska, ConocoPhillips is active on state and federal leases, both onshore and offshore. Those efforts include traditional exploration and development, strategies to increase recovery rates and research on the feasibility of currently untapped resources.
On the North Slope, the company recently sought to expand the Kuparuk and Tarn participating areas at the Kuparuk unit to bring drainage areas within the unit boundaries.
ConocoPhillips also hopes to begin development of the CD-5 Alpine satellite.
Those efforts began in 2005, but faced delays as ConocoPhillips worked with local Native groups to find the ideal route for a utility bridge across the Nigliq Channel of the Colville River. They found consensus, but in early 2010 the U.S. Army Corps of Engineers rejected the bridge idea and told the company to drill directionally underneath the channel instead. ConocoPhillips appealed that ruling. The State of Alaska and the Joint Pipeline Office both favor the bridge over the directional drilling approach.
In the meantime, ConocoPhillips sought to drill 15 additional wells at the CD-1, CD-2 and CD-3 pads, “because of the delays associated with the CD-5 development.”
Delays at CD-5, Alpine West Because CD-5 is in NPR-A, it would open the door to federal production in Alaska.
For that reason, the debate at CD-5 quickly became symbolic of a larger battle between the State of Alaska and the United States government over resource development in Alaska, an issue that Gov. Sean Parnell has made a centerpiece of his first full term in office. The issue stretches from proposals to designate the Arctic National Wildlife Refuge as a “wilderness” area and the slow pace of permitting in the Arctic Ocean.
That issue eased some in 2011. President Barack Obama called for annual lease sales in NPR-A, including an expedited sale this year, and created a group responsible for coordinating the permitting process of offshore development projects in Alaska. But CD-5 remains unresolved and it is unknown when ConocoPhillips will be able to proceed.
Preparing for OCS exploration While Shell Oil is leading the charge to explore and develop the Alaska OCS, ConocoPhillips is widely considered to be the second most bullish company in the area.
ConocoPhillips dropped most of its Beaufort leases in 2009, not seeing the potential for hubs that could make development economic, and is now focused on the Chukchi Sea.
ConocoPhillips holds an interest in the two most promising Chukchi Sea prospects: Devil’s Paw and Burger. Devil’s Paw is the name ConocoPhillips gave to the prospect Shell investigated in 1989 with the Klondike well. ConocoPhillips acquired the acreage in 2008 and in early 2010 brought in the Norwegian company Statoil as a 25 percent partner on 50 leases in the prospect. ConocoPhillips also owns some leases at the edges of the Burger prospect, where Shell hopes to drill once it moves into the Chukchi Sea.
ConocoPhillips recently received a draft air quality permit for its Devil’s Paw work, applied for well in advance of actual drilling because of the long expected lead-time for federal permitting. That permit is currently in the middle of a public comment period.
ConocoPhillips, Shell and Statoil are currently working on a continuing Chukchi Sea environmental monitoring program to establish environmental baseline data.
However, there will be no drilling in the Chukchi until several legal matters are first resolved. One is nearing conclusion: The U.S. Bureau of Ocean Management (formerly the Minerals Management Service) is currently taking comments on a court ordered final supplemental environmental impact statement for the February 2008 Chukchi Sea lease sale.
Closing down Denali pipeline While ConocoPhillips pursues those oil developments on several fronts, it simultaneously worked to develop its natural gas resources on the North Slope through Denali.
ConocoPhillips and partner BP chose not to apply for a license under the Alaska Gasline Inducement Act in 2007 and instead formed a joint venture to pursue a roughly $40 billion pipeline from the North Slope to Alberta. Following several years of environmental and engineering work, Denali held an open season in 2010, but eventually discontinued the plan in May 2011, saying it couldn’t find enough customers to justify moving forward.
Although policymakers optimistically noted that the end of Denali freed ConocoPhillips and BP to commit their ample natural gas reserves to another pipeline project, such as the TransCanada and ExxonMobil joint venture proceeding with a blessing (and money) from the state through AGIA, the company has yet to commit itself to any other venture.
That “any other” refers not only to a big pipeline to export Alaska natural gas to domestic or foreign markets, but also a proposal to build a pipeline from the North Slope to the Southcentral region. That project is moving along under the guidance of the Alaska Gasline Development Corp. ConocoPhillips met with the group, as did most other natural gas players in Alaska, but as of yet has not made any commitments to the project.
While conventional natural gas supplies on the North Slope remained stranded without transportation infrastructure, ConocoPhillips is also looking at ways of developing the unconventional natural gas resources on the North Slope. With the U.S. Department of Energy, the company drilled a well at the Prudhoe Bay unit in the first half of 2011 to test a method for producing gas hydrates, or molecules of methane trapped in miniscule cages of ice. The Ignik Sikumi testing project is set to continue in 2012.
Investment in Cook Inlet Although it is not discussed as frequently or as publically, ConocoPhillips is also the leading producer in the Cook Inlet area and continues to promote development there.
The company spent significant capital recently to maintain production and deliverability from its two aging workhorse fields: the Beluga River and North Cook Inlet.
Between 2008 and 2010, ConocoPhillips drilled four wells at Beluga at a cost of more than $80 million to increase production, wells required, in part, by the terms of an agreement with the State of Alaska over support for an LNG export license. In 2011 the company spent $60 million to disperse several compressor stations, to improve the pressure and increase the quality of the giant machines at the 50-year-old gas field that is one of the primary sources of supply for Chugach Electric Association’s Beluga power plant.
In 2008 and 2009, ConocoPhillips also spent $75 million drilling three wells at North Cook Inlet, also as part of the agreement, but said those wells were disappointing.
ConocoPhillips likely won’t conduct any exploration in Cook Inlet anytime soon because of the need for a jack-up rig, Dan Clark, manager of Cook Inlet assets for the company, said in December 2010. With one jack-up rig currently drilling in the Cook Inlet and another scheduled to arrive next year, perhaps those plans could change in the future.
North Cook Inlet has historically been the primary source of supply for the LNG export operation in Nikiski. Following a successful attempt to get an extension of its export license — through March 31, 2013 — ConocoPhillips and partner Marathon announced in February that they would be mothballing the facility in the spring because they could not secure contracts in the Asian markets where they traditionally sold their supplies.
Amid concerns about employment loss and the loss of a crucial source of back-up supply during periods of peak demand, policymakers wondered if the facility could be configured for alternative uses, particularly as a facility to import LNG. ConocoPhillips said it planned to keep its options open for the facility, but as 2011 progressed those alternative plans went on the back burner as Asian demand increased and the owners twice postponed the closing of the facility to make additional shipments. The plant is currently scheduled to remain open through October to facilitate final shipments east.
Interest in Lower 48 shale Those struggles in Alaska come at a time when ConocoPhillips is finding new opportunities outside the state — particularly in booming Lower 48 shale plays.
Historically, ConocoPhillips has produced greater volumes from the Lower 48, but earned more money in Alaska because the natural gas it primarily produces in the Lower 48 does not command as high a price as the oil it primarily produces in Alaska.
With its increasing investments in the Eagle Ford shale, Permian basin and Barnett shale of Texas and the Bakken shale of North Dakota, though, ConocoPhillips is producing more crude oil from its Lower 48 assets, a shift that could have implications for Alaska.
ConocoPhillips certainly believes Alaska is at a disadvantage. It lobbied in favor of a Parnell administration proposal to change the fiscal regime in Alaska primarily by removing a progressivity feature that increases the tax rate as the price of oil increases.
The company said that it is prepared to spend $5 billion to generate 90,000 barrels per day with those changes. Opponents of the changes point to the profits and spending figures ConocoPhillips is posting for Alaska. The company made $1.7 billion in Alaska in 2010 and budgeted $900 million for this year. ConocoPhillips, in turn, pointed to production declines, and the fact that budgeting rarely matches actual spending, and noted that much of the 2011 budget depended on the CD-5 project moving forward.
That bill ultimately did not become law, but will almost certainly be on the table again once lawmakers return for the second half of their regular session this coming January.
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