Tuesday, November 20, 2012

1 step forward, 2 back; Conoco goes ahead with CD-5; BP halts heavy oil trials, won’t increase viscous

Kristen Nelson
Petroleum News

BP Exploration (Alaska) and ConocoPhillips Alaska, the North Slope’s major operators, delivered similar messages to the Resource Development Council’s annual conference Nov. 14 in Anchorage: The state’s oil and gas tax system needs to be changed.

It’s not a new message, but Nick Olds, ConocoPhillips Alaska’s new vice president, North Slope operations and development, said a better business climate in Alaska is necessary to draw the investment needed for continued development of legacy fields, including high-risk satellite opportunities.

John Minge, president of BP Exploration (Alaska), called ACES — Alaska’s Clear and Equitable Share — a good short-term fiscal policy for the state, but said because it’s short-term, BP will have to “adjust our plans and our strategy to shorter term, to fit within the ACES policies.”

Minge said if the state wants to see a long-term sustainable oil industry, and a gas pipeline, it needs to consider a policy to encourage long-term investment.

CD-5 going ahead

Olds said ConocoPhillips will be going ahead with CD-5, and will start construction in 2013.

CD-5 will be the first development in the National Petroleum Reserve-Alaska, and crude oil from that drill site will tie back into the Alpine production facilities on state lands. Development was held up for years in disputes over how oil, and personnel, would cross the Nigliq Channel of the Colville River, which lies between Alpine and CD-5. The Corps of Engineers approved a bridge proposal earlier this year.

Olds cautioned that ConocoPhillips moved CD-5 forward “before the current tax regime,” spending a lot of time and money to advance technology for the project, but before ACES was put in place.

Olds didn’t provide details on CD-5 development plans, but ConocoPhillips Alaska spokeswoman Natalie Lowman told Petroleum News in an email that plans remain as the company described them a year ago, starting with completion of engineering design work, ordering of materials and equipment and beginning of fabrication next year and construction “over two years to coincide with the ice road access to Alpine.” Lowman said first production is expected in late 2015.

Olds said the company sees other opportunities in NPR-A, but they are farther from infrastructure, with smaller accumulations and higher risk.

ConocoPhillips has two federal units — Greater Moose’s Tooth and Bear Tooth — farther west in NPR-A.

Focus on light oil

Minge said that in adjusting its plans to fit with the state’s policies, BP is going to stop, within the next few months, its heavy oil pilot investments and stop further investments in viscous oil.

He said the company’s plans “have really been mismatched against the state policy” and “probably a little too focused on some of the more challenged resources and we’ve got to take some steps to invest into the easier light oil.”

He also said BP will focus on making dollars go further.

Efficiency and technology will be a focus, and Minge said the company will “take some significant steps to make our business more efficient.”

That includes increasing investment “into the easiest oil, the light oil” in order to “put off the decline as much as we possibly can to grow the cash flow.”

He said that includes de-bottlenecking facilities and “looking at taking infrastructure out of service so that we don’t have to pay to maintain that.”

Money will be moved, Minge said: “Our capital’s about the same — but we’re going to move it into short-term, easier oil.”

It’s short-term

What the new plan does, Minge said, is takes “more oil out of the tank faster and you’re not actually progressing resources for the very long term.”

If the State of Alaska has a short-term, 10-to-15-year mindset, “ACES is perfect.” In the short term, it’s the right approach, he said.

“But if you want to take a long-term view and have a sustainable oil business and have a real shot at gas, change is needed.”

Minge said he finds real disagreement among Alaskans he talks to on whether oil taxes should be changed, but no disagreement on the goals: “Everyone wants a sustainable oil business; everyone wants a major gas project to go forward in the state; everyone wants affordable energy for in-state needs — and it couldn’t be any more dire than it is in the Interior of Alaska; and everyone wants jobs.”

Minge called ACES a “short-term going-out-of-business policy” and said it has delivered predictable short-term results: “The State of Alaska is doing extremely well, taking vast amounts of the upside in oil prices.”

“It’s also clear that the long-term investment is down, especially capital going into production enhancement activities,” Minge said, with production decline continuing at 6 to 8 percent a year.

“And ACES is a major impediment to a major gas project,” Minge said.

He said a change in tax policy would make Alaska more competitive and draw more investment, slowing production decline and creating “a healthy long-term oil business with a long-term future to generate revenue” to the state and the producers, while creating jobs and allowing “for legacy infrastructure to be maintained for the very long term,” increasing odds of a major gas project going forward.

“So what do Alaskans get for the X-billion-dollars-a-year giveaway? They get a future,” Minge said.

One big argument against changes in taxes has been the lack of guarantees, he said.

The state’s tax and royalty system is similar to those in many places BP works, and “I’m not aware of any tax and royalty regime in the world where there is this debate: What will you promise me to get a reduction?”

Elsewhere, he said, economic theory is used.

“The sovereign government determines the policy; investors respond to this policy.”

If taxes are changed in Alaska and there is no investment increase, “the taxes can always be changed back,” he said.

ACES and the gas line

Minge argued that a tax change is needed to move the gas project forward.

Physically, the oil and gas are in the same reservoir, come out of the same wells, go into the same flowlines and pipelines and are processed in the same infrastructure, he said.

Then there is the length of a gas project, Minge said, with the timeline submitted to the governor showing a final investment decision by 2016, five or six years of construction and a project life of about 40 years.

Combined, that’s out to 2062-63, he said.

“That means at that time Prudhoe Bay infrastructure is 90 years old and it needs to look a whole lot better than most people do at 90 years old if it’s going to enable this gas project to go forward.”

Then there is the huge investment, $45-$65 billion, “slightly less than the total capital budgets of ExxonMobil, BP and ConocoPhillips combined in 2012,” he said.

As the companies look at cash flows from the project they ask if they could write off the capital investment against oil taxes.

“And the fact of the matter is we know there’s no way — the State of Alaska can’t afford it; the State of Alaska would go broke,” Minge said.

Which means the producers would have to invest the money upfront, “10 years of investment before we get one dime of revenue.”

And there’s something else about that $45-$65 billion, Minge said. “We assume that the project economics start at the fence line of Prudhoe Bay and Point Thomson,” so no gas project investment is required at Prudhoe Bay.

“But we also say the operating cost on the slope is essentially zero — we look at the operating cost of the project from the fence line down,” he said.

Prudhoe Bay facilities were designed for 30 to 35 years, and if “it needs to be 90 years old, we need to be investing today into that infrastructure so that it will last out to 2065,” Minge said. “The tax policy of ACES does not support that.”

Opportunities for Conoco

ConocoPhillips’ Olds discussed some of the opportunities that the company sees in Alaska.

At Kuparuk, he said, the company is looking at designed wells.

Over the last few months the company has implemented “what we call an octa-lateral, four laterals going out one way, four going out the other way.” That’s complex, he said, and requires a technology investment.

And at Kuparuk “the targets are smaller, they’re higher risk and so we need to continue to use innovation and technology to go after them,” which also requires a good business climate, Olds said.

There are also opportunities south of Kuparuk, he said.

“They are some small satellite developments that are years in front of us,” but require the company to ask if the size is there, if the risk is acceptable and if the business climate is there to support the work.

Viscous oil, being produced at West Sak, needs technology for more development.

And heavy oil, with a billion barrels at Kuparuk, will require “significant technology to advance it. Currently there’s not a commercial application to unlock that potential,” he said.

“We’ve got opportunities, but it needs the right business climate to continue to advance these,” Olds said.

While there may be big Chukchi discoveries in the future, they would be at least a decade from production, he said, and legacy fields are the immediate source of production, with 4 billion barrels of potential recoverable over that decade.

But that production will require “substantial investment” in new wells and infrastructure tie-ins, “and that’s on top of the renewed infrastructure investment that we’re doing.”

It requires investment, he said, and while ConocoPhillips increased its investments in the Lower 48 from $1.6 billion in 2010 to $4.8 billion in 2012, “in Alaska, we’ve remained flat at $900 million.”

There is opportunity to invest in Alaska, he said, “we just need the business climate to do so.”

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