Photo credit:
Clark James Mishler
2003 Oil Industry Forecast
There’s a lot of potential for medium-sized and even smaller companies in the
oil fields of Alaska.
By Mike Bradner
Alaska’s oil and gas industry is changing and as
in any transition there are challenges–and opportunities.
There’s still a bright
future for petroleum in Alaska, industry leaders agree–billions of barrels of
oil in known oil reserves are left to be produced, and there’s a lot of
potential for new discoveries–but the size and shape of the industry will be
different.
Alaska will no longer be
the exclusive turf of major oil companies, for one thing. Medium-sized and even
smaller companies are now on the scene, and more of them will be coming.
That’s good in a number of
ways. For one, having more people exploring and poking holes in the ground means
more oil and gas will be discovered.
For another, smaller
companies traditionally contract out for a lot of support services that large
companies do themselves. It means, potentially, more work for Alaska’s very
capable oil services and support companies that have grown with the petroleum
industry.
However, every transition
has downsides.
While they are heartened
about the new players, Alaskans worry that large companies may be less
interested in Alaska. There are fewer major oil companies around these days,
too, because so many firms including many that where in Alaska–Texaco, Amoco,
Mobil, ARCO, Phillips and Conoco–are now merged with others.
Outside of the coastal
plain of the Arctic National Wildlife Refuge, the state may no longer offer
prospects for very large oil discoveries like the Prudhoe Bay field. These are
the kind of discoveries that interest these super-giant companies.
Ken Thompson, a retired senior manager for
Atlantic Richfield Co., now living in Alaska, says the state still has a lot of
potential but it is in medium-sized discoveries, like Alpine. If the
super-majors are less interested in small or medium-sized oil fields, there are
plenty of other firms–small and medium-sized companies–who will be interested,
he says.
All of this has economic
implications for Alaska, because employees of the large companies are well
compensated in salaries and benefits and constitute an important upper-income
population segment in the state’s communities.
Smaller oil and gas
companies, in contrast, tend to operate with leaner staffs.
While they contract out
more work to support contractors, many of these have more employees living
out-of-state who commute to their jobs in the oil fields.
Alaskans fear one very
large company now operating in the state–British Petroleum–is already
withdrawing, although gradually.
Steve Marshall, president
of BP Exploration (Alaska) Inc., the company’s Alaska subsidiary, says this
isn’t so, that BP’s stake in Alaska is as important to the company as ever,
Marshall told the Anchorage Chamber of Commerce in a briefing last fall.
BP’s remaining reserves in
Alaska are larger than anywhere else the company operates, Marshall says, and
even without new reserves being added they are enough to sustain current
production for 20 years.
Just sustaining this
production takes continued investment in things like new drilling, expanded
waterflood and enhanced oil recovery in the producing fields. Marshall says it
takes about $2 billion a year in new investment to keep the existing fields at
peak performance.
Marshall is upbeat,
however. With reasonable luck in adding reserves through technology
improvements, there could be enough to sustain BP for not only 20 years but also
30 to 50 years, he said.
Reasonable luck in adding
reserves through new exploration is something BP hasn’t had in recent years,
however.
Marshall said the company
spent $400 million in exploration over the last 10 years, which has resulted in
only 160 million barrels of new oil, a disappointing performance.
BP has had better luck in
developing new reserves in and around the large, existing fields, where in the
last 10 years, 900 million barrels of new oil have been added. Given this track
record, it’s no surprise BP has switched its strategy to focus on more intensive
development around the producing fields rather than exploring new areas.
The caveat to this future
potential is that the production must be profitable, and BP also says that
Alaska doesn’t compare well with other producing areas where the company
operates.
This is important when it
comes to the annual budget negotiations, because if a large new project in
Kazakhstan of Sakhalin can earn more than a large project in Alaska, the
investment doesn’t go to Alaska.
A fundamental problem is
that there is less oil flowing through the trans-Alaska oil pipeline, about half
what the pipeline carried at its peak throughput in 1988. That means the
pipeline’s fixed costs are spread over fewer barrels, so the cost of shipping
each barrel is going up.
Also, the producing wells,
flow stations and field pipelines on the North Slope are 25 years old and
maintenance costs are increasing.
To improve the
competitiveness of the Alaska operation with other parts of the world, BP has
been engaged in a series of cost cutting that seems relentless to its employees
and contractors. It is mainly these work force and spending reductions that have
created a perception the company is less interested in the state.
Alaskans are also watching
newly merged ConocoPhillips closely. The new company is larger–it is now the
third largest U.S. oil and gas company–and there are now more projects around
the world competing internally for investment.
ConocoPhillips has had
better luck than BP in recent years with exploration. Test wells drilled in the
National Petroleum Reserve-Alaska discovered oil and gas, but the company is
still working to determine whether they can be commercially developed, according
to Kevin Meyers, president of ConocoPhillips Alaska Inc., the Alaska operating
company.
Meanwhile, ConocoPhillips’
new Alpine oil field, in the Colville River delta west of the Prudhoe Bay-area
oil fields, has produced well above expectations, Meyers says. Anadarko
Petroleum Co. is ConocoPhillips’ minority partner in Alpine.
The company also has had
good luck in developing smaller oil accumulations in and near the existing
Kuparuk field, such as at Tarn and Meltwater, two satellite fields. BP and
ExxonMobil are partners in these projects.
Despite concerns for BP and
ConocoPhillips, one upbeat signal is that the world’s biggest oil company and
another long-time veteran in Alaska, ExxonMobil Corp., has launched an ambitious
development plan for its Point Thomson gas and gas condensate field east of
Prudhoe Bay.
The field, a large gas and
gas condensate (a gas liquid) deposit, has been known and extensively explored
for years, but technical problems with extreme high reservoir pressures
prevented development.
The company must secure
its permits before making a definite commitment to the project, according to
Jack Williams, ExxonMobil’s production manager for Alaska.
Extension of
infrastructure to Point Thomson also puts a pipeline virtually on the doorstep
of the coastal plain of the Arctic National Wildlife Refuge. The Canning River,
the western boundary of ANWR, is a few miles east of Point Thompson.
Congress must decide
whether to open the 1.2 million-acre coastal plain to exploration. If it does
it’s highly likely that oil and gas will be made in the western part of the
coastal plain where the geology is very similar to the area around Point Thomson
where discoveries have been made.
A number of other new
companies are active on the North Slope. Encana, a Canadian company that is the
largest independent producer in North America, is drilling a exploration well
this winter at McCovey, a prospect in the Beaufort Sea north of Prudhoe Bay.
Pioneer Natural Resources,
another large U.S. independent, and Armstrong Resources, another independent,
are drilling test wells in shallow offshore waters.
Some companies formerly in
Alaska are back, too. Chevron Texaco, for example, is a partner in the Point
Thomson project, and is bidding in lease sales. Before they merged Chevron and
Texaco were both active in Alaska, but then left the state and closed offices.
In Cook Inlet, Alaska’s
older oil producing area, a transition is also under way.
Forest Oil, one of the new,
medium-sized companies on the scene, took a gamble that a old prospect at
Redoubt Shoals, on the southern edge of the inlet’s traditional oil producing
area, had potential.
Forest won its bet, big
time. A brand new oil field with 50 million to 100 million barrels of
recoverable reserves is due to begin production.
There’s been success in gas
exploration, too. Marathon Oil Co. and Unocal Corp., two long-time operators in
southern Alaska, have discovered new gas reserves at Nikiski, south of Kenai. A
22-mile new pipeline will be under construction in early 2003 to connect the new
discoveries to an existing gas pipeline system.
There are setbacks, also.
Unocal was unsuccessful in exploration wells on the southern Kenai Peninsula
drilled last year.
A recent development is
Unocal’s decision to shut in production on two older, economically marginal Cook
Inlet platforms, and to close the company’s Kenai office.
State of Alaska officials
hope that other uses can be found for the platforms so they are not removed.
Once that infrastructure is taken out it will be more difficult to do new
exploration in that area, says Bill Van Dyke, petroleum manager in the state
Division of Oil and Gas.
Another worrisome
development is that Unocal has told Agrium Inc., owner of the large ammonia and
fertilizer plant at Nikiski, near Kenai, that gas reserves in fields from which
production had been dedicated to the manufacturing plant were less than had been
estimated.
The company must reduce the
volume of natural gas sold to the plant, it said.
While there has been
concern for some time about decreasing reserves of gas in older fields in south
Alaska, the revelation that reserves in Unocal’s fields are even less than were
thought is a cause for worry.
What about the one
“mega-project” out there in the future, the development of North Slope gas? Last
year the three North Slope producers, BP, Phillips (now ConocoPhillips) and
ExxonMobil spent $125 million on conceptual engineering, feasibility and route
studies and concluded it would cost $20 billion to build a large-diameter
pipeline from Alaska to the continental U.S.
The producers had hoped to
secure federal regulatory changes and tax incentives in the federal energy bill
in 2002, but Congress didn’t act on a final bill before its adjournment. Those
issues will be back on the table in Congress 2003.
This means the timetable
for this large project has been pushed back. With luck, construction might begin
in 2007.
Meanwhile, Alaska voters approved creation of a
new state gas pipeline authority in the Nov. 5 state election. The authority is
focused on a liquefied natural gas (LNG) project, which would require a pipeline
built across Alaska to a LNG plant in a community on the state’s southern coast.
Some worry that the new
state authority could be a distraction from efforts to build a Lower 48
pipeline, which they say is more feasible.
Others, like state Rep. Jim
Whitaker, a Fairbanks legislator, think the state authority will keep the LNG
export plan on the table for discussion.
What to Watch for:
Developments in Alaska’s
Oilpatch
Here
are key developments to watch in Alaska’s oil and gas industry:
• A decision by Congress in 2003 to allow
exploration of the coastal plain of the Arctic National Wildlife Refuge, and to
approve incentives for an Alaska natural gas pipeline.
• Startup of production in early 2003 from
Forest Oil’s new Redoubt Shoals oil field in Cook Inlet.
• Construction of a new natural gas pipeline
from near Kenai to new gas discoveries near Nikiski, on the Kenai Peninsula.
This is planned to be in construction in early 2003.
• Unocal Corp. shut-in of Dillon and Baker
platforms in Cook Inlet. Can alternative uses for the platforms be found, or
will Unocal have to remove them?
• Announcement by ConocoPhillips and Forest Oil
of results of the Cosmopolitan exploration well near Anchor Point.
• Expansion of the Alpine oil field processing
facilities, on the North Slope. The first part of the expansion could be under
way in 2003.
• Expansion of production in the North Slope
viscous oil fields. ConocoPhillips Inc. may build a new production pad and wells
for West Sak viscous oil project. BP may do further expansions of production
from the Schrader Bluff viscous oil project.
• Announcement by ConocoPhillips and Anadarko
Petroleum of whether discoveries in the National Petroleum Reserve-Alaska can be
commercially developed.
• ExxonMobil Corp.’s decision to proceed with
development of the Point Thomson gas and gas condensate field east of Prudhoe
Bay. Permits are now being secured for the project, but a decision to proceed
has not yet been made.
