Oil is found all over western North Slope
Dry holes for decades; new technology now enables discoveries
ConocoPhillips’ new oil and gas discoveries on the North Slope have provided a big boost in confidence for many in Alaska. There have been worries about declining production and deficits in the state budget. The latest is the company’s announcement July 16 that confirmation drilling last winter has allowed it to increase the expected oil recovery at Willow, a discovery in the National Petroleum Reserve-Alaska announced in early 2017, from the initial estimate of 300 million barrels to a figure between 400 million and 750 million barrels. The oil at Willow is high quality – 41 degrees to 44 degrees API, an industry measurement of oil quality. The “sanction” for the project – the final investment decision – could come in 2021 with the first production four to five years later.
The company also said that a well drilled west of Willow, appropriately named “Willow West,” found oil, although no details were provided. Additionally, Conoco said drilling last winter confirmed a discovery near the Colville River in what it calls the “Narwhal trend,” with resources estimated at 100 million to 350 million barrels. No estimate for Narwhal production was released, but at least part of this resource can likely be tapped fairly quickly by drilling extended-reach wells from an existing Alpine field drillsite. Meanwhile, Conoco told state officials it is very interested in another prospect to the south of Narwhal that it calls “Bear.”
ConocoPhillips is obviously very bullish about the western North Slope, but what struck us was that the company brought a group of analysts to Anchorage and the North Slope, feeling the need to sell the investment community on Alaska’s prospects. The briefings were to counteract a belief that Alaska is an oil province in decline where political leaders are feuding with industry over taxes. “People are questioning why we want to spend a lot more money here,” one ConocoPhillips official told us. Gov. Bill Walker, state resource commissioner Andy Mack, Anchorage Mayor Ethan Berkowitz and major contractors helped ConocoPhillips make the pitch to analysts that Alaska is still a good place to invest.
Willow and other western slope projects, if they proceed, will certainly result in a sharp increase in ConocoPhillips’ spending. The company plans a capital budget of about $1 billion a year to sustain production in its existing “legacy fields” (the company is now producing about 225,000 barrels per day from these) and an additional $3 billion to $6 billion to develop Willow in the 2022-2024 timeframe. Despite the revised resource estimate Conoco has made no change of Willow’s expected 100,000 barrels per day production, a figure released when the discovery was announced in early 2017.
The U.S. Bureau of Land Management has meanwhile started the regulatory process for Willow, publishing a Notice of Intent to begin the Environmental Impact Statement. This also provided the first details of the construction: A “stand-alone” oil and gas processing plant; five drill pads with up to 50 wells each; access roads, pipelines and an airfield. Willow would also be connected by road to GMT-2 and GMT-1, two smaller projects to the east now in development, and to the larger Alpine field near the Colville River further east.
A temporary gravel island would be built in Harrison Bay, north of the Colville Delta, to facilitate the unloading of process plant modules for Willow. The modules would be moved overland to the site in winter. Under Dept. of the Interior rules the draft EIS must be completed within 12 months. Conservation groups complain that the draft is being “fast-tracked” too quickly to assess environmental concerns.
What can we make of these new oil discoveries?
How might these affect employment and total production on the North Slope? The production calculation seems simple enough, although there must be big assumptions included. If Willow does produce 100,000 b/d and that is added to 60,000 b/d produced from GMT-1 and GMT-2, which will be producing in late 2018 and 2021 (under the present schedule) this would add, in theory, 160,000 b/d of new production. If the current slope production declines at 5 percent/year, that’s a 26,000 b/d-per-year drop that must factored in, amounting to 132,500 b/d by 2023, when Willow might start up. If this is the case, ConocoPhillips’ new production would fill the gap, keeping overall slope production essentially level. If Pikka, another discovery near the Colville River, is developed and produces its expected 120,000 b/d, there would be an overall gain. Willow might also produce more than 100,000 b/d.
The “legacy field” production, overall, could be less than a 5 percent decline, too. BP has been able to keep Prudhoe Bay production almost level for the past two years, a significant achievement in a period of lower oil prices, and Prudhoe accounts for about half of total slope production. ConocoPhilips says it expects declines in its own “legacy” fields (Kuparuk River and Alpine) of about 6 percent per year. Other production, by Hilcorp Energy, operator of smaller fields like Milne Point, could see slight declines, though the company expects its “Moose Pad” project in Milne Point to start up later this year.
If the overall slope legacy field production loss is kept to less than 5 percent and Pikka is developed, the overall result would be a bump up for slope production for a period, maybe to 600,000 b/d. This is speculation, but it’s somewhat informed.
Employment effect more difficult to judge
The employment effect is a little more difficult. Basically, each of the two smaller projects that have been done (CD-5, now producing, and GMT-1, near completion) have employed about 800-900 through the winter seasons, when most of the work has been done. We would expect GMT-2, which would probably begin construction in 2019 assuming no hiccups, (it is to be finished in 2021) would employ about the same. The stand-alone processing facility planned for Willow will be a much larger project, $2 billion to $3 billion compared with roughly $1 billion each for CD-5, GMT-1 and GMT-2, so presumably the employment effect will be larger.
We have no way to judge what that might be, but construction at the ExxonMobil-operated Point Thomson project east of Prudhoe Bay might provide a guide. It, too, was a multi-billion-dollar project with large process facilities but limited wells and pads. Point Thomson employed about 800-900 in winter from 2013 to completion in 2015. Willow’s job impact would probably be higher because more production pads and wells are planned, but it’s hard to guess, for now. ConocoPhillips’ own construction work on CD-5, GMT-1 can offer a guide. Those employed 700 to 800 in construction over several winter seasons from 2015 through 2018, and a similar workforce is projected for GMT-2 in 2019 and 2020.
New development is technology-driven
An important consideration in ConocoPhillipas’ new discoveries is the role played by new technologies not only in finding the oil but in drilling and developing it at significantly lower cost. In its analyst presentation in Anchorage July 16 ConocoPhillips laid out this information:
- The company forecast its production to be about 100,000 b/d higher than today in 2028, or approximately 325,000 b/d compared with approximately 225,000 b/d today
- In its July 16 presentation to analysts ConocoPhillips said its average “cash-balanced price” for production in 2018 (the price needed to obtain a 10 percent return on investment) is $42 per barrel compared with $55 per barrel in 2015
- The per-barrel production cost is sharply down for incremental new supply developed in existing fields with technologies like coiled-tubing drilling (a lower-cost technology for drilling wells). The costs is estimated at $30 per barrel. Twenty percent of ConocoPhillips’ current slope production is produced from wells drilled by coiled-tubing units
- A similar low cost is experienced with the expansion of CD-5, a highly-successful satellite of the Alpine field developed recently, where drilling is with traditional “rotary” rigs. Its per-barrel production cost was originally estimated at $66 per barrel, assuming an initial 16,000 b/d. Production has increased to 34,000 b/d, and the cost of CD-5 oil supply is now estimated at $30 per barrel
- The “rate of penetration” with wells is twice as fast in early 2018 as it was in 2014. Faster drilling translates to less expensive wells and lower per-barrel costs
- New types of wells include “octa-laterals” with as many as eight underground production legs drilled off a single well to surface. The number of below-surface production legs, which are really separate wells, has increased steadily in recent years. By sharing the infrastructure of the vertical well to surface and surface facilities (pad, tie-in lines, utilities) the per-unit cost of oil is substantially reduced
- There has been a significant 45 percent gain in productivity, measured as the amount of oil produced per operations employee. In 2015, in production assets it operated, ConocoPhillips produced 96 b/d per operating employee. In 2018 the number was 139 b/d per operating employee.
Arctic Slope Regional Corp., a big winner
The overall western North Slope development will greatly benefit Arctic Slope Regional Corp., the Alaska Native regional corporation for northern Alaska, as well as Kuukpik Corp., the village corporation on the Colville River near the Alpine oil field. ASRC owns part of the mineral rights in the Alpine field (it is shared with the state), all mineral rights at the producing CD-5 project (which is within the National Petroleum Reserve-Alaska), part of the rights at GMT-1, which will begin production later this year and is also within NPR-A, and much of the mineral rights at the recent small “Narwhal” discovery to the south of Alpine field, which is on state lands. Kuupik Corp. owns surface lands through much of this area and has negotiated a small royalty override in some areas. Seventy percent of ASRC’s royalty is shared with other Native regional and village corporations under terms of the 1971 Alaska Native Claims Settlement Act, and this amount will increase as new production is brought on line.
Point Thomson technical problems
ExxonMobil continues to struggle with technical problems at the Point Thomson gas/condensate project east of Prudhoe Bay. The company has been able to produce only 5,000 barrels per day to 9,000 barrels per day of condensates, compared with a target of 10,000 barrels per day, because of problems with the two large gas compressors. Reservoir pressure at Point Thomson is 10,000 pounds per square inch, the highest pressures of any producing reservoir, and the first-of-a-kind compressors have struggled to reinject gas produced after liquids are removed. ExxonMobil and partner BP are studying a plan to produce Point Thomson’s gas and transport it to Prudhoe Bay via pipeline, injecting the gas in Prudhoe and in effect storing it until a planned gas pipeline is available.
Slope oil production is stable
North Slope production held generally stable through the first month and a half of state fiscal year 2019, which began July 1. Production averaged 467,000 barrels per day, down slightly from 468,000 barrels per day for the same period last year. For all of fiscal 2018, the year ending June 30, production averaged 519,000 barrels per day, slightly down from the state’s forecast of 522,000 barrels per day for the year. North Slope crude has been selling at between $70/barrel to as high as $80 per barrel, but prices dipped to below $70 Aug. 16. The state is using an assumed price of $63 per barrel for its forecast.
NPR-A coastal areas to open?
U.S. Interior Department officials confirmed they are considering changes to an Obama-era comprehensive land plan for the National Petroleum Reserve-Alaska with the support of the North Slope Borough, the regional municipality. The changes would likely include shrinking protected coastal areas where there is also high potential for oil and gas discoveries. The state and the borough argue the existing protected lands are cover too large an area.
ANWR EIS draft in 4th quarter?
The U.S. Department of the Interior is reported to be planning release its draft Environmental Impact Statement for leasing in the Arctic National Wildlife Refuge in the fourth quarter of the year. If it happens, it will be ahead of schedule for the aggressive timeline Interior planned for the EIS. Conservation groups will attack the document, arguing it is hastily-done.