Saturday, February 7, 2015

ConocoPhillips delays GMT-1 amid BLM talks

Tim Bradner
Alaska Journal of Commerce

ConocoPhillips has delayed a decision to develop its Greater Moose’s Tooth-1, project in the National Petroleum Reserve-Alaska as negotiations continue over permitting issues with the U.S. Department of the Interior.

“We have no specific timeframe for revisiting the Final Investment Decision, but having alignment with BLM is important to that,” ConocoPhillips spokeswoman Amy Jennings Burnett said.

The delay in securing permits is one of several factors in the decision along with current oil prices, she said. However, sources in congressional offices say they have been informed that BLM’s insistence on a set of costly mitigation measures has also become a factor.

Greater Moose’s Tooth-1, or GMT-1, would produce 30,000 barrels per day at peak and would have started production in late 2017 had the company started construction this year. That schedule may now have slipped.

In a statement, ConocoPhillips’ Alaska President Trond-Erik Johansen said, “We are deferring the final investment decision for GMT-1. The project is challenged by permitting delays and requirements, as well as the current oil price environment.”

Seismic work planned for the GMT-1 area this winter will continue, he said.

Meanwhile, ConocoPhillips is proceeding on other planned projects, including an expansion of viscous oil production in the Kuparuk River field, Johansen said. The $450 million North East West Sak, or NEWS, project is expected to add 9,000 barrels per day of new production in 2016.

In October, the company announced that it is proceeding with its new Drill Site 2S in the Kuparuk field, a $600 million project that will have peak production at 8,000 barrels per day with first production beginning in late 2015.

Also, the CD-5 project now under construction is also on schedule and will also start up late in 2015, with peak oil production of 16,000 barrels per day.

On GMT-1, however, ConocoPhillips has been frustrated by delays in securing final permits from the U.S. Bureau of Land Management, the Interior Department agency that administers the 23-million-acre NPR-A.

BLM issued a final supplemental environmental impact statement, or SEIS, on Oct. 24 but has yet to issue a Record of Decision. The ROD typically leads to federal permits being issued, and the delay will likely lose the 2015 winter construction season for ConocoPhillips, which could set the schedule back a year.

Congressional sources familiar with the project say the main problem the company now faces is BLM’s request on a set of mitigation measures that will add an estimated $40 million to GMT-1’s cost.

“ConocoPhillips has already built mitigation for wetlands impacts into its project plan using the customary three-for-one formula (three acres of restored wetlands for one acre affected by gravel placement) but BLM is insisting on further steps that would add $40 million in costs,” said Robert Dillon, spokesman for the Senate Energy and Natural Resources Committee, which is chaired by Alaska U.S. Sen. Lisa Murkowski.

Dillon said ConocoPhillips had briefed Murkowski on the negotiations with BLM.

He does not know the details of the additional mitigation or other stipulations BLM is seeking but at one point BLM sought ConocoPhillips’ agreement that the company would fund cleanup of old exploration wells drilled decades ago in the reserve by the federal agencies. Those were abandoned in an unsafe condition and Alaskans officials have been pressing BLM for years on funding a cleanup the wells, some of which are leaking.

There is also a disagreement between the BLM and the U.S. Army Corps of Engineers over the route of an eight-mile road to GMT-1 from CD-5, a drill site now under construction that is on the boundary with state lands to the east of the federal petroleum reserve.

Dillon said BLM and ConocoPhillips expect to be able to resolve differences over the road, but that there is an impasse over the mitigation.

“Our concern is that this will kill the project,” Dillon said. “It sets a precedent for future activity in the petroleum reserve. No one will buy NPR-A leases if they see they will be bled to death by project stipulations.”

Neither ConocoPhillips or BLM would comment on the status of the mitigation negotiations.

Alaska officials are watching the GMT-1 project closely because the additional production in 2018 and beyond will be important in offsetting declines from producing fields in the central North Slope area.

Also, GMT-1 and its access road will lead to further development in the reserve. ConocoPhillips is already working on plans for a GMT-2 project further west but that would be delayed if GMT-1 is not constructed on schedule.

Meanwhile, the GMT-1 access road disagreement involves a route favored by ConocoPhillips, labeled as “Alternative A” in the SEIS document, and a slightly-longer “Alternative B” that was favored by BLM.

The U.S. Army Corps of Engineers favors Alternative A because it is shorter by about one mile, at 7.7 miles, than Alternative B, and would have a smaller gravel “footprint” of 72.7 acres compared with 80.4 acres covered by gravel in the Alternative B routing.

BLM’s decision favoring the longer road route stems partly from support for that from the Native Village of Nuiqsut, the tribal community for the nearby Nuiqsut village, because the route avoids an important subsistence use area in the Fish Creek area.

Conservation groups have also supported the tribal group in supporting Alternative B.

“The Fish Creek area was set aside for protection in 1998 to protect acquatic habitat, which is considered of international significance, and that was reaffirmed by the BLM in 2013 with the adoption of an Integrated Activity Plan for the national petroleum reserve,” said Nicole Whittington-Evans, Alaska director for the Wilderness Society.

“If BLM were to favor Alternative A it would constitute a violation of the agency’s own management plan,” she said.

Members of the Nuiqsut tribe were not available for comment but Whittington-Evans said she has understood that many of the concerns rise from the high elevation of some of the Alpine field roads built by ConocoPhillips and the concern that the road to GMT-1 would be of similar height, constituting a barrier for wildlife movements.

“The SEIS says that the road will be a minimum of five feet in height but does not state a maximum,” she said.

The Native community on the North Slope is divided on the issue, however.

Kuukpik Corp., the village corporation for Nuiqsut; Arctic Slope Regional Corp. and the North Slope Borough have joined ConocoPhillips in support of Alternative A.

In an Oct. 30 letter to the BLM, North Slope Borough Mayor Charlotte Brower said, “We understand that BLM’s concerns (over the road routes) are based on discussions with the Native Village of Nuiqsut about not permitting the road in the Fish Creek buffer, as a way to mitigate the impacts to subsistence.”

However, “Because of the reduced (gravel) footprint, we continue to support Alterative A,” she said.

Overall, the borough supports GMT-1 development because its expected 30,000 barrels per day of development, “will provide significant economic benefits to Alaska Natives on the North Slope and throughout the state through direct payment of royalties and revenue-sharing among the Native regional corporations,” Brower and Rex Rock Sr., president of Arctic Slope Regional Corp., wrote in a separate letter.

“New resource development in Alaska will help offset the current North Slope production decline and help meet the energy demands in the state and nation,” Brower and Rock wrote.

NPR-A was originally created in 1923 as Naval Petroleum Reserve No. 4 by President Warren Harding with the intention of exploring to find oil reserves for the U.S. Navy. The Navy itself funded exploration in the 1950s and found small oil and gas deposits but none of a size sufficient to develop.

In 1975 the reserve was transferred to BLM and a second round of federally-funded exploration was initiated, led by the U.S. Geological Survey. This effort also failed to find significant oil and gas.

In the 1980s President Ronald Reagan opened the reserve to leasing by private industry. Over three decades, industry exploration, led by ConocoPhillips and its partner, finally found commercial deposits in the northeast part of the reserve, which has become the company’s GMT-1 project.

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