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ConocoPhillips Continues to Invest in Alaska

Tax regime limits activity

ConocoPhillips’ custom-built coiled tubing drilling rig, CDR-5, was designed to optimize drilling operations. It maximizes oil recovery through the use of a continuous string of tubing spooled off a reel into an existing wellbore. The flexible tubing is used instead of pipe to deliver and control drill bits and other tools in the reservoir.

ConocoPhillips’ custom-built coiled tubing drilling rig, CDR-5, was designed to optimize drilling operations. It maximizes oil recovery through the use of a continuous string of tubing spooled off a reel into an existing wellbore. The flexible tubing is used instead of pipe to deliver and control drill bits and other tools in the reservoir.

Photo courtesy of ConocoPhillips Alaska

For more than 50 years, ConocoPhillips has played a major role in the development of Alaska’s oil and gas industry. As the largest oil producer and one of the largest gas producers in the state, the company employs nearly 1,100 people through its facilities on the North Slope and in Southcentral Alaska, and at its headquarters in Anchorage. In addition, the company indirectly employs thousands of contractors’ employees. In 2011, ConocoPhillips earned $1.9 billion in Alaska, and paid an estimated $4 billion in taxes and royalties to the state while producing 215,000 barrels of liquid a day. It spent $775 million out of a proposed $900 million budget; the same amount that it has budgeted for Alaska this year.

ConocoPhillips’ current holdings in the state include significant ownership interests in three oil fields located on the North Slope—Kuparuk (56 percent), Prudhoe Bay (36 percent) and Alpine (78 percent), which the company operates. In Southcentral Alaska, ConocoPhillips has 100 percent ownership and operates the Kenai liquefied natural gas plant and the Tyonek platform in North Cook Inlet. ConocoPhillips operates the Beluga River natural gas field, of which it owns 33 percent, and is also a 28.3 percent owner in the TransAlaska Pipeline System.

In 2012, ConocoPhillips made headlines by aligning with other oil and gas giants BP, ExxonMobil and Canadian pipeline operator TransCanada to work on a plan to commercialize North Slope natural gas resources within an Alaska Gasline Inducement Act framework as an alternative to a natural gas pipeline through Alberta. The company also recently took part in developing groundbreaking technology to get methane gas out of hydrates on the North Slope that could result in a potential new gas source in the future.

Trond-Erik Johansen, President, ConocoPhillips Alaska

Photos courtesy of ConocoPhillips Alaska

ConocoPhillips also completed a major corporate restructuring within the past year, changing from one large integrated oil and gas company to two large companies that handle upstream and downstream operations separately. “ConocoPhillips will be focusing on its core competencies as an independent exploration and production company, while the downstream company, Phillips 66, will focus on its core competencies,” says Trond-Erik Johansen, president, ConocoPhillips Alaska. “Alaska really won’t see any changes, because we’ve always been an upstream company here.”

The main Alpine pad and processing facilities in summer. The pipeline in the foreground is coming from the CD4 satellite, also known as Fiord.

Photos courtesy of ConocoPhillips Alaska

Investing in Alaska

While ConocoPhillips continues to invest in Alaska, the majority of the money that it spends is earmarked for renewal and maintenance projects. According to Johansen, the $900 million that the company is investing in 2012 is relatively flat compared to the money being spent in other parts of the country. “Alaska has a lot going for it: There are a lot of resources left,” he says. “But the state is lagging behind other parts of the world because of its high tax system. If the state were to get that right, I believe that it would see much more development activity.”

In Alaska, more than 70 percent of the income that the company generates goes to state and federal governments, compared to 50 to 60 percent in other states such as Texas and North Dakota, says Johansen. “In the last few years, we have tripled our investments in the Lower 48, while our investment in Alaska has remained flat,” he says. “Companies are willing to take more risks when they share more of the reward.” Between 2009 and 2012, ConocoPhillips’ oil and gas investments in the Lower 48 have grown from $1.6 billion to $4.8 billion.

ConocoPhillips plans to spend this year’s capital budget replacing a number of older facilities and updating current facilities to ensure employee and operational safety. “We will be drilling a moderate amount—mainly infill drilling in existing fields where it makes economic sense,” says Johansen.

One new project is CD-5 in the National Petroleum Reserve-Alaska (NPRA) that, once sanctioned for funding, will be a new satellite field west of the Alpine development on the North Slope. “We tried for more than five years to get approval for this field, but it was held up by the U.S. Army Corps of Engineers,” explained Johansen. “We finally reached an agreement and got formal approval this past Christmas, so we are hoping to sanction to proceed this year, with most of the capital investment being spent in 2014 and 2015.”

Construction at CD-5 will include drill site facilities, gravel roads, pipelines and power systems, and production is expected to begin in late 2015. The project is expected to produce between 10,000 and 18,000 barrels per day of new oil, and was originally budgeted in 2009 at $600 million, though that number will be revisited before the project proceeds.

ConocoPhillips also has plans to drill a well in 2014 on its Chukchi Sea leases. On March 1, the company submitted its exploration plan to the federal Bureau of Ocean Energy Management. “We have a good acreage position of 98 blocks in the Chukchi Sea, which we are hoping to move on in a reasonable timeframe,” says Johansen. “It is a very complicated, expensive and time-consuming process because there are so many federal agencies involved, but we do have a good dialogue going so we’ve got our fingers crossed that we will get an approval soon and can proceed.”

Aerial view of the Kuparuk Operations Center, including Central Processing Facility 1 (CPF1) in the foreground. The Kuparuk field is celebrating its 30th year of operation in 2012.

Photo courtesy of ConocoPhillips Alaska

Exploring New Horizons

While the idea of building a natural gas pipeline from the North Slope through Alberta to the Lower 48 has been discussed for years, ConocoPhillips and other leading oil and gas producers launched a new initiative in March of 2012 that would instead encourage the large-scale export of LNG from Southcentral Alaska to other markets. “There is already plenty of natural gas in the Lower 48, so we would prefer to see Prudhoe Bay and Point Thomson gas used as a potential source for a new LNG plant in Southcentral Alaska, perhaps in Cook Inlet or Valdez,” says Johansen. “While it has not yet been determined whether an LNG project would be commercially viable or where this liquefied natural gas would be sold, there is potential in the Asia Pacific market.”

While ConocoPhillips has successfully operated an LNG plant in Kenai for more than 40 years, the type of technology that the plant uses is just one alternative that the company, BP and ExxonMobil will be exploring. The companies are currently in the process of putting together technical and concept selection plans, which they hope to have completed by the end of this year. Once it is determined that the project is technically feasible, the group will work on the regulatory framework, explore commercial issues relating to marketing and securing gas buyers, and work on establishing competitive and stable fiscal terms with the state of Alaska. “We know we can do it; I can’t think of a stronger group of companies to find the solutions the state needs on this issue,” says Johansen.

While exploring new markets for its oil and gas production, ConocoPhillips is also experimenting with new technologies to recover resources. In 2008, the U.S. Department of Energy joined ConocoPhillips to execute the first field trial of a groundbreaking new technology to produce methane gas from hydrates locked in the tundra on the North Slope. This technology, tested successfully in 2012, could result in a potential new gas source in the future. While excited about the results, Johansen is realistic about the timeframe involved. “This was a very small-scale project and it was very expensive to do, so we’re not fooling ourselves—it could be decades before we can use this technology to bring more gas out of the ground,” he says.

While ConocoPhillips would like to move forward on some potential projects, including a limited expansion of West Sak viscous oil production in the Kuparuk River field and the evaluation of a conventional oil development at the Shark Tooth exploratory well at Kuparuk, these developments are on hold right now because they are not competitive in the company’s global portfolio. “While we hope to have more projects in Alaska in the future, we are limited in what we can do by the state’s current tax regime,” says Johansen, adding that the company is continuing to work with the governor and the Legislature to explore ways to make improvements to the tax system.

“We’ll continue to do what we’ve been doing to ensure that our assets in the state remain healthy and to get oil and gas out of the ground, but unfortunately, this means that we will continue to see production decline because it is becoming more expensive and more challenging to produce every barrel,” he says. “It is our hope that the industry, the Legislature and the governor can work together on key issues to make it more attractive to invest in Alaska.”

Vanessa Orr is a writer living in western Pennsylvania.

This article first appeared in the August 2012 print edition of Alaska Business Monthly magazine.

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