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Alaska wants heavy oil tax credit Technical and cost hurdles must be overcome to increase viscous production Larry Persily Petroleum News Juneau Correspondent
Though just about all of Alaska�s attention to the federal energy bill has keyed on potential future projects � drilling in the Arctic National Wildlife Refuge or building a natural gas pipeline to supply mid-America � the state also is looking for federal help in expanding its existing production of heavy oil.
Boosting production is all about overcoming technical and cost hurdles. There is no shortage of heavy oil beneath the North Slope � or viscous oil, which the producers call it.
The Alaska Department of Revenue in its fall 2002 price and production forecast book estimated there are more than 13 billion barrels of heavy oil at West Sak and Schrader Bluff alone.
�We think unlocking this oil potential is an important part of maintaining North Slope production for years to come,� said Daren Beaudo, spokesman for BP Exploration (Alaska). �We�re not to a place yet where we fully understand how to produce it.� Credit could be $3 per barrel To help speed up and pay for the learning curve, the state and North Slope producers support a provision in the energy bill that would extend the federal government�s existing credit of $3 per barrel for heavy oil production to also include Alaska.
The Senate version of the bill, which is before a joint House-Senate conference committee this month, has volume restrictions on the credits that would continue to keep Alaska out of the program, said the director of the governor�s Washington, D.C. office. In addition to removing the low production eligibility cap, which is far too low for the economics of Alaska�s larger fields and higher production costs, the state would prefer to see the three-year credit extended to five or seven years, said John Katz of Alaska Gov. Frank Murkowski�s capital office.
A 10-year window to receive the credits would be even better, Beaudo said. �We�re an industry of very long lead times.� In addition to developing new technology, testing the equipment and getting it into the field, he said, producers need corporate approval and the consent of partners in jointly owned fields.
West Sak, for example, is operated by ConocoPhillips, which holds the majority stake, with BP and Unocal as partners. Alaska problems are different The state believes it is justified in asking for inclusion under the heavy-oil tax credit program because although the fields are larger here, so are the problems and the costs. Lower 48 fields may be marginal because of their small size, but Alaska�s heavy oil should qualify as marginal because of its own problems, said Justin Stiefel, chief of staff to Alaska Sen. Lisa Murkowski.
Heavy oil currently provides less than 4 percent of the almost 1 million barrels per day flowing through the Alaska pipeline. Most of the production, about 20,000 barrels per day, comes from Schrader Bluff, with the rest from West Sak, Tabasco, Polaris and Orion, with Orion just starting up in July at 3,500 barrels per day.
BP is the operator at Orion, with partners ConocoPhillips and ExxonMobil, and small shares for Chevron USA and Forest Oil. Beaudo said total investment in the field could eventually approach $500 million, with potential recovery at more than 200 million barrels.
Cost-benefit analysis The key is striking a profitable balance between higher capital costs of new technology and improved operating costs and production, said Frank McCorkle of BP�s Greater Kuparuk Unit, which includes West Sak. �With each step in technology you can access a different portion of heavy oil.�
BP is looking to invest $100 million a year in North Slope heavy oil work for the next three years, Beaudo said, and federal tax credits could help increase that number. Even with such costly investments, production will be small by Alaska�s old standards of Prudhoe Bay and Kurparuk. �We�re talking single-digit thousands of barrels per day,� Beaudo said.
Federal tax credits �would allow you to take more risk,� McCorkle said. Heavy oil �is right at the margin.�
Of the more than 13 billion barrels in place at West Sak and Schrader Bluff, the Alaska Department of Revenue last fall said production through June 30, 2002, had totaled 26 million barrels, with a potential for 170 million additional barrels with �modest� investment and 510 million barrels more with �major� investment.
�This relatively cold, heavy or viscous oil flows poorly and is difficult to extract from the reservoir,� the department said. �The reservoir rock containing these accumulations crumbles easily, causing sand to impede the flow of oil. Viscous oil is also less valuable.�
The department also lists 7 billion barrels at Ugnu, but did not forecast any production from that field.
Sand and rock are a problem The stuff just doesn�t come to the surface easily. Producers are using water jet pumps instead of the traditional electrical submersible pumps, to avoid the higher cost of pulling the electrical pumps out of the ground when they clog with sand and rock. �You have a lot of problems with all that gunk,� Beaudo said.
The water pumps still fail, but they are less costly to pull out of the ground because the operator doesn�t also have to pull out the entire tubing system, McCorkle explained.
In addition to new pumps to move the oil out of the ground, producers face added problems and costs in treating all of the sand and rock that comes to the surface, less production per well per dollar spent, and the need for booster pumps to move the lower-temperature oil to the surface, Beaudo explained. �Your economics are much thinner.�
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