North Slope Slow Down
Majors pull back on Alaska investments, exploration.

By Vanessa Orr

For many years, the North Slope of Alaska has provided oil, gas, jobs and opportunities for Alaskans. Yet with each year that passes, the ability to get "easy oil" decreases, requiring companies to make more of an investment in exploration and drilling, as well as make major investments in new technologies to harvest the oil that remains.

According to the Alaska Oil and Gas Association (AOGA), the long-term outlook for oil on the North Slope is one of gradual decline. The state expects average daily production in fiscal year 2009 to drop to 689,000 barrels per day and 665,000 barrels per day in fiscal year 2010. The good news, however, is that new gas field development, smaller field-size oil development, and the development of technologies to extract heavy oil may help to extend the North Slope's future.

2010 Caution
While still committed to projects on the North Slope, two major oil companies, BP Exploration (Alaska) Inc. and ConocoPhillips Alaska Inc., are cutting back in the new year. BP will be reducing capital spending by approximately 15 percent; from $1 billion in 2009 to approximately $850 million in 2010. Roughly one-third of this investment is earmarked for infrastructure renewal, one-third for drilling and one-third for growth.

"Our first priority is to invest in the infrastructure to enable a sustainable long-term future," explained John Mingé, president, BP Exploration Alaska, at a recent Resource Development Council for Alaska Inc. meeting. "We will then invest in developing the light oil base which generates the cash, and then invest for growth – projects like Liberty, Point Thomson and Denali-The Alaska Gas Pipeline." According to Mingé, over the last five years, oil and gas industry costs have increased at a rate of four times the price of oil, while North Slope oil production has declined about 29 percent. "The light oil business has suffered over the last few years due to declining production and rising costs; costs have risen through significant inflation and increased government taxes," he explained.

"Our cash break-even point is much higher today than it was five years ago," Mingé continued. "Policy decisions around taxes made over the past few years have slowed the pace and scale of some of our North Slope developments; we put projects on the shelf that didn't make sense in this environment."

One project that is moving forward is Liberty, the first full federal offshore development in Alaska. In 2010, the first of up to six Liberty ultra-extended reach wells will be completed, reaching six to eight miles from its surface location to the new 100 million barrel field. To complete this engineering marvel, which will be the longest reach well ever drilled, the company had to create a new rig, which was delivered to Endicott satellite drilling island this past summer. The new rig weighs 8,500 tons, has eight 2,640-horsepower engines that generate 16 megawatts of power, and its top drive is rated at 105,000 foot pounds of torque. By adding to an already existing facility, BP was able to reduce its environmental footprint, and to create efficiencies by tying production from Liberty to its Endicott production facility.

The first oil production from Liberty is expected in 2011, with a peak of approximately 40,000 barrels a day. Capital investment in the project is expected to equal more than $1 billion. Approximately 40 Alaska companies worked on Liberty's construction.

ConocoPhillips, one of the most aggressive explorers on the North Slope, is also proceeding with caution in 2010. "At this time last year, oil prices had fallen dramatically and our industry was under significant pressure," explained Helene Harding, vice president, North Slope operations and development. "As a company, and particularly in times of capital constraints, ConocoPhillips engages in strong cost management and close scrutiny of investments. As we look to 2010, we continue to carefully consider each investment decision. In 2010, we will continue to focus on operating well, controlling costs and assessing the overall business climate in this uncertain price environment.

"As we look to continue improving oil recovery, we recognize that the Kuparuk field, approaching 30 years of age, is a mature asset," she added. "This situation requires increased spending on maintenance, and increased maintenance costs may impact the timing and funding of drilling and well work. Our exploration drilling activity will be significantly down compared to recent years, but we will continue to concentrate on finding ways to accelerate production from our base fields."

According to Harding, because a Record of Decision on the Alpine West CD5 404 permit has not been issued, the company will not be able to meet the project's planned construction schedule and will have to postpone the CD5 project for at least a year.

"This permit delay will postpone the earliest estimate for oil production from this satellite from 2012 to at least 2013," said Harding. "Unnecessary delays in permitting result in delays in investments, delays in creation of North Slope construction jobs, and delays in commencement of production and associated revenues."

In the Chukchi Sea, ConocoPhillips plans to continue with environmental studies in hopes of drilling in 2012 – more than four years after investing more than $500 million in the record-breaking $2.6 billion 2008 OCS sale, to acquire federal oil and gas leases in this frontier area. "We will not be drilling any exploration wells this season, either onshore or offshore," said Harding. "In 2010, we will focus on our core assets. Our history shows that satellites and infill drilling can add significant production, but the fiscal policy of the state and market conditions need to support those investments."

Oooguruk Producing
Pioneer Natural Resources Alaska, a wholly owned subsidiary of Pioneer Natural Resources, is proceeding on the development of oil wells in Oooguruk on the North Slope. As the first independent to operate a producing field on the North Slope, the company has had continued success since it first saw oil production in June 2008.

According to the company's Web site, production is expected to peak during 2011 at 15,000 to 20,000 gross barrels of oil per day from about 40 development wells; half are producing wells and half are injection wells.

"In 2009, our second year of drilling, we focused on two production areas: the Kuparuk reservoir and the Nuiqsut formation," explained Ken Sheffield, president, Pioneer Natural Resources Alaska. "We drove five horizontal wells: three producers and two water inducers." The company fracture stimulated the three producing wells, a common practice in the Lower 48. "It's not necessarily a new thing on the North Slope; many wells in Prudhoe Bay and Kuparuk are fracture stimulated," said Sheffield. "What's a little different is that we are combining horizontal drilling and fracturing in the same well.

"By drilling injection and producing wells in two reservoirs, we pushed our production curve up," added Sheffield. Production from Pioneer's total fields in 2009 equaled approximately 2.6 million barrels gross or 7,000 barrels a day.

In 2010, the company plans to continue working in these same reservoirs. "We're in drilling mode; we'll be drilling all year long on the island," said Sheffield. "This year, our team will be working hard to increase production and working to improve operational efficiencies."

Nikaitchuq
In 2009, Eni U.S. Operating Co., a subsidiary of Italian oil company Eni, delayed development work at the Nikaitchuq unit, which they had begun developing in January 2008. According to the Alaska Division of Oil and Gas, the company now plans to start producing oil from an offshore unit in December 2010.

A missed sealift date and low oil prices contributed to the delay in production, but the company now expects to complete its production modules in Louisiana and ship them to Alaska in 2010. Once the modules have been installed, drilling work will begin, and will consist of roughly 80 wells at Oliktok Point and an offshore site. The sites will be connected with an underwater pipeline.

Nikaitchuq is estimated to contain approximately 180 million barrels of oil, and production is expected to peak at about 26,000 barrels per day.

Point Thomson
In April 2009, ExxonMobil Production Co. completed drilling and casing the surface section on the second well at Point Thomson. A natural gas and condensate field located east of Prudhoe Bay on the North Slope, Point Thomson holds an estimated 8 trillion cubic feet of gas, or about 25 percent of the North Slope's proven gas resource, and approximately 200 million barrels of condensate.

"We are making real progress at Point Thomson, and are on schedule to start production in 2014," said Exxon Alaska Production Manager Dale Pittman, in a company press release. As of December 2009, project owners had invested more than $300 million in Point Thomson, 80 percent of which was spent in Alaska.

This past summer, the company drilled its second well to a surface-section depth of 4,875 feet, which is as deep as is permitted during the ice-free season. In December, they resumed drilling, and both wells, PTU-15 and PTU-16, are expected to reach total depth by the end of 2010. The company also succeeded in delivering more than 30,000 tons of fuel, equipment and supplies in 120 barge runs over the summer. Over the past year, ExxonMobil staff and Alaska contractors worked to prepare the rig and pad for drilling, which included a $35 million upgrade of a Nabors 27E drilling rig. When completed, the Point Thomson project will include a gas-cycling plant designed to produce hydrocarbon liquids and re-inject natural gas back into the reservoir and a pipeline tie-in to the Trans Alaska Pipeline System (TAPS) and other ancillary facilities and infrastructure.

The project is expected to process 200 million cubic feet per day of natural gas in order to produce approximately 10,000 barrels per day of liquid condensate TAPS, with capacity for up to 10,000 additional barrels of oil per day. After processing, the natural gas will be recycled into the reservoir, making Point Thomson the highest-pressure gas cycling operation in the world.

Investing in the Future
In addition to light oil and gas, there is the possibility for the development of heavy oil on the North Slope, given the right technology. According to the Alaska Division of Oil and Gas, heavy oil production accounted for about 6.5 percent of North Slope production in 2009; an increase from 5 percent in 2005.

"There are 20 billion barrels of heavy oil in place, but we need to deliver a technology solution to extract the thick oil in commercial quantities from the wellbore, because the economics suffer if flow rates are too low per wellbore," said Mingé.

In 2008, BP began a five-year technology project with a successful heavy oil pilot well. To date, four wells have been drilled and one recently began long-term production. The remaining three wells will be brought on as the heavy oil technology project progresses.

"It's an exciting project and we have a strong belief we will find a technological solution," said Mingé. "However, our current estimates indicate that even with technological success, heavy oil is not economic under the current tax structure at today's oil prices."

While drilling for gas and oil has always been a time- and labor-intensive process, it seems that in 2010, those working on the North Slope may be facing more challenges than usual.