Providing coverage of Alaska and northern Canada's oil and gas industry
June 2004

Vol. 9, No. 25 Week of June 20, 2004

State releases results of ANS facility sharing study

Kay Cashman

Petroleum News Publisher & Managing Editor

On June 15 the Alaska Division of Oil and Gas released the results of a study thats subject matter is considered critical to the future of oil production from Alaska’s North Slope.

Conducted for the state by Petrotechnical Resources of Alaska, the North Slope of Alaska Facility Sharing Study was the first undertaking of its magnitude, producing a hefty manual that describes existing North Slope facilities and their processing potential.

The 60-page report, with as many pages of attachments, identifies the needs and desires of both facility owners and non-owner companies interested in producing oil on the North Slope and lays the groundwork for designing a template for facility access for non-owners which benefits all parties.

Facility sharing is considered critical to the North Slope’s continued oil production. Major facility owners and producers such as BP and ExxonMobil have discontinued exploration in the region, concentrating instead on technically squeezing the last drop of oil out of declining fields such as Prudhoe Bay and Kuparuk. They have instead focused their attention on exploration areas outside of Alaska, which have the potential of 1 billion barrel-plus discoveries, something geologists say is no longer likely in the areas of Alaska that are open to oil and gas drilling.

Other companies, including independent oil and gas producers, have moved in to explore the North Slope, looking for the 50-500 million barrel fields the area is still thought to contain. These new companies, referred to as potential producers or third parties in the study manual, need reasonably priced access to existing North Slope production facilities. In turn, facility owners such as BP, ExxonMobil and ConocoPhillips need to be fairly compensated for the use of their facilities and the likely temporary loss of their own production. And the state needs to keep oil production royalties and taxes high enough to avoid major fiscal deficits.

Lots of cooperation

Among the companies providing information and perspectives for the pilot project were facility owners BP Exploration (Alaska), ConocoPhillips Alaska, ExxonMobil, and independents Winstar, Armstrong, Pioneer Natural Resources, Talisman (Fortuna), AVCG, Kerr-McGee and Devon Canada.

PRA’s Tom Walsh said he was surprised at the amount of cooperation his firm received from North Slope facility owners, who initially expressed some concerns about the study.

“We got a lot of cooperation from the facility owners, the North Slope producers. More than we expected. We didn’t get particulars on current facility sharing agreements with the exception of Ballot No. 255 for Kuparuk, but we did get the means to work that out,” Walsh said.

When asked if the North Slope facility owners were initially resistant to providing information, Walsh said, “Yes, it’s fair to say there were parties concerned that the state was stepping in at all and wondering what the state’s role was. They got over that hurdle pretty quickly … when we made it clear that this had to be a cooperative effort or it wasn’t going to happen. That really eased people’s tensions.”

As the study progressed, he said “it became obvious that the study was good for everyone.”

The end result, Walsh said, is, “We came up with a very factual and technical study that provides a platform for individual companies to undertake their own economic analysis.”

Two individuals from the division, Bill Van Dyke and William Nebesky, worked closely with PRA on the study. Nebesky, a commercial analyst, was also pleased with the results of the study and is in the process of putting the manual on the agency’s web page (http://www.dog.dnr.state.ak.us/oil/) as a set of pdf files. He said the state will also produce CDs and printed versions.

Most facilities have reached capacity for oil, gas or water

While many North Slope processing facilities have spare room for oil, water or gas handling, the study concluded that most of the facilities have reached capacity for at least one of the three. For example, Prudhoe Bay, Endicott, Kuparuk and Lisburne have room for additional oil; but all three have either reached capacity, or will soon reach capacity, for water and gas handling.

As fields mature they tend to produce more water and gas than oil, Nebesky said.

The new fields that would be produced by non-facility owners, he said, would tend to produce a higher proportion of oil per barrel, thus likely necessitating backing out some of the facility owners’ oil from more mature fields and, because of its higher percentage of water and gas per barrel, holding it to produce later. That could cost the facility owners a bundle of money, especially if oil prices drop in the future.

PRA’s report said it was critical to reach an agreement between all parties for a “simplified backout methodology.”

The report also said the state of Alaska “has options to help defray the impact of backout fees” and that implementing those options “may prove to be a decisive factor in the success of North Slope facility sharing.”

Pipeline capacity also addressed

Pipeline capacity was also reviewed as part of the study. The results showed Alpine full; Kuparuk, Milne Point, Northstar and Lisburne/Point McIntyre nearly full; and Badami, Endicott and Prudhoe Bay with available capacity.

Although concrete or detailed costs were not included, the PRA reference agreement within the manual has examples of potential costs associated with facility access.

PRA also studied how facility access was managed in other oil and gas provinces and developed guidelines on how facility access for third parties might be conducted for the North Slope.

“The guiding principles from the United Kingdom (U.K.) Code of Practice and Alberta’s Jumping Pound formula have much in common with the existing North Slope facility sharing agreements,” the report said. “However, the U.K. and Alberta contracts provide for regulatory interdiction as needed to resolve disputes between negotiating parties.”

As a result of the information and perspectives it collected over the last year from facility owners, North Slope producers and non-owner North Slope explorers, PRA said that there was “mutual benefit to the facility owners and third-party producers” to adopt “reasonable terms for facility access which are equitable and understandable.”

In other mature basins, such as the North Sea, facility owners offer a ballpark figure — i.e. indicative tariff — for facility access cost to interested producers, the report said.

In its recommendations, PRA said the biggest “obstacle to successful negotiations” has been a “lack of trust” between the North Slope facility owners and non-owners. A process for third party facility access that is “fair and transparent” will help to resolve this issue, PRA said.

Further investigation and communication should be pursued

Other recommendations and conclusions from PRA included the following:

• Nearly all of the existing North Slope facilities have the potential for developing a precedent for facility sharing agreements. The potential producers should expect to be able to negotiate an acceptable agreement. But the negotiations should be initiated by the potential producers as early as possible.

• The potential producers need to provide the facility operators with a well thought out development plan with as many crude characteristics as possible.

• The most critical technical issue is the calculation of the backout volumes. The operators need to communicate the backout methodology and be able to respond to requests in a timely manner.

• The potential producers need to recognize backout as a valid concept, representing real lost or deferred barrels to the facility owners.

• Both parties need to be ready to compromise on the backout methodology to simplify the calculations for fields without a detailed dynamic plant model.

PRA also recommended that “further investigation and communication should be energetically pursued to assure continuation” of the progress made by conducting the pilot study.

Editor’s note: Watch for part two of this story in the June 27 issue of Petroleum News.

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