North Slope & Cook Inlet Activity

Alaska’s oil and gas industry is always “active”

In business or financial terms, “activity” does enjoy a spot as a leading indicator of success or failure. Normally measured by the amount of sales and inventory turnover, a successful activity level leads to a business’s overall profitability. In Alaska’s oil and gas industry, oil and gas activity generally focuses on one element of the three branches of defined financial activity.

Many Aspects of Activity

The three branches of activity in accounting vernacular are operating, financing, and investing. In Alaska’s oil and gas production run dating back to the discovery of oil (in quantities measuring more than a billion barrels of oil on Alaska’s North Slope and in the nearby Cook Inlet), oil and gas activity has mainly focused on investment activity.

Indeed, investment activity is very important because an investor will want not only a steady return on investment but a chance for equity growth in the base value of the initial investment. Case in point, the Alaska Department of Labor Research and Analysis Section put the number of oil related jobs in 1980 at 6,000. In 1977 the Prudhoe Bay field was just beginning to flow oil and would not peak in throughput in the Trans Alaska Pipeline System (TAPS) until 1988, when the number of oil field employees increased to more than 9,000. The 1980s was a time of investment for major oil companies on a scale that had the world financial markets also peaking with activity.

By 1991, the then-peak of 10,700 oil employees dropped and would not top 10,000 oil employees again until 2006. The year 2015 saw a record number of 14,000 oil employees. The subsequent (in excess of 20 percent) drop to preliminary 2016 numbers is 11,000. Alaska activity in the oilfields is at present still well over the average for decades prior to 2006. So activity needs to be taken in context.

Activity at BP Alaska is a great example of context. Investment activity, as a percentage, was drastically reduced from 2015 expenditures of $1.1 billion to roughly half that number at $600 million in 2016 dollars. BP Group Chief Executive Bob Dudley in January 2017 stated that total capital expenditures will be under $17 billion for 2017 and 2018 for all their operations, yet Alaska is grabbing a large percentage.

Investment activity aside, operational activity has not slackened. The Greater Prudhoe Bay gross production in 2015 was 281,800 barrels of oil per day and in 2016 measured in at 280,700 barrels per day. This number is well over half of the throughput for TAPS in 2016. In context, overall activity prompted a reduction of 50 personnel for BP Alaska from 2015 numbers of 1,750 to the 2016 numbers of roughly 1,700. The 1,700 direct oil employee jobs support approximately 16,000 industry jobs according to BP; however, the Alaska Oil and Gas Association places the number of industry jobs at 110,000, in total, throughout the state. Given a prorate share of the jobs versus throughput, the activity is important.

Janet Weiss, president of BP Alaska, says, “Our focus at Prudhoe Bay over the next few years would be to improve competitiveness by reducing costs both for operations and for new developments, with a goal of making programs that used to require $80 oil to be economically competitive, economically competitive at $55 per barrel oil.”

On the operating budget side, expenditures are $100 million less than spending in 2015 of $1.2 billion. This is in part due to BP Alaska’s improved efficiency of Greater Prudhoe Bay area operations in response to the low price environment. Examples of efficiency are leveraging activities including well and facility maintenance and rate-adding wellwork that may be done in a less costly manner using non-rig equipment and development drilling. In 2016, BP completed 430 rate-enhancing well jobs; the previous year BP completed 465 rate-enhancing well jobs.

To be fair regarding the Alaska Department of Labor statistics, the activity needs to be buffered as the Alaska oil industry also employees a huge number of nonresident workers. In 2015, more than 36.4 percent of the 18,000 workers did not qualify for a Permanent Fund Dividend. This number has been increasing steadily since 2009 and may be fueled by the fact that nonresidents in the industry earned 10 percent less than resident Alaska oilfield workers.

North Slope

South of Prudhoe Bay, Accumulate Energy Alaska is planning to spud Icewine 2 in the second quarter to fracture and test the tightoil formation the HRZ shale. The well will be drilled from the Franklin Bluffs pad, approximately thirty miles south of Deadhorse, adjacent to the Dalton Highway. The 11,200 foot vertical wellbore will be hydraulically stimulated followed by flow back tests. Further sidetracking, subsequent deepening of the wellbore, or lateral legs would be considered after the evaluation and would likely be carried out in 2018.

Offshore in the Beaufort Sea, Hilcorp Alaska is continuing to progress the Environmental Impact Statement (EIS) for development on an artificial gravel island. The plan is for a new 9.3 acre, man-made Liberty Island, which would take an estimated two years to construct and require about 833,000 cubic yards of gravel to be excavated from an onshore gravel mine. The island will have facilities for drilling, production, operational support, utilities, camp, and a relief-well area, and would use a subsea pipeline to a tie-in with the existing Badami pipeline, which also carries hydrocarbons produced at ExxonMobil’s Point Thomson facilities.

Hilcorp is also planning a new drill pad at Milne Point, on the shore between the Prudhoe Bay and Kuparuk units. The new “Moose” pad is designed to support development of forty-four wells drilled into the Kuparuk and Schrader Bluff formations. The 17-acre pad is estimated to require 236,550 cubic yards of gravel and will eventually be connected by a three mile road and pipeline. If all goes as planned, construction will be completed by September 2018 and allow the start of drilling.

Anadarko Petroleum is a large leaseholder on the North Slope, and the company has a capital budget of $4.5 billion to $4.8 billion with $1.9 billion being spent onshore in the United States. In Alaska, Anadarko works only through other operators, so its activity will be melded with other North Slope producers.

Caelus Energy LLC has no North Slope activity planned for the Smith Bay area after completion of two exploratory wells, Caelus-Tulimaniq #1 and a step out Caelus-Tulimaniq #2. The next step will be to drill another appraisal well in the winter of 2017/2018 and perform a mini-development with hydraulic fracturing and flow testing. The Nuna project, east of the Colville River, has a planned 22 acre pad and two wells; it’s slowed, pending oil price recovery and more certainty about State of Alaska oil tax credits.

ExxonMobil continues to operate the Point Thomson Unit, producing nearly 8,000 barrels of gas condensate per day. This is a significant rise from the initial production rate of 5,000 barrels per day achieved at startup in June of 2016. The current production facility limit is 10,000 barrels of gas condensate. As of January, 708,312 barrels had been produced from the new field. The field’s real energy potential is natural gas, estimated to be 25 percent of the known gas on the North Slope. Combined with ExxonMobil’s 36.4 percent working interest in Prudhoe Bay, ExxonMobil remains committed to make natural gas reserves available to a viable North Slope gas project through bilateral negotiations on mutually agreed terms.

BP is also supportive of the State of Alaska in the Alaska LNG project. AGDC and BP have signed a Cooperation Agreement that will bring together efforts and resources on: assessing a tolling model; preserving regulatory progress; and, identifying financing options for the path forward. Janet Weiss adds, “The gas at Prudhoe Bay and Point Thomson represent for BP the largest resource opportunity to progress in BP’s global portfolio. Exploring a new commercial structure—a utility-type structure that could be further advantaged by State ownership—is very worth-while as the Wood-Mackenzie study issued a few months ago suggested. It will also open up exploration and development for the next forty-plus years.”

Wood-Mackenzie, an independent analytics business, in January of 2017 stated that the global upstream outlook for 2017 is good and this year will see an upturn in activity, reversing the last two years of decline.

Cook Inlet

The Alaska Industrial Development and Export Authority (AIDEA) has been investing in Cook Inlet. Consistent with its mission to assist with economic development, AIDEA provided BlueCrest Energy with a loan of $26,007,155 for the development of the Cosmopolitan oil field in the southern portion of Cook Inlet. These funds complement the $200 million spent thus far by BlueCrest Energy and are only part of the estimated $525 million needed to reach the goal of 8,000 barrels of oil per day.

The Cosmopolitan Unit is located along the shore north of Anchor Point in the Kenai Peninsula. The plan is to drill ten production wells with multi-zone completions and ten injection wells, all from the shore to the oil bearing formation located offshore. The injection wells are for a planned gas lift as the oil found contains very little of its own gas. Injecting gas into the well will cause the density of the liquid to be reduced to the point it may flow to the production facilities.

BlueCrest Energy completed construction of a new extended-reach, high-horsepower drill rig and has begun drilling. The rig recently finished well H-16 adjacent to the Hansen Production Facility, north of Anchor Point. The Hansen Production Facility will employ ten full-time operators, and the mancamp is capable of housing up to seventy-four people. The facility will be used to separate the oil from produced water and gas before shipping the oil to Tesoro’s refinery on the Kenai Peninsula.

Because initial production will not support a pipeline, the produced oil will be trucked using Carlile Transportation, perhaps at a rate of twenty-five loads a day. The processed oil will be stored at the Hansen Production Facility in heated tankage while awaiting pickup.

If continued drilling goes as planned, 180 people will be employed for another five to six years. BlueCrest Energy boasts that 90 percent of their employees are from the local area and there is increased vendor activity from Kenai to Nikiski.

Glacier Oil and Gas also has been active in the Cook Inlet. Glacier Oil and Gas retained holdings of Miller Energy and operates the West McArthur, Redoubt, and North Folk Unit in Cook Inlet. The company completed a well workovers program at West McArthur and Redoubt Units and is planning for future small projects at the North Fork Unit.

It still hopes to drill a new well from a jack up drilling rig, Spartan 151, as early as April. The well, named Sabre #1, is set to be drilled in forty feet of water to a depth of two miles. The target location is west of the Trading Bay Unit, which has produced 107 million barrels of oil and 79 MCF of gas, and north of the West McArthur Unit, which has produced a little under 15 million barrels of oil and a little under 4 MCF of gas. The Bruin Bay fault is a major structure in this area and has tended to be the limit for oil and gas fields in the Cook Inlet.

Hilcorp Alaska is active in the Cook Inlet, and completed an exploratory well named Greystone #1 which is nestled in the Kenai Peninsula’s Deep Creek Unit and the Nikolaevsk Unit between the towns of Homer and Ninilchik. The well is on CIRI land and neither CIRI nor Hilcorp have released any information.

Working in the Ninilchik Unit, which stretches from Clam Gulch to Ninilchik offshore, Hilcorp has plans to expand the Kalsota Pad, roads, and pipeline for the future installation of eight gas development wells. Produced fluids from the gas wells will be separated at the Kalsota Pad and shipped to the Susan Dionne Pad for injection back into the produced water system. The new pipelines are planned to be six inch diameter, flexible steel gas flowlines designed to be buried three feet in the ground with fiber optic communication, electrical, and instrumentation cables.

Hilcorp Alaska has been the operator of the Beluga River gas field for a year since ConocoPhillips sold their one-third interest to Municipal Light and Power (ML&P) and Chugach Electric Association, which own 70 percent and 30 percent, respectively. The prolific gas field still produces 45,000 thousand cubic feet per day, and while majority owner ML&P reports that there is a development plan filed with the State of Alaska, there is no new activity for 2017.

FREELANCE WRITER DARRYL JORDAN LIVES IN ANCHORAGE.