EXPLORATION Cooperative spirit paves way for Alaskan E&P operations

Agencies and operators are cooperating to advance exploration and production projects in and adjacent to Alaska's North Slope and Cook Inlet producing areas.

"The idea of partnering has progressed to where Gov. Tony Knowles, Drue Pearce, president of the Senate, and Gail Phillips, speaker of the House, recognize partnership as a way to do business in Alaska-a way to make this a more competitive investment climate," Ken Thompson said of Alaska's governor, who is a Democrat, and the Republican leaders of the state's legislature. Thompson is president of ARCO Alaska Inc.

"As an example, an Oil and Gas Policy Council has been formed to address issues facing our industry in Alaska," Thompson said.

This article is the first in a three part series. The two later parts describe North Slope and Cook Inlet action, respectively.

Kuparuk tax eased

Another example Thompson cites of the relationship between government and industry is the Large Scale Enhanced Oil Recovery (Lseor) project nearing completion in ARCO-operated Kuparuk River field.

"The state worked for us there to prevent double taxation of the natural gas liquids that are being injected," Thompson said. "Under the old regulations, we were taxed at Prudhoe Bay when a barrel of NGL was produced and once it's injected at Kuparuk and later produced again we'd be taxed a second time."

A proposal to change regulations had been made by Gov. Hickel's administration in 1994. The Knowles administration that followed supported the proposal and the change became effective last year. The change will apply not only to Kuparuk but also to future enhanced oil recovery projects in Alaska.

"We're now using miscible gas enhanced oil recovery on three drill sites at Kuparuk," Thompson said. "Lseor will expand use of this process to 20. The necessary modules are being fabricated in Anchorage. We think building these modules in Alaska-by Alas- kans-is simply the right thing to do."

Capital cost of the Lseor project is $175 million, Thompson said. Alaska Petroleum Contractors is building the modules. The work has created 100 construction jobs in Anchorage and on the North Slope.

"We expect this expansion to generate more than $800 million in state revenue," Thompson added. "In addition to building the modules in Alaska, ARCO Alaska is working to purchase as many goods and commodities for Kuparuk and our other fields from Alaska-based, Alaskan-owned companies. We recently announced our 'Alaska Buy' program by signing 15 master agreements with 15 Alaska suppliers and vendors.

"Lseor will add 200 million bbl of new reserves, 35,000 b/d incremental rate and enable us to keep Kuparuk production near the current level of 280,000 b/d through the turn of the century.

"The Lseor project is limited to the very best part of Kuparuk field. If the project performs as expected, we believe EOR will eventually be expanded to the rest of Kuparuk River Unit."

Leasing accommodations

Leasing was another example cited by the ARCO executive.

"We worked with the Alaska Oil & Gas Association to get alignment behind areawide leasing similar to that in the Gulf of Mexico. We were seeing only sporadic lease sales in Alaska and at times not dependable. They would be scheduled and then canceled.

"Areawide leasing would allow for broader best interest findings on environmental and regulatory issues so you could have broader areas available each year in the North Slope and Cook Inlet."

The House passed the bill 40-0 in April. The Senate also passed the bill and sent it on to Knowles for approval.

"We hope it creates more leasing activity and regular leasing action like we saw in the Gulf of Mexico once areawide leasing was adopted," Thompson said.

Tax clarifications

Alaska also is adopting a tax appeals process and has clarified tax regulations, Thompson added. "In the past, the regulations were so complex that you often had major disputes between producers and the state. That led to major lawsuits."What this bill will do is establish a new tax hearing process before an independent tax council. The bottom line is the computation of taxes will be simpler ao there will be fewer disputes."

The bottom line impact on ARCO Alaska of the changing government/industry relationship has been positive, Thompson said.

"Since 1994 we've lowered our cost structure by over 40%, and this lower cost structure combined with tangible actions creating a positive investment climate by the government/industry partnership has allowed ARCO to increase our capital budget by 40% this year compared to 1995 with a renewed sense of optimism," Thompson said.

"This includes a 50% increase in our exploration budget. Total capital budget is $175 million, of which $30 million is exploration. Last year total capital was $129 million. In fact, our board of directors has been so encouraged that they gave us an additional $150 million in our five-year plan, increasing our five-year capital budget to $1.15 billion."

Oil export approval

John Morgan, president, BP Exploration (Alaska) Inc., sees encouraging signs that Alaska is really open for business.

"Working together toward common goals, Alaskans and the oil industry are making strides toward enhancing our ability to attract new investments in a fiercely competitive global environment," Morgan said.

One encouraging sign was lifting of the ban on export of North Slope crude, which became official on Apr. 28 when President Clinton gave clearance for exporting the oil.

"Lifting the decades-old federal ban on exporting Alaskan oil required tremendous teamwork among Alaska's congressional delegation, the governor and his administration, the legislature, and a number of international unions within the AFL-CIO and BP," Morgan said.

"This historic achievement will increase the relative value of Alaskan oil and make future Alaskan investments more attractive, generating jobs and revenues for Alaskans."

Before President Clinton's clearance, BP had signed a one-year contract to sell ANS crude to Taiwan's China Petroleum Corp. In the wake of the clearance, BP hopes to make the first shipment in mid-June.

"The contract with Taiwan is to sell an average of about 10,000 b/d," said Paul Laird, BP spokesman in Anchorage. "That amounts to about one shipment a quarter. We expect to make more contracts in the Pacific Rim. Our goal is to ship somewhere about what we've been shipping to the Gulf Coast. About 25% of the oil has gone to the Gulf Coast over the past few years.

"Our present production from the North Slope is around 550,000 b/d, about the same amount as it has been," Laird said. "The West Coast will continue to be the prime market of about two-thirds of our production. A small amount has gone to the Amerada Hess refinery at St. Croix in the Caribbean and will continue to go there."

Lifting of the ban was not expected to have any major effect on ARCO Alaska. For the immediate future, the company is not expected to export crude. All oil the company produces on the North Slope will continue to be used in its West Coast refineries at Cherry Point, Washington, and Los Angeles. "We could see slight improvement for a short time in wellhead prices if other producers ship overseas," ARCO's Thompson said.

Royalty rates trimmed

Another positive action singled out by BP's Morgan came in June 1995 with passage of House Bill No. 207, which was designed to encourage development of marginal fields by reducing royalty rates.

"Passage of a bill enabling the state's commissioner of Natural Resources to adjust royalty rates to encourage development of new marginal oil fields is another example of how the history of confrontation between the oil industry and the state is being replaced by a new spirit of cooperation," Morgan said.

The first major test of the new spirit of cooperation came not with regard to House Bill No. 207 but with an agreement announced in March between the Knowles administration and BP. The agreement was designed to encourage development of the Northstar field in the Beaufort Sea, 6 miles offshore from the Kuparuk River delta and Prudhoe Bay field.

The field is on state and federal leases awarded in 1979. The state leases, which had been sold to Amerada Hess Corp., are believed to hold the largest share of reserves. They carried a 20% royalty and an 89% net profits provision. Federal leases, originally leased to Shell Western E&P Inc. with 16.67% royalty, would not be affected by the Knowles administration/BP agreement.

Northstar field was a 1982 discovery by Shell from manmade Seal Island. Amerada Hess followed Shell's discovery with an extension find drilled from Northstar Island. Both companies weighed plans to develop the field but backed off in the face of the high cost of laying a buried pipeline to transport oil to existing onshore facilities and the high net profits percentage to be paid on state leases.

BP entered the picture in January 1995 by acquiring Amerada Hess' 81% interest in the Northstar Unit and followed up with acquisition of Shell's 17% interest, bringing to 98% BP's ownership. Murphy Oil retained ownership of the remaining 2%.

In the agreement reached between the Knowles administration and BP, the state agreed to drop the 89% of net profits provision and substitute for it a supplemental royalty that would rise whenever North Slope oil prices exceed a $17.35/bbl West Coast benchmark to a maximum additional 7.5% above the 20% the state already would receive.

The 20% royalty is higher than any other field in Alaska, where the state's usual royalty is 12.5%. BP agreed to develop the field promptly and to hire Alaskan workers and contractors.

In support of the agreement, BP's Morgan said between direct spending in Alaska and government revenues, Northstar will have a $1 billion impact on Alaska's economy under BP's plan to develop the field.

Among benefits Morgan listed were:

Half a billion dollars in new government revenues at a time when lawmakers and the administration are struggling to close the state budget gap-revenues that will flow by early 1999.
Five hundred construction jobs, 50 permanent jobs, and hundreds of indirect jobs they will support-coupled with BP's commitment to hire Alaskans whenever possible.
Development spending in Alaska ranges from $200 million-250 million, highlighted by BP's commitment to build Northstar facilities in-state.
An opportunity to launch a new industry-manufacturing large, sea-lift scale modules in Alaska-is afforded by BP's willingness to pay a premium to do so for Northstar as long as capacity is available in-state and technical challenges are overcome.
BP's commitment to begin development in 1997 and production by 1999 if the company secures the necessary permits.
Access to new development opportunities through technology and infrastructure developed for Northstar.

Of the agreement with the state, Morgan added, "We approached the Department of Natural Resources in a spirit of cooperation, to work together to identify a mutually beneficial solution to a mutual problem. The agreement we negotiated achieves that end.

"The BP-DNR agreement removes net-profit tax provisions from Northstar leases in exchange for tangible benefits to Alaskans-jobs, business, the highest royalty rates in Alaska, a supplemental royalty, and early development."

Opponents challenged the state's authority to revise royalty rates on grounds it would set a precedent. Supporters answered that such a precedent already existed.

In 1992, state officials and Exxon had modified six leases covering the Thetis Island Unit, changing terms from a 12.5% royalty rate plus a 30% share of net profits to a flat 16.7% royalty rate. Exxon had waived its rights to royalty reductions until after 10 years of sustained production and to exploration incentive credits. When Exxon failed to meet a drilling schedule, Anadarko Petroleum Corp. acquired the leases.

The BP-DNR agreement ran into a roadblock in April after it reached the state legislature in the form of a bill introduced by Knowles seeking the legislature's approval.

The first skirmish in the House of Representatives concerned who would fill jobs created by Northstar development. Rep. Joe Green's House Resources Committee came up with a version that would require BP to hire Alaskans for 85% of Northstar's jobs and use only Alaskan contractors for construction and supply contracts.

Rep. Ramona Barnes' Committee on World Trade State/Federal Relations responded with a version that required BP to hire Alaska residents and contractors only "to the extent they are available and qualified." Meanwhile the Senate halted work on its version to await consideration of whatever bill might pass the House.

On May 2, the House by a 37-3 vote approved Knowles bill without amendments. The issue went to the Senate, which approved it by an 18-2 vote without major changes. The House approved the Senate's version 35-2 and sent it to Knowles for approval.

"It certainly is a victory for Alaska jobs and Alaska families," the governor said. "This is truly a win-win situation."

Northstar's payoff

BP's plans for development of the 30,788-acre Northstar Unit call for expanding the size of Northstar Island from which Amerada Hess drilled in the 1980s for use as a base from which to drill new wells.

The drilling program calls for 23 wells, including 13 producing wells, six water injection wells, three gas injection wells and one waste disposal well. Oil will be transported from the drilling island through a subsea pipeline buried 10 ft below the ocean's floor. The line will be the first subsea Arctic pipeline in Alaska.

The field's reserves are estimated at 130 million bbl of oil, with recovery possibly reaching 145-150 million bbl of an estimated 260 million bbl in place. Peak production has been predicted at a rate of 50,000 b/d. The oil is 40° gravity, considerably higher than the mid-20° gravities of production from other North Slope fields.

If reserves prove larger than expected, there is an upside potential of $670 million in revenues to the state over the presently-predicted $575 million over the life of the project. Capital expenditures, mostly for more drilling, could reach $415 million.

Cook Inlet directions

While BP prepares to make Northstar the first of a new generation of smaller oil fields to go on line in Alaska, another significant test of the spirit of cooperation is taking shape in Cook Inlet.

In mid-April, Unocal announced it will seek royalty relief under House Bill No. 207 passed into law in June 1995.

Unocal's application to the DNR is the first under legislation designed to extend the life of marginally producing fields by improving their economic viability and creating incentives for capital investment.

Under the application, Unocal and its partners will recoup a portion of their capital investments in Cook Inlet through decreased oil royalty payments based on the prior year's expenditures. There is a sliding scale royalty component associated with individual platform cash flows.

Initially, only two of Unocal's 10 platforms will qualify.

"Royalty relief is in the best interest of the State of Alaska," said John Donohue, Unocal's Alaska general manager. "In our application, only truly marginal economic platforms benefit and we receive relief by making additional capital investments."

The two platforms for which royalty relief is being sought are Dillon in Middle Ground Shoal field, where the reduction would be from 12.5% royalty to 3% royalty, and Bruce in Granite Point field, where the reduction would be from 12.5% royalty to 9.5% royalty.

John Shively, Commissioner of the DNR, will analyze the application to evaluate critical factors such as employment and the effect on Kenai Peninsula Borough property taxes and make a best interest finding. Extending the life of the Cook Inlet infrastructure is something with which companies interested in exploring in Cook Inlet are concerned.

"Under our proposal, Cook Inlet capital investment projects will better compete with global company opportunities," Donohue said. "That means more investment, more revenue and more work for Alaskans."

The royalty reduction application process began last year with an initial evaluation process that was completed in November. The evaluation process involved development of a concept based on platform production and formal presentation to DNR's Shively, the House Speaker, and the Senate president. Unocal worked with DNR to modify concept through March before submitting the application in April. The company is anticipating a favorable ruling by later this month.