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Vol. 25, No.18 Week of May 03, 2020
Providing coverage of Alaska and northern Canada's oil and gas industry

Alaska oil biz unknowns

How low can TAPS go? How high must ANS crude climb to restart drilling?

Kay Cashman

Petroleum News

Alaska’s oil industry has entered uncharted waters thanks to a combination of falling demand from the reduction in worldwide economic activity related to the coronavirus and the oil price war between Saudi Arabia and Russia that was in part aimed at quashing the U.S. shale industry. Both hit particularly hard on the U.S. West Coast where most of Alaska’s crude is sold.

Major impacts to Alaska’s oil industry to date include North Slope explorer and producer budget cuts; the shutdown of BP and ConocoPhillips development drilling at the fields they operate, including biggies Prudhoe Bay, Kuparuk and Alpine; cancellation of Oil Search’s 2020-21 winter exploration/appraisal drilling; postponed drilling by the new extended reach drilling rig at ConocoPhillips’ Fiord West field; and Oil Search’s cancellation of early Pikka production.

The most recent impact came as this issue of Petroleum News was going to press the morning of April 30: ConocoPhillips is cutting its 200,000 barrel a day Alaska output in half for the month of June - the 100,000 barrel reduction represents about 20% of the state’s 500,000 barrel per day production (see page 1 breaking news story).

The company is making global production curtailment decisions on a month-by-month basis. While the latest announcement appears to be negative news, it means less North Slope crude will be sold at prices that lose the company and the state of Alaska revenue; plus, suspending wells creates work for ConocoPhillips contractors.

The bright spots for Alaska’s oil industry so far in 2020 are Oil Search’s impressive exploration drilling results near Pikka and Horseshoe; Hilcorp’s continued drilling with two rigs in the North Slope Milne Point unit; and ConocoPhillips April 30 announcement that the North Slope GMT-2 project remains on track for late 2021 startup.

No plans to shut down pipeline

The operator of the trans-Alaska pipeline system has no plans to shut down the 800-mile oil line, Michelle Egan, chief communications officer for pipeline operator Alyeska Pipeline Service Co., told Petroleum News April 24.

But given the price of North Slope crude, which has been running below both the Brent and West Texas Intermediate oil prices, instead of above them which has been the norm for the last few years, oil producers are likely to reduce output by first suspending their low-performing, higher-cost wells. Some wells, including some of the high producers, can’t be shut in and easily restarted, such as those with artificial lift.

The Alaska Oil and Gas Conservation Commission sent a letter to all producers on April 14 asking how they would respond to production cuts because of COVID-19 and/or the drop in demand for oil.

Commission Chair Jeremy Price told Petroleum News that the goal of the letter was to “start a conversation to identify ahead of time any actions that could be required of AOGCC,” which is the quasi-judicial agency responsible for protecting the public interest in exploration and development of Alaska’s petroleum resources through the application of conservation practices designed to ensure greater ultimate recovery including preventing the waste of oil and gas.

To suspend a well, Price said, an oil company would have to submit an application for sundry approval to ensure they follow AOGCC regulations.

“To suspend a well, the operator must demonstrate to AOGCC that the well is mechanically sound, fluids can’t migrate, recovery of oil and gas won’t be impaired, and there’s no threat to public health,” he said April 27.

Although there is no penalty from the state for suspending a well, the producing company would have to cover the suspension costs, including such things as injecting freeze protection fluids in the well cellar, a material similar to mineral oil.

When asked about the far-fetched possibility of a massive shut down of all North Slope wells, he said: “There’s a host of problems associated with a slope-wide shut down. I’d be hesitant to comment on anything like that because I agree, it’s pretty far-fetched.”

What’s the magic price?

How high must the Alaska North Slope crude prices climb for explorers and producers to restart exploration, appraisal and development drilling?

The key word tossed around by oil executives in Alaska’s oil and gas industry is “stabilize.” The prices must stabilize for a period of time, stay flat or slowly climb, although none have said exactly what price is acceptable for Alaska crude.

Following is what they HAVE said.

Alaska’s biggest spender among producers and explorers, ConocoPhillips, said it was voluntarily reducing oil production in May in the Lower 48 and Canada by about 225,000 barrels a day gross but was not curtailing output in Alaska. But that could change in future months, per company CEO Ryan Lance, COO Matt Fox and CFO Don Wallette Jr., who participated in an April 16 market update webcast.

The reason Alaska’s North Slope didn’t see any production reductions in May was because trading for ANS crude begins a little earlier than it does for Lower 48 and Canadian crude, and the ANS price at the time was acceptable.

A Petroleum News source in the company said at the time there will be natural attrition in production from the North Slope due to the reduction in development drilling that was previously announced, although ConocoPhillips expects output to stay relatively flat for 2020. That could change with the company’s April 30 conference call (see story on the side of page 1 in this issue).

Regarding major proposed North Slope oil developments, the first is the Pikka Nanushuk development operated by Oil Search, which at peak is expected to yield 135,000 barrels of oil per day.

The company’s Alaska spokeswoman Amy Burnett told Petroleum News April 27 that the current Pikka development project breakeven is in the mid-$40s per barrel, and “we are focused on evaluating opportunities to reduce this.”

Tie-backs and extended reach drilling will decrease long term break-even estimates, the company said in September.

Oil Search has not released a breakeven oil price for its next proposed development at and near its Horseshoe discovery wells.

In September, Wood Mackenzie estimated the breakeven oil price for ConocoPhillips’ giant Willow development is $42 per barrel.

Painter: Costs higher than price

Alexei Painter, fiscal analyst at the Alaska Legislative Finance Division, said in a mid-April briefing to the House Finance Committee that at a $10 per barrel ANS sales price many of the Alaska producing fields would operate in the red.

Painter told Petroleum News April 28 that North Slope per barrel costs for oil producers are as follows: $9.68 for transportation (pipeline and tanker), $25.74 for operating expenditures, and $40.75 for combined operating and capital expenditures.

The Alaska Department of Revenue reported the trading price of ANS crude at market close of on April 29 was an estimated $10. 67 a barrel (Brent $22.54, WTI $15.06).

How low can TAPS go?

So, if North Slope producers begin suspending wells until the price of North Slope crude increases, how low can the amount of oil transported through the trans-Alaska pipeline go?

In answer to that question Alyeska’s Egan responded with this statement in an April 28 email: “The short answer is that we are continually pursuing technical ways to operate at lower throughput. Data analysis to date suggests that with additional investment, it may be technically possible to safely operate down to annualized throughput rates as low as 200,000 barrels per day.”

However, “technical capability is not the same as economic viability,” she added. “The long-term sustainability of TAPS may ultimately be limited by per barrel transportation costs.”

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Nothing unusual

The operator of the trans-Alaska pipeline system says its recent 10% slowdown of the oil flowing through the 800-mile line is not unusual, nor is it connected to the drop in oil prices and the coronavirus pandemic.

In an April 24 interview with Michelle Egan, a member of the leadership team and chief communications officer for pipeline operator Alyeska Pipeline Service Co., she told Petroleum News the 50,000 barrel-per-day reduction that began earlier that day is simply part of the day-to-day management of the pipeline.

“We are not a storage facility,” Egan said. “We have a dynamic system. Oil comes in at the North Slope, it flows down the pipeline to Valdez, where it’s loaded onto tankers.”

Alyeska currently has 14 storage tanks in Valdez.

What the company does on a daily basis in any circumstances, not just under the current circumstances, is exchange information on tanker schedules and their capacities, as well as projected crude volumes from the North Slope producers and “we balance the inventory and if we see we are getting high inventory of over 75%, we have two levers we can pull, so to speak,” she said.

The first lever and the most common thing Alyeska does is work with the tankers and their schedules to see if an adjustment can be made with them to pick up more, or less, crude.

For example, “last week we pulled the first lever and worked through some high inventory; this time of year, high inventory is not uncommon” Egan said.

The other lever is to ask the producers to “send us less oil and that’s a proration. We looked at the 28 day and 60 day forecasts and we have some high inventory points in the month of May,” she said.

“The 10% reduction in incoming oil is to manage some of these high inventories points we see that are around until end of May.”

“But things could change,” Egan said.

“There could be a tanker schedule change that would change the proration — say a couple of large tankers coming into Valdez. We look at that every day and make adjustments as we have to,” she said, noting Alyeska strives to have a steady and light proration to minimize impact.

“I’ve been with Alyeska for 11-plus years … larger prorations for a shorter period of time are more common. This one is a little different because it’s for a longer duration (through the end of May) but for a smaller amount (of crude),” Egan said.

“The fact is as we get better and better at managing inventory and doing projections.”