New Slope Exploration Renews Oil Tax Debate

- New Slope Exploration Renews Oil Tax Debate

Tuesday, August 16, 2011
Knight Ridder/Tribune Business News
by Sean Cockerham, Anchorage Daily News, Alaska

Gov. Sean Parnell is getting ready to renew his push to roll back Alaska's oil tax while supporters of the tax are pointing to news of increased exploration and jobs on the North Slope. The latest report getting attention from lawmakers came from Petroleum News. It reported in an Aug. 14 article that "operators on the North Slope and nearshore Beaufort Sea are preparing for what promises to be one of the busiest exploration seasons since 1969, when 33 exploration wells were drilled following the discovery of the Prudhoe Bay oil field."

Legislators opposed to Parnell's attempt to lower oil taxes forwarded the article by email with comments like "amazing news" and "great article." But advocates of lowering the tax say exploration does not necessarily mean production, and that the tax dissuades companies from investing in the development of Alaska fields instead of elsewhere in the world.

Parnell spokeswoman Sharon Leighow said Monday the governor will continue to push for lower oil taxes when the next session of the Alaska Legislature begins in Juneau in January.

Fairbanks Democratic Sen. Joe Paskvan sent a statement to the press soon after the Petroleum News article first appeared. Paskvan is among the skeptics in the state Senate who blocked Parnell's tax cut.

"It appears that Alaska's tax credits under its production tax system are working to promote capital expenditures, including new exploration wells. Good news for the industry and the state, which relies upon the industry for revenues to its treasury. Exploration should mean increased oil production and increased throughput down the pipeline," he said.

Paskvan went on to say he didn't want to be overly optimistic and wanted to learn more from the companies, but that "this is strong evidence that the independents in the oil industry are both looking at Alaska as a place to do business and that they are actually coming to Alaska to develop our abundant oil resources."

The Petroleum News reported that, if all goes as planned, as many as 28 exploration wells could be drilled between October 2011 and mid-2012. The trade industry publication cited exploration by Brooks Range Petroleum Corp., UltraStar Exploration, Repsol, Linc Energy and Great Bear Petroleum.

Leighow, the Parnell spokeswoman, on Monday sent a statement from the governor saying that such exploration is "great news" but that Alaska also needs to get a big financial investment in the currently producing fields just to maintain the existing level of flow in the trans-Alaska oil pipeline.

The flow of oil through the pipeline has been declining since 1988 and is now at about 600,000 barrels per day. Parnell has said he would like to see production up to a million barrels a day within a decade, which he figured would require a $4 billion annual investment from the companies instead of $2.5 billion now.

"If we don't see renewed investment in the legacy fields to keep production on a slow decline, any new discoveries are going to be entering a pipeline with substantially reduced throughput and, therefore, higher tariffs. We need more than new exploration to keep the pipeline full (enough) and functioning well," Parnell said.

Parnell's bill, which the Department of Revenue estimated could result in more than $8 billion in lost production tax revenue to the state over the next five years, passed the Alaska House of Representatives this spring. But state senators resisted and the bill didn't make it very far in the Senate.

Parnell's plan still has little support in the Senate. Some senators cite Alaska Department of Labor employment figures that show oil industry employment up around record levels.

The Senate Finance Committee has paid for a review of what is happening with oil employment in Alaska, including data showing nearly half the North Slope jobs go to nonresidents. The review, by the McDowell Group of Juneau, is supposed to be turned in to the Legislature in December.

Advocates for lowering Alaska's tax attribute the increased jobs to maintenance, rather than production, and say Alaska is missing out on the kind of drilling boom enjoyed by North Dakota.

Anchorage Sen. Lesil McGuire said Monday she's seeking an effective way to get some certainty that the companies would reinvest any Alaska tax reductions in the state.

McGuire said she's heard from oil companies that Alaska has a good tax structure when it comes to exploration, but that at high oil prices the state takes too big a bite from production in comparison to other places they could develop.

Senate President Gary Stevens said he's interested to see if there might be "compromise between what the governor might be thinking and what we're thinking" in the Senate.

Copyright (c) 2011, Anchorage Daily News, Alaska

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Anadarko Resumes Exploration, Drilling in North Slope Foothills

- Anadarko Resumes Exploration, Drilling in North Slope Foothills

Monday, August 01, 2011
Alaska Journal of Commerce
by Tim Bradner

Anadarko Petroleum Corp. will test its Chandler No. 1 gas discovery made in 2009 in the foothills region of the southern North Slope, the company said. The company will move equipment to the site for testing later this year when cold weather allows the construction of a snow road, Anadarko spokesman Mark Hanley said.

Anadarko drilled the Chandler well over two winter seasons in 2008 and 2009, but did not conduct a production test, Hanley said. A production test was conducted, however, on another gas exploration well Anadarko drilled at Gubik, about 10 miles north of the Chandler well. Results of that test have not been disclosed, Hanley said.

Gas was first discovered at Gubik in exploration in the 1960s but the deposit was considered too small to be commercial. Anadarko and its partners acquired leases on the prospect and drilled two tests to delineate the old discovery including the one where production testing was done.

Anadarko has been active in exploring in the foothills region for several years but took a two-year hiatus after PetroCanada, who was a partner with Anadarko in the foothills exploration, merged with Suncor Energy in 2009. Suncor remained in the venture along with BG Energy and Anadarko, and has now approved its share of expenses related to the planned testing.

Encana and BP were previous partners with Anadarko in the foothills, but have pulled out.

Geologists consider the foothills of the southern North Slope to be gas-prone, but there is also some oil potential.

"There is gas in this region and almost every well that is drilled finds gas. The question is whether enough can be found to make a gas field," Hanley said.

Land ownership in the region is split between the state of Alaska and Arctic Slope Regional Corp., a private development corporation owned by Inupiat people of the region.

Hanley said Anadarko will build a snow road about 75 miles to the Chandler site from the Dalton Highway, a year-around road that parallels the Trans-Alaska Pipeline System. Testing will be done without a drill rig, he said.

Discussions are also underway with Linc Energy, an Australian-based independent, about coordinating winter exploration logistics with that company's plan to do test drilling at Umiat, a small oil field within the National Petroleum Reserve-Alaska about 13 miles west of the Chandler discovery.

Linc Energy has said it will be moving a drill rig to Umiat later this year for its drilling but had initially planned to move the rig by air. Umiat has an existing all-weather airstrip.


Copyright (c) 2011, Alaska Journal of Commerce, Anchorage

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Denali to Close-Out Ops at Alaska North Slope Project

- Denali to Close-Out Ops at Alaska North Slope Project

Tuesday, May 17, 2011
Denali - The Alaska Gas Pipeline LLC

The Alaska Gas Pipeline announced that its open season efforts have not resulted in the customer commitments necessary to continue work on its Alaska North Slope gas pipeline project, which has an overall estimated capital cost of $35 billion (2009 dollars). Denali will withdraw its Federal Energy Regulatory Commission pre-file application and, over the next few months, close out its operations.

"Denali is ending its efforts because of a lack of customer support," said Bud Fackrell, Denali President. "Denali is a market-driven company. As such, we cannot spend the billions of dollars necessary to advance the project unless we have binding agreements with shippers. Although we have been in discussions with potential shippers for nearly a year and half, we have been unable to secure the financial commitments necessary to advance the project."

Work to date has been substantial. Denali has conducted extensive stakeholder consultations, set up multiple data rooms with detailed information, submitted comprehensive public filings, and provided access to Denali's experts to help potential customers evaluate the project. Denali has spent over $165 million and invested more than 760,000 man-hours in its work effort.

Since Denali began its efforts in 2008, the North American gas market has changed significantly, primarily as a result of the development of shale gas resources. This has created a very difficult environment in which to secure financial commitments from potential customers.

"Although we are disappointed that Denali was not able to secure customer support, we are proud of our achievements," said Fackrell. "In particular, I want to thank the hundreds of Alaskan and Canadian companies and individuals who have worked on the project as well as the regulatory agencies, government officials, and the many Native Alaskan and Canadian Aboriginal groups who have supported our work effort over the last 3 years. Denali's work has advanced the project further than at any point in the past and has provided potential shippers an opportunity to evaluate the competitiveness of North Slope natural gas in the North American marketplace."

Denali - The Alaska Gas Pipeline is owned by subsidiaries of BP and ConocoPhillips.

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BP Kicks Off Ugnu Test on North Slope

BP Kicks Off Ugnu Test on North Slope

Monday, May 09, 2011
Alaska Journal of Commerce
by Tim Bradner

BP has started up the first of four North Slope wells in a $100 million project to test heavy oil production technologies in the Ugnu formation.

The Ugnu is a large accumulation of heavy oil, with about 23 billion barrels of oil-in-place estimated, that overlies existing conventional oil fields on the North Slope. Ugnu oil was produced in am experimental test well drilled by BP two years ago, BP spokesman Steve Rinehart said.

The oil is thick and flows with difficulty. It measured 12 degrees API in the test well done by BP previously, Rinehart said.

API is an American Petroleum Institute index for oil quality.

Heavy oil from Ugnu is seen by BP and others as one of three unconventional sources of oil production that could supplement declining conventional oil production on the North Slope.

The others are production of viscous oil, also a lower quality oil that is about 19 degrees API and which lies in deeper formations than the shallow Ugnu accumulation. Viscous oil is being produced now.

A third potential type of unconventional oil that could be produced is shale oil production from the large layers of shale on the North Slope that are the source rocks for the conventional oil fields now producing. Independent oil and gas company Great Bear Petroleum will drill a well in 2012 to test whether shale can be produced from North Slope shale rock.

The major challenge in producing oil from Ugnu is the thickness of the oil and its temperature, which is about 70 degrees Fahrenheit in the shallow formation. The oil lies just below the permafrost that under the North Slope -- the wells will produce from depths of about 3,800 feet to 4,400 feet -- and the oil, thick and cool, will have be made to flow upward through the 2,000 feet of frozen permafrost to the surface.

Rinehart said BP will test two production procedures in its project. One is a technique called cold heavy oil production with sand, or CHOPS, that is now being used in Alberta to produce from oil sands. A second method involves producing the oil from horizontal production wells drilled laterally through the oil-bearing rock, a technique now common on the North Slope.

The first well, now producing about 350 barrels per day, is a horizontal well that was drilled 3,800 feet vertically and 3,500 horizontally, with 1,500 feet "perforated" for production, Rinehart said.

The second well is planned to begin production in May, he said. It will be a CHOPS well, Rinehart said, where a progressive cavity pump, an auger device, is installed in the well to create enough pressure to draw sand out of the formation to create fissures allowing the heavy oil to flow.

A progressive cavity pump also is installed in the horizontal well now producing to aid production, he said.

One of the problems in producing heavy oil, and also the somewhat higher-quality viscous oil, is sand that is produced up the well along with the crude oil. As oil is withdrawn from the weak rock that holds the heavy and viscous oil, sand is broken loose and flows with the oil into the well, where it can cause damage to the wells and the surface facilities that process the oil.

Companies producing viscous oil, including BP, have found ways to allow the sand to flow without causing damage, and to separate it from the oil at the surface.

In the heavy oil project a specially built processing facility separates and stores the sand until it can be trucked to an underground disposal well to inject the sand back underground.

Rinehart said the heavy oil also must be heated before it is pumped on by pipeline to Pump Station 1 of the Trans-Alaska Pipeline System, where it is mixed with other, conventional crude oil for shipment south.

"Our goal here is data collection, but we are also processing and selling the oil we produce," Rinehart said. The test production project is on S Pad in the Milne Point field.

"The project is going well so far. There is a lot of oil in place but there are a lot of production challenges. We need to ensure we can produce it on a sustainable basis. Once we understand the engineering and physics, we can have a conversation about the economics," Rinehart said.

BP's plan is for the test production program to be run for three to five years, Rinehart said. By then enough data will be in-hand to make a judgment on possible commercial production.

Copyright (c) 2011, Alaska Journal of Commerce, Anchorage. Distributed by McClatchy-Tribune Information Services.

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BP Alaska to Pay $25M for North Slope Spill

BP Alaska to Pay $25M for North Slope Spill

Tuesday, May 03, 2011
U.S. Environmental Protection Agency

The U.S. Environmental Protection Agency (EPA), the U.S. Department of Justice and the U.S. Department of Transportation's Pipeline and Hazardous Materials Safety Administration (PHMSA) on Tuesday announced that BP Exploration Alaska, Inc. will pay $25 million in civil penalties and implement a system-wide pipeline integrity management program for spilling more than 5,000 barrels of crude oil from the company's pipelines on the North Slope of Alaska. The penalty is the largest per-barrel penalty to date for an oil spill.

"Today's settlement with BP Alaska imposes a tough penalty and requires the company to take action to prevent future pipeline oil spills on the Alaska North Slope," said Cynthia Giles, assistant administrator for EPA's Office of Enforcement and Compliance Assurance. "The Clean Water Act gives the U.S. authority to assess higher penalties when oil spills are the result of gross negligence, and this case sends a message that we intend to use that authority and to insist that BP Alaska and other companies act responsibly to prevent pipeline oil spills."

"This penalty should serve as a wake-up call to all pipeline operators that they will be held accountable for the safety of their operations and their compliance with the Clean Water Act, the Clean Air Act and the pipeline safety laws," said Ignacia S. Moreno, Assistant Attorney General for the Environment and Natural Resources Division of the Department of Justice. "Companies like BP Alaska must understand that they can no longer afford to ignore, neglect or postpone the proper monitoring and maintenance of their pipelines. This agreement will help prevent future environmental disasters and protect the fragile ecosystem of Alaska's North Slope."

"This penalty is a stern reminder to pipeline operators to follow orders issued by PHMSA or risk a federal civil lawsuit and steep fines," said PHMSA Administrator Cynthia L. Quarterman. "Also, it is a warning that operators must know, test and maintain their pipelines or risk harming people and the environment and having to spend, as in this instance, hundreds of millions of dollars replacing those pipelines."

In March 2006, BP Alaska spilled approximately 5,054 barrels of crude oil on the North Slope in Alaska. A second spill occurred in August 2006 with approximately 24 barrels of crude oil spilled. Investigators from EPA and PHMSA determined that the spills were a result of BP Alaska's failure to properly inspect and maintain the pipeline to prevent corrosion. PHMSA issued a Corrective Action Order to BP Alaska that addressed the pipeline's risks and ordered pipeline repair or replacement. When BP Alaska did not fully comply with the terms of the corrective action, PHMSA referred the case to the Department of Justice. Today's settlement also addresses Clean Air Act violations arising out of BP Alaska's improper asbestos removal along the pipeline in the aftermath of the spill.

Tuesday's settlement requires BP Alaska to develop a system-wide program to manage pipeline integrity for the company's 1,600 miles of pipeline on the North Slope based on PHMSA's integrity management program. The program will address corrosion and other threats to these oil pipelines and require regular inspections and adherence to a risk-based assessment system. The program will cost an estimated $60 million over three years and is in addition to the approximately $200 million BP Alaska has already spent replacing the lines that leaked on the North Slope.

Of the $25 million penalty, $20.05 million will be deposited in the Oil Spill Liability Trust Fund established under the Clean Water Act. The remainder, $4.95 million, will be paid to the U.S. Treasury. The funds paid to the Oil Spill Liability Trust Fund will be used to finance federal response activities and provide compensation for damages sustained from future discharges or threatened discharges of oil into water or adjoining shorelines. Oil spills are known to cause both immediate and long-term harm to human health and ecosystems, including the suffocation of wildlife and the contamination of nesting habitats.

In 2007, BP Alaska pled guilty to one misdemeanor violation of the Clean Water Act for the March 2006 spill and was sentenced to three years probation, ordered to pay a $20 million criminal penalty, including a $12 million fine, $4 million to the National Fish and Wildlife Foundation to support research and activities on the North Slope and $4 million in restitution to the state of Alaska.

The consent decree is subject to a 30-day public comment period and final court approval.

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ConocoPhillips Commits to $2B Slope Project If State Tax Change Is Made

ConocoPhillips Commits to $2B Slope Project If State Tax Change Is Made

Monday, April 18, 2011

Alaska Journal of Commerce

by Tim Bradner

ConocoPhillips CEO James Mulva said his company will increase its Alaska drilling and will work toward development of a $1.5 billion to $2 billion partial gas processing plant, and a new 50-well drill pad, in the west end of the Prudhoe field.

That's if the state of Alaska takes steps to improve the fiscal environment.

Mulva spoke to a gathering of Make Alaska Competitive, a group formed to push for modifications to the state's production tax that are proposed by Gov. Sean Parnell.

Parnell's bill, House Bill 110, passed the state House of Representatives April 1 but was bogged down in the state Senate with days left before the Legislature's scheduled April 17 adjournment.

Mulva's statements were intended to counter criticisms by state senators, including Senate President Gary Stevens, that there is no commitment by industry to invest if the state does lower the tax and forego revenues.

The west-end Prudhoe field project needs approvals of other field owners BP and ExxonMobil, but Claire Fitzpatrick, BP's Alaska chief financial officer, said in Juneau recently that the west-end project was the type of development that could occur quickly if changes in taxes were made.

The project, aimed at developing viscous oil resources in that part of the Prudhoe field, had been planned but was put on hold when the Legislature increased the state production tax in 2007.

Mulva said ConocoPhillips would also increase its work on the West Sak viscous oil development in the Kuparuk River field and pursue small satellite accumulations known to exist around the Alpine field if the tax changes are made. ConocoPhillips is the operator of those fields.

"Alaska's business environment has deteriorated over the past several years. We face restricted access, increased litigation and the highest tax rates," of any producing region outside OPEC, Mulva said. "Meaningful improvements in the business environment are needed this year to affect investment decisions next year. We need new investments. Past investments cannot sustain us."

Mulva cited continued production decline of 6 percent yearly and potential operating problems with the Trans-Alaska Pipeline System due to the low flow of crude oil moving through the system.

TAPS is operating at about one-third of its capacity, he said.

In opening remarks at the meeting Northrim Bank chairman Marc Langland warned against an us vs. them attitude that has developed between the state and the petroleum industry, it's major source of revenue."

"Our state and our economy need a new vision based on what we can accomplish together, not how we can tear each other apart," Langland said. "We need a vision based on cultivating partnerships, not building adversaries. We've done this before. The road map already exists. All we need to do is ask directions."

Make Alaska Competitive was formed earlier this year by business and labor leaders and former political leaders including former Gov. Tony Knowles, a Democrat, and former House Speaker Gail Phillips, a Republican.