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Cranked up Exploration

Is it enough to dent decline?

Furie jack up rig Spartan 151 and OSV Discovery on site Kitchen Lights Unit in Cook Inlet.

Furie jack up rig Spartan 151 and OSV Discovery on site Kitchen Lights Unit in Cook Inlet.

Photo courtesy of Offshore Systems

Exploration for oil and gas in Alaska has really cranked up, but there are questions whether the pace is enough to dent the continued decline in production from the big oil producing fields on the North Slope, or to provide enough new natural gas to offset looming shortages in Southcentral Alaska.

A lot of what is prompting the new drilling is the generous set of incentives put forward by the state that pays for as much as 60 percent of the explorers’ costs, or even more. In Cook Inlet, an offshore explorer is eligible for 100 percent of well costs, and a new incentive approved by the Legislature this spring will pay 80 percent of well costs in unexplored Interior Alaska basins.

But there are other factors at work, too. High oil prices have attracted a new crop of independents to Cook Inlet, where they hope to find deep oil deposits in rocks previously unexplored. State taxes on oil are also much lower in the Inlet compared with the North Slope. On the slope, expiring lease deadlines have provided the prime motivation for at least one company, Repsol, to get busy and drill.

What’s the Drill?

Cook Inlet is going to be a busy place this year, with more exploration drilling than the inlet has seen in decades. Most of the drilling is focused in finding oil, which commands high prices. Some gas will almost surely be found too, because oil and gas are often found together. There is some exploration focused just on gas, too.

Projects being watched closely in Cook Inlet include the completion and testing of an offshore test well where Furie Alaska Operating, formerly Escopeta Oil, found gas last fall with a jack-up rig; new drilling of offshore exploration wells by Buccaneer Energy with a second jack-up rig to be in the inlet in June; the drilling of wells by Buccaneer near its new onshore Kenai Loop gas field to test for extensions of the known deposit, which is now producing; and the first wells to be drilled by Apache Corp., a major independent company that has aquired a large group of leases in the region.

One other project being watched is a reported onshore gas discovery by NordAq, an Alaska-based independent company, on the Kenai Peninsula. NordAq’s well is within the Kenai National Wildlife Refuge on a lease where the subsurface mineral rights are owned by Cook Inlet Region Inc., the Alaska Native regional corporation based in Anchorage.
NordAq must fully test its discovery but is meanwhile proceeding with permits for production facilities with the U.S. Fish and Wildlife Service, which manages the Kenai refuge. What is advantageous is that the NordAq discovery is near an existing gas pipeline, which means if the find is economical to produce the gas can be brought to market fairly quickly once permits are secured and facilities are built.

Slow Winter up North

Meanwhile, the winter season on the North Slope turned out to be slower than originally expected, but there was important progress on several projects. Repsol, the Spanish company, had set out an aggressive drilling schedule last fall but experienced a setback when there was a shallow gas “blowout” on one of its wells. There were no injuries or major damage, but the indcident was a setback for the company’s plan because it meant Repsol was unable to complete that well, which was a high-priority prospect in the Colville River delta. Repsol was able to finish one other well drilled southwest of the Kuparuk River field, however. Results of that have not been announced.

                                                       Repsol Q-4 on the North Slope.

© 2012 Judy Patrick Photography   

One promising prospect is “Mustang,” an onshore discovery by Brooks Range Petroleum, an Alaska-based company, that is west of the Kuparuk River field. Brooks Range made the discovery last year, the winter season of 2010-2011, but ran out of time with the impending spring thaw before it could test the well. Further tests were done this last winter. Reports are that they went well, and Brooks Range has been in discussions recently with the Alaska Industrial Development and Export Corp., the state development corporation, on helping finance a small processing facility. Mustang is very near an existing pipeline, a great help in its development.

East of Prudhoe Bay Savant Resources, a small Denver-based company, is working in partnership with Arctic Slope Energy Services, a subsidiary of Arctic Slope Regional Corp., in a redevelopment of the small Badami field. BP is still the owner of Badami (it was first developed in the 1990s) and the two small companies are investing in redevelopment in a “farm-in” arrangement, where they will own the field after investing. BP encountered problems with difficult reservoir conditions when it first drilled Badami and the field has never produced up to the company’s expectations. Savant and ASRC are re-drilling some of BP’s wells with horizontal production “legs,” or extensions, employing new technologies in an effort to get more oil out of thin reservoir sections. Savant and ASRC have also drilled a new exploration well in an effort to add new reserves.

Liberty and CD-5

One development project that is on the back burner for now is BP’s plan to develop the offshore Liberty oil field, which is in federally-owned waters northeast of the Prudhoe Bay field. It is about five miles offshore. BP had plans to drill Liberty with ultra long-distance “extended reach” wells from a large drilling rig onshore.

Some of the wells would be as long as eight miles drilled laterally from the surface location of the drill rig, which is at the Endicott oil field. The project has been delayed, however, so that technical problems with the drilling can be resolved. The wells would set world records for extended-reach wells.

While not really an exploration project (the oil at Liberty was discovered many years ago), the successful demonstration of ultra long-reach wells by BP to produce at Liberty will enhance the exploration for many offshore prospects that are near enough to shore to reach with wells drilled from a rig on shore.

Another development project that is definitely on the way, and which has implications for boosting future exploration, is ConocoPhillips’ and Anadarko Petroleum’s CD-5 production pad on the west side of a channel of the Colville River and the Alpine oil field. CD-5 is an oil accumulation discovered several years ago but its development was delayed because of a dispute with the U.S. Army Corps of Engineers over a bridge across the river channel.

The dispute is now resolved, and the companies are proceeding with engineering work for the new drill pad. Although it is considered a “satellite” of the Alpine field (satellites are small accumulations near large fields), CD-5 is also on federal lands within the National Petroleum Reserve–Alaska and would be the first commercial production from NPR-A.

Interestingly, the subsurface mineral rights in that area are owned by Arctic Slope Regional Corp., the Alaska Native development corporation for the region, so oil and gas royalties from CD-5 would go to ASRC and also be shared with other Native corporations through revenue-sharing provisions of the Alaska Native Claims Settlement Act.

What is also important about CD-5, however, is that the bridge and road infrastructure to reach the pad will lead to an extended road and pipelines being built farther west in NPR-A as other known oil and gas accumulations are developed. This will enhance further exploration in the northeast part of the federal reserve because prospects that are too small or that appear marginal because of lack of infrastructure will be more attractive to explorers.

NPR-A’s Limited Attraction

Except for the northeast part of the NPR-A that is near the Alpine field and the southeast part of the reserve near Umiat, where Linc Energy is working to develop an old oil discovery, the huge federal reserve has limited attraction for companies that are exploring, at least for now. Geologists consider much of the huge reserve to have more potential for natural gas discoveries than oil, which means that until there is a gas pipeline and a way to move gas off the slope, there will be little interest from companies.

The exception to this are lands in the northeast where ConocoPhillips, Anadarko and FEX LLC have made oil and gas discoveries, and particularly lands near the coast that are rated as having very good potential for oil. Unfortunately, the coastal lands are largely off-limits to the explorers because the wetlands of the region are also intensively used in summer by migratory waterfowl. National environmental groups are waging a campaign to stop any drilling around Teshepuk Lake, a particularly important habitat area near the coast. So far the campaign has been successful.

What will really open most of the NPR-A is if Shell and other companies make commercial oil and gas discoveries in the Chukchi Sea. If an oil pipeline and quite likely a gas pipeline are built to shore and across the NPR-A, to a connection with the Trans Alaska Pipeline System and an eventual gas pipeline from the Slope, the new infrastructure will make it possible to develop medium-sized and small oil and gas prospects across the petroleum reserve.

Point Thomson

Just as CD-5 will open the door to new infrastructure in NPR-A, the natural gas “cycling” and liquids production project at Point Thomson, which is near the Arctic National Wildlife Refuge border east of Prudhoe Bay, will result in a new pipeline built to that area. Once it is there, more exploration will result.

Point Thomson is a large gas and condensate (a natural gas liquid) field, and there are small deposits of oil nearby and the likelihood of more. Also, Shell will be exploring its Beaufort Sea leases in the Camden Bay area to the northeast of Point Thomson. Having a pipeline available will make it possible for Shell to tie in with a pipeline to shore, assuming Shell makes a commercial discovery. The Point Thomson project is due to begin production in 2016 and will produce 10,000 barrels a day of liquid condensates that will be shipped to Prudhoe Bay and TAPS. The pipeline, however, is designed to handle 70,000 barrels per day.

Having a pipeline and production facilities so close to ANWR would make it simpler to develop any oil found in the coastal plain of the refuge if exploration is ever allowed. The coastal plain is part of the refuge but was kept out of the wilderness sections of ANWR because of its oil and gas potential. Congress has yet to vote to allow exploration in the coastal plain.

Testing Shale

No discussion of the North Slope is complete without mentioning Great Bear Petroleum and its plan to examine the possibility of producing oil from deeply-buried shale formations, similar to the way companies are producing oil from shale in North Dakota and Texas. Great Bear will drill its first two test wells in late spring, 2012. At this point there are important questions to be answered before it is known whether shale oil can be commercially produced. First is a technical question: Are the North Slope shales brittle enough to be fractured so that the oil can flow? The second is an economic question: Shale oil development will require many wells, roads, pads and support facilities. The slope is a high-cost environment. Can Great Bear ultimately drill the wells and build the needed production facilities at an affordable cost? These are big unknowns.

Ironic Incentives

Overall, the dilemma explorers face is that if they are lucky enough to find something, the state’s tax system is so difficult that the deposit may be uneconomic to produce. The irony is the State of Alaska is providing very generous incentives to explore, on the “front end” of a project, even to the point of paying for most of the drilling. But the question of whether a discovery can be profitably developed and produced is more difficult, because in some oil prices ranges—today’s for example—the state actually takes most of the profit.

This has led to a situation where industry investment in new oil projects has actually dropped in Alaska despite sky-high oil prices and the state’s generous front-end incentives. In contrast, in other oil-producing states like Texas, industry investment has tripled over the last four to five years.

Gov. Sean Parnell and some legislators want to do something about this, and are investigating ways to lower the tax to make Alaska more attractive for long-term industry investment. Despite Legislation’s failure to accomplish that in the 2011 and 2012 sessions, the efforts continue, but have been a difficult struggle.

Mike Bradner is publisher of the Alaska Legislative Digest.

This column originally appeared in the June 2012 print edition of Alaska Business Monthly magazine.

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