Belts tighten on Alaska's North Slope
Belts are tightening on Alaska’s North Slope. After several years of hectic activity, the plunge in oil prices is sending a chill through the state’s oil patch.
BP Exploration (Alaska) Inc. president Doug Suttles said his company will suspend work on a $120 million gas processing plant planned for the western part of the Prudhoe Bay oil field and will reduce its drilling by about 10 percent next year.
ConocoPhillips’ Alaska president Jim Bowles warned that “things will get tougher next year” as oil producers struggle with high costs and high state taxes but sharply lower oil prices.
Pioneer Natural Resources Corp. said it would delay a delineation well planned for its Cosmopolitan offshore oil project in Cook Inlet from 2009 until 2010, which effectively delays plans to put the field into production, said Pioneer’s Alaska manager, Ken Sheffield. Cosmopolitan is three miles offshore from Anchor Point on the Kenai Peninsula.
Suttles, Bowles and Sheffield addressed the Resource Development Council’s annual conference in Anchorage, Nov. 17 and 18 along with other industry officials.
In addition to the project deferrals, however, people at the RDC conference were worried about the state of Alaska’s effort to stop ExxonMobil’s drilling planned this winter at Point Thomson, east of Prudhoe Bay. ExxonMobil plans to begin drilling in February in the first stage of a $1.3 million condensate production and gas cycling plan, but the state Department of Natural Resources blocked a permit giving permission for the company to build an ice road to move the drill rig 60 miles from Prudhoe Bay to Point Thomson.
Though some projects are delayed, other work is proceeding, and the lights won’t be turned out at Prudhoe Bay anytime soon.
Suttles told the conference his company is proceeding with its plan to develop the $1.2 billion Liberty offshore field, with site preparation work starting this winter. BP is also continuing with a test program to develop heavy oil deposits. Three new test wells are being drilled into the Ugnu heavy oil formation by BP as part of a long-term test of a new production technology.
Eni Oil and Gas will continue its development of the Nikaitchuq offshore field, an oil deposit in shallow waters two to three miles north of the Beaufort Sea coast. Drilling of the first production well for the Nikaitchuq started this month at a drill pad near Oliktok Point, northwest of Prudhoe Bay. Eni hopes to have the field in production by the end of 2009.
Bowles said ConocoPhillips plans two exploration wells this winter near previous discoveries in the National Petroleum Reserve-Alaska. UltraStar, a small independent, plans an exploration well north of the Prudhoe Bay field. Anadarko Petroleum Corp. plans to complete a test well and drill two others in a search for natural gas in the foothills region of the southern North Slope. Chevron Corp. will continue a multi-year exploration drilling program in the White Hills region, south of Prudhoe Bay.
In other projects, BP will also complete its construction of new Prudhoe Bay field pipelines this winter, concluding a two-year project, Suttles said.
ConocoPhillips hopes move toward development of the CD-5 production area in the Alpine field in the Colville Delta, west of the Kuparuk River field. Bowles said the company is putting a priority on resolving permitting problems on a river crossing that will give access to CD-5.
The river crossing has become bogged down in local controversy. People in the village of Nuiqsuit, which is nearby, have objected to the company’s plan to cross a channel of the Colville River to develop the CD-5 site. Bowles said the crossing is important to plans for developing substantial new resources in the area as well as discoveries ConocoPhillips and its partner, Anadarko Petroleum, have made farther to the west in NPR-A.
As for the projects being deferred, Suttles and Bowles said their two companies are being squeezed by high costs, high taxes and now declining oil prices. The projects themselves aren’t affected by short-term price volatility, they said, but declines in prices do mean there’s less cash available to fund new projects.
Suttles said costs on the North Slope have increased at rates of 15 percent to 20 percent over the past two years. Both Suttles and Bowles said that the state’s new production tax, and mainly a cap on deductions of costs from the big Prudhoe and Kuparuk River fields, have hurt the economics of marginal projects like the gas processing plant at Z Pad.
Last year BP cancelled another west-end Prudhoe project, the $1 billion “I-pad,” a 50-well production pad.
Bowles said another casualty of the state’s new tax law, a new refining unit to make ultra-low sulfur diesel fuel on the North Slope for use by the producing companies and contractors, had to be cancelled.
Federal rules are requiring the use of ultra-low sulfur diesel in diesel engines in trucks and heavy equipment on a phased-in schedule and the fuel will be required to be used on the North Slope in 2010. The companies had planned to modify a small diesel-refining unit to make the diesel on the slope, but state tax rules make the project uneconomic.
The only alternative now is to transport the diesel by road from the Tesoro refinery near Kenai, which has the capability to make the fuel.
“What this means is that 25 million to 30 million gallons of ultra-low sulfur diesel will have to be hauled to the North Slope up the Dalton Highway beginning in 2010. This is expected to add $100 million in new operating costs,” Bowles told the RDC conference.
Suttles said the North Slope is declining at rates of 6 percent to 8 percent annually. “If those rates continue, by 2020 there will be about 200,000 barrels per day moving through the Trans-Alaska Pipeline System, about a third of what the pipeline is handling today,” he said.
That’s about the time a natural gas pipeline is expected to be in operation, but Alaskans shouldn’t think that gas could entirely replace oil in providing revenues to the state treasury. “Four billion cubic feet of gas is the energy equivalent of about half of today’s oil production,” he said. “Gas is not enough,” Suttles said.
“It’s important we continue to develop new oil resources, like heavy oil and oil from offshore,” he said. New conventional oil will be needed to blend with heavy oil that is too thick to flow through the pipeline by itself.
The squabble over Point Thomson development, which led the state DNR to refuse an ice road permit, involves a long-standing dispute over past work obligations between the state and Point Thomson leaseowners, which include BP, Chevron, ConocoPhillips and ExxonMobil, which is the operator.
If the ice road permit isn’t issued in November the companies may not be able to build the ice road in time to move the rig to the field. If the drilling is delayed, the companies may not be able to meet their timetable to have Point Thomson in production by 2014.
Ironically, the root of the dispute is the claim by the DNR that ExxonMobil and its partners haven’t been diligent in efforts to develop the field.
The DNR is now attempting the cancel the leases. There’s wide agreement within industry and even other states agencies that canceling the leases will set Point Thomson development back 10 years to 15 years.