Slope producers lay out scenario with proposed oil changes

Photo/Michael Dinneen/For the Journal

North Slope oil producers have laid out their vision of what’s possible with new oil development if the state Legislature makes changes in the state’s oil production tax. They’ve also highlighted the problems they face under the status quo.

BP Exploration (Alaska) Inc. President John Minge said he believes there is about $5 billion in projects the producers could tackle if lawmakers pass Gov. Sean Parnell’s House Bill 110 or something like it this year. Many of the projects are within the existing producing fields.

Minge also outlined one new project BP is testing this year, in a layer of tight oil-bearing rocks in the Prudhoe Bay field that could add up to 200 million barrels of new oil reserves. However, the project is economically challenged and needs the tax change to make it happen, he said.

Minge spoke Jan. 6 at the Alaska Support Industry Alliance’s Meet Alaska conference in Anchorage.

Mary Ann Kah, ConocoPhillips’ chief economist, told Meet Alaska that her company’s Alaska production is the highest-cost oil in its worldwide portfolio of producing assets.

On average, it costs ConocoPhillips $15.48 to produce a barrel of oil in Alaska compared to $12.32 per barrel in Canada, $10.24 per barrel in the Lower 48 and $10.15 per barrel in the North Sea. The company’s production in the Middle East costs $6.98 per barrel, Kah said.

The figures for operating costs come out of ConocoPhillips’ financial reports and do not include taxes, capital investments or transportation costs.

ConocoPhillips has lower costs than some other producers because it has the benefit of long-established infrastructure.

Kah said Alaska’s challenges include high costs and the probability of only modest-sized oil discoveries, which combined with the high state tax rate effectively puts a damper on investments in new oil.

Citing data from consulting firm Wood Mackenzie, Kah told Meet Alaska that from 2000 through 2009 the average size of new commercially viable new oil discoveries in Alaska was about 80 million barrels. In Venezuela — which has a marginal tax rate comparable to Alaska’s — it was about 380 million barrels, Kah said. In Kazakhstan, another producing country with comparable taxes, the average-size new discovery was substantially higher over the nine-year period.

“Kazakhstan has huge prospectivity. Investors there can afford the heavy tax,” Kah said.

In his talk, Minge laid out BP’s problems with declining production and rising costs. In 2006, BP spent about $1.2 billion in operating the North Slope fields it manages and produced 82 million barrels of oil that year. In 2012 the company will spend $1.6 billion for operations and produce 56 million barrels, he said.

“It is costing us one-third more to produce one-third fewer barrels, and not all operations costs are deductable from the state tax,” Minge said.

The figures cited are for operations only and do not include dollars spent in capital investments.

Ironically, the boom in industry activity outside Alaska has driven up costs for the companies here in terms of specialized materials, supplies and services.

“Engineers can work anywhere. Our costs are being set by the global economy,” Minge said.

Although it’s an encouraging development, the surge of exploration drilling on the Slope this winter, paid for partly by state of Alaska exploration tax credits and direct payments, has also added to the strain on drilling rigs and services, and is helping drive up costs for the existing field operators, he said.

As for the producing companies’ capital costs, a good share of those are for projects in the fields related to maintaining existing production, and not on finding new oil, Minge said.

“Only one in six of our North Slope employees work on projects related to developing more oil. The rests are in operations, maintenance and repair,” he said.

Despite those problems, there are bright prospects for the North Slope if the economic environment improves, Minge said.

The project to test production from the tight sandstone rock of the Sag River formation is an example of one possibility. BP has approved a five-well program to test production from the Sag River, a shallow layer of tight rock overlying the western part of the large producing Prudhoe Bay and Milne Point fields, Minge said.

If the results are positive, it could result in a 200-well program and 200 million barrels of new oil reserves, he said.

“We need to crack the technology problems first, but if there are also improvements in fiscal terms,” the Sag River could become profitable to develop, Minge said.

In a nearby project, BP also is testing methods of producing heavy oil from the Ugnu, a large potential resource with an estimated 22 billion barrels of oil in place. The company had encouraging results with the first test well, which produced at a sustained rate of 650 barrels per day for 117 days. Four more test wells are planned.

“What has encouraged us is that the (first) well is producing at three times the rate of heavy oil wells in Canada. The bad news is that costs are 10 times the cost of wells in Canada, so we have some work to do on cost reduction,” Minge said.

The first test production well is off-line now for technical work but is expected to be restarted soon.

Minge said new production techniques developed for heavy oil also can be applied to large viscous oil resources known on the Slope, some of which is being produced now. There are about 11 billion barrels of in-place viscous oil resources in formations like West Sak and Schrader Bluff in the Kuparuk and Milne Point fields.

“If we can get just 10 percent of this it would be wonderful,” Minge said.

The meeting in Anchorage Jan. 5 between the CEOs of the major North Slope producers and Gov. Sean Parnell that included Robert Dudley, BP’s chairman, was significant, Minge told Meet Alaska.

“It would not have happened if Alaska wasn’t very important to all three companies,” he said.

While a major focus of that meeting was on natural gas, “we must remember that gas is several years out. For the next 10 years what’s very important is sustaining our oil production,” Minge said.

But if the three companies and the state can find alignment, many things are possible. “Out of alignment comes investment,” he said.

11/07/2016 - 1:34pm