NOW READ OUR ARTICLES IN 40 DIFFERENT LANGUAGES.
HOME PAGE SUBSCRIPTIONS, Print Editions, Newsletter PRODUCTS READ THE PETROLEUM NEWS ARCHIVE! ADVERTISING INFORMATION EVENTS PAY HERE

SEARCH our ARCHIVE of over 14,000 articles
Vol. 25, No.32 Week of August 09, 2020
Providing coverage of Alaska and northern Canada's oil and gas industry

Tax uncertainty puts investment at risk

Big explorer and developer ConocoPhillips Alaska waits on Nov. 3 tax initiative ballot outcome to determine 2021 capital budget

Kay Cashman

Petroleum News

The North Slope’s most active explorer, ConocoPhillips Alaska, is holding off on re-starting its exploration program in the upcoming winter of 2020-21 until the outcome of the tax initiative ballot in the Nov. 3 election is known.

Scott Jepsen, the company’s vice president of external affairs and transportation, said May 8, 2020, that getting North Slope jobs and production back to a normal level of activity is partly dependent on the state’s investment climate, “and by that, I mean on whether or not the oil tax initiative passes.” The initiative calls for “a significant tax increase” which “will put a brake on future investment,” he said, echoing the conviction of several other oil and gas companies in Alaska.

John Roper, director of media relations and crisis communications for ConocoPhillips out of Houston, said “the capital reductions we announced in March and April assumed we don’t resume drilling activity at our North Slope operations for the remainder of 2020. We haven’t yet set our capital plans for 2021.”

Those plans “will depend on our outlook for prices and, specifically in Alaska, the outcome of the tax initiative,” Roper said.

In the previous winter of 2019-20, ConocoPhillips drilled three of its planned six to seven exploration wells before it cut the season short because of concerns for worker safety connected to the coronavirus.

High cost area

In a June 4, 2020, CERA Week interview/discussion between Daniel Yergin, vice chairman of IHS Markit, and Ryan Lance, ConocoPhillips chairman and CEO, Yergin asked about the new oil potential in Alaska.

Lance talked about the company’s big North Slope Narwhal and Willow oil discoveries, which are primarily in the Nanushuk formation.

Those “new petroleum systems” offer Alaska the opportunity to “stabilize production going through TAPS,” the trans-Alaska pipeline system, Lance said. “We see a lot of opportunity in Alaska,” he told Yergin, noting ConocoPhillips “took some of our partners out” and now “own a 100% position.”

But if the new tax initiative passes, it increases the “above-ground risk.” The North Slope is already a “high cost area,” Lance said.

And although ConocoPhillips has operated in Alaska for “a long time … if the tax rate goes up, cash flows go down and we have to manage in a rational environment,” Lance said.

2019-20 exploration

The results from the three wells ConocoPhillips drilled in early 2020 - two Tinmiaq wells near the big Willow discovery and a rank exploration well in the Harpoon prospect - appear promising.

According to Matt Fox, ConocoPhillips executive vice president and COO, Tinmiaq results were what was “expected,” and Willow development is on track. (Willow is anticipated to have a peak production of 130,000 barrels of oil per day over a 30-year life.)

“We’re working through Willow, and we’re in the concept selection stage just now. We have a timeline that would get us to the end of this year with the opportunity to select the concept. And by that, I mean, how big a facility do we build, how many drill centers do we have and so on,” Fox said on April 30, 2020, in a first quarter earnings conference call, noting no decision has been made to defer Willow. (On July 30, 2020, days after The Explorers magazine goes to press, ConocoPhillips has scheduled its second-quarter earnings conference call, so check Petroleum News for updates.)

In the Harpoon well they “clipped the edge of the topset based on its log response. … We won’t know that for sure until we get a chance to drill the second well,” Fox said, a reminder that ConocoPhillips executive Michael Hatfield said in November 2019 that 3D seismic imaging indicates Harpoon has “high-potential Brookian topset targets with stacked plays.” Hatfield is president of Alaska, Canada and Europe for the company.

When asked about encountering hydrocarbon fluids in the Harpoon well, Fox said: “Yes, we did encounter hydrocarbons. … it looks from a lithological perspective similar to other lithological signatures we’re seeing on the edge of these topsets.”

‘Beast’ a game-changer

In March 2020 a new ultra-extended reach drilling rig, built by Doyon Drilling for ConocoPhillips, was delivered to the CD2 pad in ConocoPhillips Colville River unit northwest of the main Alpine field to assist with development of the unit’s Fiord West prospect on the environmentally sensitive Beaufort Sea coast.

Doyon 26, also known as the “Beast,” can reach reservoirs some 7 miles from its surface location. This means the high-tech ERD rig will be able to reach 154 square miles of reservoir versus the standard 55 square miles accessed by other North Slope rigs.

Fox described it as the “largest mobile extended reach drilling rig in North America and maybe the biggest in the world.” Doyon 26 is yet another example of ConocoPhillips massive investment in Alaska.

The 9.5 million-pound ERD rig - weight equivalent to almost 10 fully loaded Boeing 747s - has four 2,200 horsepower mud pumps.

Doyon 26 can burn a mix of processed field gas and diesel, displacing about 50% of the diesel required to operate the rig, which will be a big savings for ConocoPhillips, both in terms of cost and emissions.

Other drilling rigs do not have the capability to access Fiord West without a new gravel pad, additional pipelines and more road being built - hence increasing the development footprint.

ConocoPhillips Alaska has been working on the rig from initial FEED, or front end engineering design, studies and concept stage for about four years, recognizing what a game-changer the rig will be for it in Alaska.

The company anticipated Doyon 26 spudding its first well near the end of April 2020.

But that all changed with ConocoPhillips April 8, 2020, statement to Petroleum News, saying it was demobilizing its North Slope rig fleet due to the coronavirus pandemic.

Top of the ladder

On April 16, 2020, in ConocoPhillips’ second round of spending cuts since oil prices plunged and the coronavirus struck, Alaska once again lucked out with only $200 million of the company-wide $1.6 billion capex reduction coming from the state. Alaska spending for 2020 was reduced March 18, 2020, from approximately $3.4 billion to $3.2 billion; the April 16 announcement brings it down to about $3 billion.

Before disaster struck on April 20, 2020, and crude fell into negative territory for the first time in history as the COVID-19 pandemic decimated oil demand, Alaska was slated to receive about half of ConocoPhillips world-wide exploration capital.

In fact, the company remained on track to invest $25 billion of capital over the next 10 years in Alaska, Hatfield said in a fourth quarter conference call Feb. 4, 2020.

“In short, we’ve got a big program that we’re executing across our assets in Alaska, including at the non-op asset in Prudhoe Bay,” he said.

“These investments will increase the state’s production and mitigate the current decline through TAPS.”

ConocoPhillips spending plans for Alaska are not surprising given its recent discovery of approximately 1 billion barrels of light, sweet oil west of the central North Slope and into the National Petroleum Reserve-Alaska. Afterall, the company has said 75% of its prospective exploration acreage in the state has yet to be drilled.

But if there is a negative change in Alaska’s fiscal regime, ConocoPhillips’ investment plans will change. Still, the company is hopeful that the ballot initiative to increase oil and gas taxes will be rejected.

“We’ve been in Alaska for over 40 years; we know Alaskans understand the industry; it’s the lifeblood of the state’s economy,” Hatfield said. “We believe Alaskans will understand that short-term revenue gain is a risky and fleeting proposition if it comes at the cost of billions of dollars of investment over the coming years.”

Sell-down on hold

At the end of 2019, ConocoPhillips was looking for a North Slope exploration and development farm-in partner to take a 15-25% interest in some of its prospects.

But the sell-down is on hold.

“At this point, we only plan to sell down after the uncertainty related to the citizens’ initiative has been resolved, and after we’ve fully interpreted the results of our exploration and appraisal program, and when we’ve progressed … Willow through the concept select gate,” Don Wallette, executive vice president and CFO, said Feb. 4, 2020. “After we’ve satisfied those three criteria, that’s when we plan to execute this sell-down, so that pushes the sell-down most likely well into next year.”

He said the company would not execute a sell-down in a way that causes it to lose control of the investment pace.

“We’re already confident that there’s multiple quality parties that are interested in these great assets,” he said.

“We would be open to an equal-value strategic transaction or a swap rather than cash, if that makes sense,” Wallette said. “We’re going to resolve some of these uncertainties, and then we’ll approach the market.”



Did you find this article interesting?
Tweet it
TwitThis
Digg it
Digg
|

Click here to subscribe to Petroleum News for as low as $89 per year.


Petroleum News - Phone: 1-907 522-9469
[email protected] --- https://www.petroleumnews.com ---
S U B S C R I B E




Copyright 2003 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistrubuted.