government granted exemption vs. negotiation · 2007. 10. 1. · government government government...

Vol. 7, No. 17 $1 • www.PetroleumNewsAlaska.com Alaska’s source for oil and gas news Week of April 28, 2002

I N S I D EAlaska leaseholders' chart 16

ExxonMobil's profits plunge 5

New bill overhauls permitting 2

Heavy oil incentive passes U.S. Senate 11

Marathon has success with Ninilchik wells 13

“Why should the Alaska Eskimos be theonly indigenous people who own land that areforbidden from drilling on it, forbidden fromusing it to provide jobs for their people andjobs for American industry?”

—SEN. TED STEVENS, APRIL 18

■ G O V E R N M E N T



Pho

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Pictured is Akita/Equtak Drilling Ltd.’s Rig 63, which drilled the Tuk M-18delineation well in the Mackenzie Delta for Devon Energy Canada Corp. andPetro-Canada. (See story below.) It was the first major gas discovery in theMackenzie Delta in 30 years. The well was drilled to 9,850 feet and test-ed at restricted rates of up to 30 million cubic feet per day, with sustaineddeliverability rate at 60 million to 80 million cubic feet per day.

Granted exemption vs. negotiationHouse Bill 519 would grant property and sales tax during gasline construction,startup; bill supported by VECO, BP, Phillips; administration wants negotiations

By Kristen Nelson PNA Editor-in-Chief

The state needs to offer incentives to get anAlaska gas project started, Rep. Pete Kott, toldthe House Special Committee on Oil and GasApril 19.

Kott, chairman of the House Rules Committee,was introducing House Bill 519, sponsored byHouse Rules.

The bill is supported by VECO Corp., BPExploration (Alaska) Inc. and Phillips Alaska Inc.and opposed by the administration.

Kott said the state has a window of opportunityfor a gas pipeline project, and needs to provide anincentive. HB 519 provides a tax holiday fromsales and property tax during construction and thefirst two years of operation and reauthorizes theAlaska Stranded Gas Development Act, which lets

U.S. Senate passes amendment toprotect builders if gas price drops

By Steve SutherlinPNA Managing Editor

Atax incentive amendment added by unanimousconsent to the Senate energy bill April 23 isdesigned to protect the builders of a NorthSlope gas pipeline from dips in gas prices that

might make the project uneconomic.The amendment, sponsored by Sen. Frank

Murkowski and Sen. Ted Stevens, provides a federalincome tax credit to builders of a southern route gaspipeline if the price of natural gas drops below $3.25per thousand cubic feet. Gas producers would berequired to repay the credits in full when the cost of

gas rises above $4.85 per mcf.

Cost to taxpayers zero

The amendment should have no net cost to tax-payers because payback provisions require that dur-ing periods of high natural gas prices, companies

Thompson urges morelimits on incentives

Ken Thompson testi-fied April 22 in HouseResources on House Bill519, urging legislators tolimit the extension ofapplications under theAlaska Stranded GasDevelopment Act — the2005 deadline proposedgave companies too muchtime, he said, you shouldsend a message that the state is impatient.

The version of the bill discussed in HouseFinance April 24 had an April 1, 2004, deadline,

Ken Thompson

U.S. Senate finds friends, foes inCanada on ANWR, pipeline loansEnvironment minister says Canada must remain ‘very vigilant’ to ensure ANWRdrilling remains a ‘mistake;’ Kakfwi opposes ‘heavily subsidized’ Alaska gas

By Gary Park PNA Canadian Correspondent

Canada has been a reverse image ofAlaska in its response to U.S.Senate decisions in mid-April onthe Arctic National Wildlife Refuge

and loan guarantees for an AlaskaHighway gasline.

Environment Minister DavidAnderson, a relentless campaigneragainst drilling in ANWR, was “happy” with theSenate verdict, but added: “I don’t think we owethem (the senators) anything for it ... I just hopeit’s the end of the game (for drilling).”

Word that the Senate has endorsed$10 billion in loan guarantees for thegasline provoked an equally strong reac-tion from Northwest Territories PremierStephen Kakfwi, who “jokingly” sug-gested Cuban President Fidel Castro“must have infiltrated the institutions ofgovernment in the U.S.” to underminethe free market.

On ANWR, Anderson said theCanadian government will be “very vigi-

lant to make sure this is the end. ANWR drillingwas a mistake when it was first proposed, it’s amistake now and it will be a mistake in the future.”

see THOMPSON page 4

Stephen Kakfwi

see SENATE page 17

Devon, Petro-Canada score first‘significant’ gas discovery inMackenzie Delta in 30 years

Devon Energy Canada Corp. and Petro-Canada have madea quick breakthrough on the Mackenzie Delta, reporting thefirst significant gas discovery in the area in 30 years.

With recoverable reserve potential up to 300 billion cubicfeet, the find gives an added lift to hopes of bringing the Deltainto commercial production.

The Devon-operated partnership said the Tuk M-18 fielddelineation well, about 15 miles south of Tuktoyaktuk, wasdrilled to 9,850 feet and tested at restricted rates up to 30 mil-lion cubic feet per day, with sustained deliverability rate at 60million to 80 million cubic feet per day, or 30 times the aver-age well.

Devon Canada President John Richels said in a statementthat Tuk M-18 “firmly establishes Devon and Petro-Canada aslegitimate Mackenzie Delta producers with proven reserves.”

The last gas discoveries in Canada’s Arctic were by GulfCanada Resources Ltd. (now Conoco Canada Inc.) whichmade the 1.8 trillion cubic foot Parsons Lake find in 1972 andImperial Oil Ltd.’s discovery of the 3 trillion cubic foot Taglufield in 1971.

M-18 trouble-free

Brian Kergan, Devon Canada’s engineering manager forfrontiers, said drilling M-18 was trouble-free, coming in ahead

see DISCOVERY page 20

“This tax provision is the final critical pieceof the comprehensive package needed tofinance and construct the gas pipeline.”

— Sen. Ted Stevens

see PROTECT page 2

see HB 519 page 17


Therriault introduces billto overhaul state’s complexpermitting systemSenator says he’s not expecting final action on Senate Bill361 this year, wants input from agencies, regulatedindustries and watchdog groups for work during interim

By Kristen NelsonPNA Editor-in-Chief

It’s time for a complete review andoverhaul of Alaska’s permitting sys-tem, Sen. Gene Therriault, R-Fairbanks, said in introducing Senate

Bill 361, which has a short title of permitcoordination and coastal zone manage-ment.

He said the Legislature has increasing-ly heard that the state’s permitting sys-tem, built up piecemeal over 43 yearssince statehood, is cumbersome, lacksadequate coordina-tion between agen-cies and has someduplication.

“We have beentrying to deal withsome of these prob-lems sort of piece-meal and I thoughtthat it was perhapstime for theLegislature, as thepolicy setting body for the state, to lookat the entire system and see if perhaps itis time to start from scratch and just sortof put together a new better coordinatedsystem,” Therriault said at an April 23meeting of the Senate State AffairsCommittee, which he chairs.

The bill, Therriault said in a sponsorstatement, is based on proposals that haveemerged, over the years, “from the front-line permitting staff, division directorsand commissioners at our resource agen-cies…” He also noted that the governorhad introduced a bill addressing theseproblems several years ago.

The senator said he does not expectaction on the bill — introduced April 12— this session. What he is looking for, hesaid, is input from agencies, regulatedindustries and watchdogs so that he canwork on the bill with these groups

between sessions.

No consensus in 1997

Patrick Galvin, Director of the Divisionof Governmental Coordination in the gover-nor’s office, told the committee that theadministration sponsored a streamliningworkshop in 1997. There was a consensusout of that workshop that there were validissues which needed work — but no con-sensus approach on how to do that.

After the governor’s 1997 bill didn’tmove in the Legislature, Galvin said, theadministration has continued to look forways to achieve streamlining without theLegislature. SB 361 includes a coordinatingagency, the division of project assistance, inthe Office of the Governor, and Galvin saidone concern of the administration was thelack of specificity of authority of this coor-dinating agency in relation to permittingagencies. He also said timelines were notspecific enough in the bill.

Galvin noted that the administration is“encouraged to hear that both of the leadingmajor party candidates for governor havecommitted to making this issue one of thepriorities of their possible administrationsand we are more than willing to commit thetime necessary to continue these discussionsin the interim between the sessions.”

Some projects may not needcoordination

Deputy Commissioner Kurt Fredrikssonof the Department of EnvironmentalConservation told the committee that one ofDEC’s concerns about SB 361 is with smallprojects. Coordinating permitting is not apanacea for all permitting, he said, and smallproject applicants can sometimes work witha couple of agencies more efficiently thanthrough a coordinated review process.

Fredriksson also said DEC has beenworking on its appeal process, incorporatingan informal conflict resolution process.DEC would like to see the bill include flex-ibility for formal appeals when needed, butalso allow parties to use mediation whenthat will work. ◆

ON DEADLINE2 Petroleum News • Alaska Week of April 28, 2002

Sen. Gene Therriault,R-Fairbanks

The administration is “encouraged tohear that both of the leading majorparty candidates for governor have

committed to making this issue oneof the priorities of their possible

administrations…” —Patrick Galvin, Division ofGovernmental Coordination

must repay any tax relief granted,Murkowski said in a statement. The cred-it would stay in place for 15 years aftergas line completion, while the paybackprovision won’t expire until all of thecredits are paid back.

Murkowski said the amendment pro-vides a financial safety net that shouldallow for financing and construction ofthe pipeline.

“Alaskans are ready to do their part toprotect America’s energy security,”Murkowski said. “Without these safe-guards, Alaska natural gas could stay inthe ground for a very long time.”

“This tax provision is the final criticalpiece of the comprehensive packageneeded to finance and construct the gaspipeline,” Stevens said. “The adoption ofthis tax credit is good news for Alaskaand America. It means more revenue forthe state’s budget, more jobs for Alaskansand access to gas resources for in-stateuse.” ◆

continued from page 1

PROTECT

ON DEADLINEPetroleum News • Alaska 3Week of April 28, 2002

ON DEADLINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2FINANCE & ECONOMY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5WORLD OIL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7EXPLORATION & PRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . .9COOK INLET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12AAPG/SPE CONFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14LAND & LEASING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

Index

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GOVERNMENTKleeschulte, Torgerson clarifyMurkowski’s position on gasline bills

Recently, it has been said in and out of legislative committee meetings that Alaska’sU.S. Sen. Frank Murkowski is strongly behind the passage of House Bill 519, whichprovides a tax holiday from sales and property tax during the construction of a NorthSlope gasline and its first two years of operation. (See top story on HB 519 on page 1.)

Long-time Murkowski aide Chuck Kleeschulte told PNA April 23 that whileMurkowski has publicly supported state participation in trying to make a gasline occur,he didn’t think the senator had recommended either HB 519 or the other gasline incen-tive bill, Senate Bill 360, specifically, nor did he think there was necessarily an imme-diate need to get state legislation passed in order to show members of Congress thatAlaska was willing to offer incentives to get the gasline built.

“Sen. Murkowski doesn’t try to influence the state Legislature. He recognizes that itis an independent entity,” Kleeschulte said.

The confusion over Murkowski’s position might have started last fall, state Sen. JohnTorgerson told PNA April 24, when the North Slope gas owners — BP Exploration(Alaska) Inc., ExxonMobil Production Alaska and Phillips Alaska Inc. — produced aone page report showing the governments’ take if a gasline was built.

“If my memory serves me correctly, they said the state would earn $22 billion andthe feds $24 billion,” Torgerson said.

“Sen. Murkowski, at that time, asked what the state was going to put up” in terms offinancial incentives for the gasline, he said. “We said we were willing to look at alloptions as soon as the producers told us what they would need,” Torgerson said. “Butthey have been busy with more critical, federal, legislation.”

Torgerson said he would vote against HB 519 “as it’s written now. … I don’t likethe fact the state’s going to lose $750 million in taxes without knowing if the producersneed a break. … We need their financial information on the gasline first. … And weneed access for the explorers and some other things,” which are provided for in SB 360.

“The two bills are relatively close — actually I have about three more incentives

see MURKOWSKI page 19

ON DEADLINE4 Petroleum News • Alaska Week of April 28, 2002

which bill sponsor Rep. Pete Kott, R-EagleRiver, credited to Thompson.

The former senior ARCO executive anda member of the governor’s gas policycouncil told House Finance that he waspleased that the deadline for applicationsunder the stranded gas act had beenchanged, but recommended applying thatsame April 1, 2004, deadline to the taxexemptions.

“I urge you,” he said, “not to pass 519without a firm line in the sand.”

If tax exemptions are given, the stateshould ask for one thing in return, he said: aproject approved and under way by April 1,2004.

He also urged a clear definition of whatparts of a project were tax exempt.

And he said the Legislature should limit

the outright incentive exemption to pipelineconstruction. An additional two yearsshould be subject to negotiation, he said.

Opponents of the bill are arguing,Thompson said, that the state shouldn’t giveaway hundreds of millions withoutinvestors showing need, and shouldn’t begranting that incentive for any period aftergas startup.

“I propose a compromise,” he said. “I dobelieve the state should grant this incentive”because there are billions in state revenuesat stake.

But grant the exemption during con-struction and the calendar year of startup, hesaid. Then let investors at that point ask forthe additional two years — based on eco-nomics.

Legislators have asked if we have toomuch on the table with this incentive,Thompson said, and granting the taxexemption only during construction helpsanswer that.


THOMPSON■ G O V E R N M E N T

Heyworth would not accept HB 302as substitute for ballot initiativeWhitaker’s Alaska Gas Corp. bill moved out of House Finance,passes in House, will be heard next in Senate Resources


Scott Heyworth told the House FinanceCommittee April 18 that he does notaccept House Bill 302, which wouldcreate the Alaska Gas Corp., as sub-

stantially the same as the initiative he gotplaced on the November ballot.

Heyworth’s initiative, which has beencertified by the lieutenant governor for theNovember ballot, specifies an all-Alaskagasline which would take gas to tidewaterin Prince WilliamSound and then pro-duce liquefied natur-al gas for shipment.

HB 302 does notpreclude any optionsof routing or process,the bill’s sponsor,Rep. Jim Whitaker,R-Fairbanks, told theHouse FinanceCommittee.

Whitaker told the committee that JackChenoweth of Legislative Legal Serviceshas said that HB 302 is substantially thesame as the initiative, and that the lieu-tenant governor could determine that pas-sage of HB 302 displaces the initiativefrom the ballot.

Asked by Rep. Eric Croft, D-Anchorage, if the producers have taken aposition, Whitaker said they would have tospeak for themselves, but that in confiden-tial conversations he believed they felt HB302 was the lesser of two evils, comparedto the ballot initiative.

Canada not in initiative

Heyworth, the lead sponsor of the initia-tive for the all-Alaska gasline, said the ini-tiative and HB 302 are “significantly un-similar.”

HB 302 is a project which will connectwith a Canadian line, Heyworth said, whilethe initiative takes gas to Valdez.

“I’m not surprised industry would havecalled it the lesser of two evils,” he said.

And HB 302 is a study with a zero fis-cal note, while the initiative — a project —has a $250 million fiscal note from theDepartment of Revenue, Heyworth said.

“If the House and Senate think this issimilar … you’re going to force me into aposition that I’ll have to sue,” he said. “…It will not hold up in a court of law.”

“There is nothing similar, ladies andgentlemen,” Heyworth said.

To study or to build

Rep. Con Bunde, R-Anchorage, toldHeyworth the “Legislature can pass legisla-tion — if you have a disagreement with the

lieutenant governor, I guess that’s whereyou’d take it.”

Heyworth said he had no problem withHB 302, the “problem would be if the lieu-tenant governor decides it’s substantiallythe same as the initiative.”

“If you want to do studies,” Heyworthsaid, “go ahead… the citizens of Alaskawant to build an in-state line.”

Rep. Gary Davies, D-Fairbanks, askedHeyworth if he agreed with Revenue’s$250 million fiscal note for the initiative.

“Of course I don’t: it’s a joke,”Heyworth responded. “… My estimate is$1 million.”

Davies also asked what if the initiativepasses and the Legislature does an analysisand determines it isn’t feasible?

Heyworth said that “until someone stepsforward and offers gas to market… we’llnever know.”

Not in disagreement

Whitaker said he didn’t disagree withvery much of what Heyworth said.

“My emotions are such that I think weshould take charge and move this forward,”he said, but my “logical side says we needto study it more…

“I think we’re trying to get to the sameplace… I think HB 302 gets us therefaster,” Whitaker said.

House Bill 302 was moved out of HouseResources April 18, passed the HouseApril 22 and was referred to the SenateResources Committee. ◆

Want to know more?If you’d like to read more about the

Heyworth’s initiative and HB 302, goto Petroleum News • Alaska’s Website and search for these recently pub-lished articles.

Web site:http://www.PetroleumNewsAlask

a.com/

2002■ April 15 All-Alaska Gasline initia-

tive could be pulled from ballot ■ March 24 Heyworth, Condon

square off on gas authority costs■ Jan. 20 Group delivers petitions

with 42,105 signatures endorsing anall-Alaska gasline

■ Jan. 13 Legislators pre-file oiland gas bills for 2002 session

2001■ Sept. 23 Lieutenant governor

certifies ballot initiative for stategasline authority

■ August Citizen group files initia-tive for all-Alaska gas line

■ July Ballot measure ordersLegislature to create all Alaska gasproject

■ June Poll finds super voters thinkAlaska benefits most if gas goes toValdez

■ May Heyworth funds companypromoting all-Alaska gasline

Note: You must be a paid sub-scriber to PNA to access the archives.

“If you want to do studies, go ahead… the citizens of Alaska want tobuild an in-state line.” —Scott

Heyworth

Scott Heyworth

Week of April 28, 2002

FINANCE & ECONOMY

Petroleum News • Alaska 5

CALGARY, ALBERTAPetroCanada boostsproduction in quarter; butprofits fall with prices

PetroCanada’s net earnings dropped nearly 70 percent for thefirst quarter, but startup of the Terra Nova project on Canada’s EastCoast brought an increase in production.

Earnings for the Calgary-based company came in at $88 million(Canadian) for the quarter, down from C$282 million a year ago.In the fourth quarter, operating earnings were C$71 million, butthat included a C$15 million charge against earnings due to thebankruptcy filing of Enron Corp.

Lower prices drove upstream earnings down 74 percent to C$67million in the first quarter of this year. Downstream, earnings werecut in half to C$45 million, but the company did show a profit inthat segment, unlike others in the industry. Refining volume wasessentially flat.

Daily production was 229,700 barrels of oil equivalent, up 14percent as Terra Nova came on line. The field produced an averageof 33,900 barrels daily after oil began to flow Jan. 20, and that fig-ure is expected to grow to 42,000 barrels daily by the end of theyear. Western Canada’s gas flow averaged 731 million cubic feetdaily, down a bit from the 2001 quarter after some non-core prop-erties were sold.

Revenues for the quarter were C$1.71 billion, down a third fromC$2.56 billion a year ago.

The figure was down just slightly from the fourth quarter’sC$1.77 billion.

—Allen Baker, PNA contributing writer

Marathon profit sinks withindustry; downstream loss,upstream shrinkage

Marathon Oil Corp., in its first quarter as a standalone company,reported shrinking profits in line with the rest of the industry.

Net income dwindled to $67 million for the quarter, comparedwith $509 million in the first quarter of 2001. That’s a drop of 87 per-cent.

Operating profit in the fourth quarter was $98 million, excludingbig adjustments as Marathon spun off its steel operations.

The refining, marketing and transportation segment showed a lossof $51 million for the quarter, compared with profits of $276 milliona year earlier. That’s in line with results at other major oil companies,including giant ExxonMobil.

Marathon Ashland Petroleum LLC, which is 62-percent ownedby Marathon, moved an average of 891,000 barrels a day through its

HOUSTON

■ B A R T L E S V I L L E , O K L A .

Phillips posts loss on refining;production slides, prices shrinkCompany reports overall $25 million loss in first quarter — Phillips earned$162 million in fourth quarter, $516 million in first quarter last year

By Allen Baker PNA Contributing Writer

Phillips Petroleum Co. slipped to a loss in thefirst quarter as refining margins took a toll onprofits. Other companies also lost money onrefining, but most were able to stay profitable

with upstream cash flows. Not Phillips, which report-

ed an overall loss of $25 mil-lion, compared with a profit of$516 million a year earlierwhen prices were booming.The Bartlesville, Okla., com-pany earned $162 million in the fourth quarter.

Downstream operations lost $88 million in thequarter, as margins dropped 45 percent just com-pared with the previous quarter. On the year-over-year comparison, average crack spread was down62 percent. Scheduled maintenance in the quartercut capacity utilization to 86 percent, compared

with 94 percent a year ago, and cut operatingresults by about $45 million after taxes. The refin-ing, marketing and transportation segment showeda profit of $46 million in the same quarter a yearago, before the Tosco acquisition.

On the upstream side, production slipped 1 per-cent from a year ago to 834,000 barrels of oilequivalent daily from 845,000. Fourth-quarterflow was 836,000, but the company said seasonaldeclines in Alaska will push the number to about800,000 for the current quarter.

Exploration and production yielded a profit of$158 million for the quarter, just a third of the

■ I R V I N G , T E X A S

ExxonMobil profits take plunge;downstream operations show loss

By Allen BakerPNA Contributing Writer

Lower prices and weak refinery margins pushedearnings down as the world’s biggest investor-owned oil company kicked off the first-quarterreports for the industry.

Exxon Mobil Corp. reported overall profits of$2.09 billion, a drop of 68 percent from the firstquarter of 2001,when high prices,particularly fornatural gas, pro-duced the second-largest quarterly earnings in the company’s history— $5 billion. The Irving, Texas company made$2.68 billion in the fourth quarter.

Gas prices in North America were 70 percentbelow the robust amounts received in the 2001quarter, and crude oil brought 20 percent less. That

cut upstream earnings by $1.77 billion to $2.01 bil-lion. Much of that came in the United States,which was responsible for $1.2 billion of thedecline.

Big surprise in downstream results

The big surprise was in downstream results,even though companies across the industry havesaid refinery margins are slim.

ExxonMobil reported a loss of $28 million onthose operations, even though U.S. refineriesincreased their throughput by 5 percent. That com-pares with profits of just under $1 billion in the2001 quarter from the downstream.

“In total, the confluence of margin weakness inboth the refining and marketing sectors led to adownstream margin environment that was theworst seen since the mid-80s,” said Lee R.Raymond, ExxonMobil’s chairman.

see EXXONMOBIL page 6see MARATHON page 6

Phillips said contractual pricing lags inAlaska and other areas hurt results even

though crude prices rose in the first quartercompared with the fourth quarter of 2001.

see PHILLIPS page 6

FINANCE & ECONOMY6 Petroleum News • Alaska Week of April 28, 2002

Margins improve in new quarter

The company says margins haveimproved in the early weeks of the newquarter.

Overall, product sales dropped by 288thousand barrels daily to 7.70 billion bar-rels, as demand slipped in Europe andAsia.

The company boosted capital andexploration spending by $458 million, or18 percent, to $2.97 billion. Focus was onthe upstream, where those investmentsrose 28 percent as part of the company’sgoal to boost production by 3 percentannually.

But instead, production slipped 3 per-cent for both liquids and gas comparedwith the year-ago period. Liquids slid to2.54 million barrels a day, while daily gasflow dropped to 11.74 billion cubic feet.

ExxonMobil said that OPEC quotarestrictions and natural field declines

were the reason for the drop in oil pro-duction.

Gas volumes up in Asia-Pacific

Gas volumes were up in the Asia-Pacific region as the big Arun field inIndonesia wasn’t curtailed as it was a yearago. But that was more than balanced bynatural field decline and lower demand inEurope.

Profits dropped by a third in the chem-ical business, which showed earnings of$132 million.

Bigger pension payments kicked cor-porate and financing costs up 71 percentto $116 million, while merger expensesof $60 million were down by a third com-pared with the 2001 quarter.

Revenues dropped $13.77 billion, or24 percent, to $43.53 billion in the firstquarter of 2002 compared with the year-ago period.

That was down 8 percent from the$47.3 billion ExxonMobil collected in thefourth quarter. ◆


EXXONMOBIL

refineries, up 2 percent compared with the2001 quarter.

But the refining and wholesale marketingmargin was a razor-thin 1.62 cents per gal-lon, compared with 8.65 cents a year earlier.

E&P profits way down

Exploration and production producedprofits of $165 million for the quarter, bare-ly a fourth of the $600 million generated lastyear, when prices were significantly higher.

The Houston-based company collectedan average of $18.06 for each barrel of oil,down 26 percent from the $24.35 it receivedin the first quarter of 2001. Gas brought$2.46 per thousand cubic feet, not even halfof the $5.47 received last year.

Hedging activities helped a bit on the gassales, but hurt the results from oil.

Liquids production worldwide for thequarter dropped 8 percent to 206,000 barrelsdaily from 222,900 barrels. U.S. liquidsdeclined slightly to 122,200 barrels dailyfrom 124,400 barrels.

Worldwide gas production rose a bit to1,309 million cubic feet daily, from 1,222million cubic feet a year ago. But new gasfrom West Africa brought 49 million cubicfeet daily.

Production declined in all other regions.Marathon bought producing properties in

Equatorial Guinea at the beginning of theyear for $993 million. It also traded someassets with XTO Energy to acquire coalbedmethane reserves in the Powder RiverBasin.

Revenues and other income totaled $6.45billion, a drop of 26 percent from $8.72 bil-lion a year earlier. Revenues for the fourthquarter were $6.85 billion.

—Allen Baker, PNA contributing writer


MARATHON

$472 million of a year ago as prices weresignificantly lower for both oil and gas.

Steep drop in Alaska

Alaska operations showed an evensteeper drop, with the state contributing$33 million in profits this quarter, com-pared with $227 million a year ago. Thatcame even though Alaska production roseto 353,000 barrels daily from 349,000 ayear ago.

Phillips said contractual pricing lags inAlaska and other areas hurt results eventhough crude prices rose in the first quartercompared with the fourth quarter of 2001.Revenues from the E&P segment droppedby more than a billion dollars overall com-

pared to the 2001 quarter, to $1.29 billionfrom $2.31 billion.

The chemicals business, a joint opera-tion with ChevronTexaco, cut its losses abit, to $8 million from $39 million a yearago.

But corporate expenses drained $139million from the bottom line, up from$125 million a year ago.

The company said that was due to $15million in benefit-related costs, particular-ly accelerated vesting of some stock com-pensation because shareholders approvedthe merger with Conoco.

Revenues for the quarter were $9.40billion, compared with $5.32 billion a yearearlier, before the Tosco acquisition. Thecompany took in 6 percent less than theprior quarter, when revenues were $9.96billion. ◆


PHILLIPS

BARTLESVILLEPhillips Alaska queries employeesabout possible staff reductions

Phillips Alaska, looking to downsize amid its parent company’s pending mergerwith Conoco, is asking some employees if they want to take retirement or buyoutpackages.

Phillips, based in Oklahoma, employs 960 people in Alaska. The company has dis-tributed surveys to some departments asking workers if they are interested in keepingtheir jobs, retiring or accepting a buyout, said Dawn Patience, a Phillips spokes-woman.

She described those who received the survey as providing “centralized support ser-vices,” which could include some administrative positions.

“We don’t expect there will be a very large impact,” she said. Phillips plans to complete its merger with Texas-based Conoco this summer, an

$18 billion deal that would create the No. 3 U.S. oil company. All Alaska employees should know their fate within 45 days after the deal closes,

Patience said. One reason the merger should not affect Alaska much is because Conoco does not

have a presence in the state. The company left Alaska in 1993 when it traded theNorth Slope’s Milne Point oil field to BP in exchange for properties in the Gulf ofMexico.

Phillips is looking to streamline jobs at its oil tanker division, based in LongBeach, Calif. The tankers move Alaska crude from Valdez to the West Coast. Conocoalso has a tanker company, Patience said.

—The Associated Press

JUNEAUTesoro loses bid to limit state probe

The Alaska Supreme Court has ruled against Tesoro Petroleum Corp. in its attemptto limit the scope of the state attorney general’s gasoline price-fixing investigation.

The high court, with the justices split 3-1, affirmed Superior Court Judge PeterMichalski’s ruling that the state wasn’t seeking an “unreasonable and oppressive” stackof records. The majority also found that the law firm of Hosie, Frost & Large qualifiedas an “authorized employee” of the state and therefore may see the documents from theinvestigation. Ron Noel, general counsel for Tesoro in Alaska, said April 24 that theSupreme Court ruling was mainly moot, as the company already had turned over allrequested records to the state by the middle of last year. The company firmly denies ithas conspired with other companies to limit competition and keep fuel prices high inAlaska, he said.



WORLD OIL


EUROPEShell completes acquisitionof solar energy joint venture

Shell Renewables said April 22 that it has concluded acquisitionof all the shares held by Siemens AG and E. ON Energie AG in theformer solar photo-voltaic joint venture Siemens und Shell SolarGmBH.

Shell said regulatory approval for closing the transaction hasalready been received.

Philippe de Renzy-Martin, executive vice president of ShellSolar, a Shell Renewables’ business, said: “I am delighted that wehave concluded this deal today. We now combine state-of-the-artmanufacturing facilities in Europe and North America with salesorganizations on all continents. We are in a very strong position tobuild a sustainable, commercially successful PV business.”

Shell Solar, which is now the fourth largest photo-voltaic com-pany in the world, has world-class operations in both research anddevelopment and manufacturing, and employs some 1,100 people,the company said.

Shell said the deal reaffirms the Royal Dutch/Shell Group ofCos. Commitment to new energies — solar, wind, hydrogen andgeothermal and is part of a potential investment of a half-billion toa billion dollars in solar and wind energy over the next five years.

State wants PUC to setpump prices

The Hawaii Public Utilities Commission would regulate whole-sale and retail gasoline prices in Hawaii under legislation proposedby the attorney general’s office.

The proposal was submitted April 19 in the form of an amend-ment to a Senate bill aimed at reducing pump prices.

Tesoro Hawaii spokesman Nathan Hokama said the companyreserved comment until it had time to review the legislation.

The commission would set maximum prices each week, basedon prices of regular unleaded gas over the previous five businessdays in Los Angeles, San Francisco and the Pacific Northwest.Adjustments would be made for the Neighbor Islands.

Manufacturers, wholesalers and retailers who sell gasolineabove the maximum prices wold be fined by the PUC.

Those who overcharge would face a penalty of $250,000 orthree times the overcharges, plus costs of bringing civil action,whichever is greater.

Gas station lease rent would also be capped under the proposal. The attorney general’s office investigated gasoline prices for

four years before the state reached a $20 million settlement withseveral oil companies earlier this year.

The Hawaii Department of Business, Economic Developmentand Tourism and the oil industry have raised concerns in the pastover price regulation.


HAWAII■ C A N A D A

British Columbia sees energy as a ‘cornerstone’ of economyProvince announces package of legislative amendments to attract C$24 billion innew investment over next six years; premier says province ready to ‘serve’ industry


The British Columbia government has takenanother step to entice the oil and gas industry tothe province by introducing legislation thatreduces red tape, improves access to resources

and creates a better investment climate. Energy Minister Richard Neufeld said April 19

his government “aims to double oil and gas produc-tion ... by fulfilling our commitment to removing bar-riers that stand in the way of reaching those goals andto create single-window authorities” for energydevelopment.

High on the list of proposed amendments is amove towards granting single exploration permits fora general area, rather than issuing approvals on awell-by-well basis.

The province also expects the changes will accel-erate development of coalbed methane, where BritishColumbia reserves have been estimated at 90 trillioncubic feet scattered across the province.

British Columbia Premier Gordon Campbell,speaking to industry leaders in Calgary April 18,vowed the British Columbia Oil and GasCommission will become more efficient in providinga greater volume of permit approvals in a “timelierfashion” in a province that has often been seen ashostile to oil and gas development.

Goal of billions

The province has set a goal of attracting C$24 bil-lion (US$15 billion) in energy and mineral invest-ment over the next six years.

“It’s one thing to be open for business and anoth-

■ W E S T E R N C A N A D A

Drillers, land buyers keep lowprofile in Western CanadaFirst quarter returns on land auctions plunge 55 percent; new well permitsdive 33 percent, reflecting sharp cuts in capital spending budgets


The latest blip in oil and natural gas prices hasfailed to register on land buying and drillingacross Western Canada. Exploration land, withthe single exception of northeastern British

Columbia, is selling at its lowest price in three yearsand governments are bearing the cost.

Auctions of publicly owned rights fetchedC$207.8 million in the first quarter, a huge 55 percentplunge from a year earlier when payments reachedC$464 million.

At total of 2.49 million acres was sold, down 22percent from the 3.21 million acres a year earlier.

The average price per acre slumped 22 percent toC$83 from C$188 in the first three months of 2001.

Alberta sales down

Alberta’s five land sales fetched C$113 million,

down from C$238 million a year earlier, with only thefoothills area of the Canadian Rockies bucking thedownward trend, where average prices jumped toC$152 an acre from C$123.

In northern Alberta, average per acre pricesdropped the most to C$49 from C$119, while thePlains area fell to C$56 from C$85.

Northeast British Columbia continued to set thepace for all of Canada, with by far the priciest land.The first quarter average was C$193, short of lastyear’s average C$208, but a strong gain from theC$145 in the final quarter of 2001. The pace quick-ened again in the province’s last sale of the quarter,with British Columbia averaging C$209 an acre com-pared with only C$80 in Alberta’s latest sale.

The focus of most British Columbia speculation isan area about 40 miles southwest of the prolificLadyfern discovery, where Calgary-based brokeragePeters & Co. Ltd. said in a recent research note that

see CORNERSTONE page 8

see PROFILE page 8

Canadian Natural Resources Ltd. may havemade a “major successful” discovery. CNR,which has four wells in various stages ofcompletion, has refused to comment until itswinter drilling program is completed.

But so far this year, buyers have spentC$14 million acquiring exploration proper-ties near Ladyfern, including a staggeringC$1.65 million by Canadian CoastalResources Ltd. for 700 acres of deeperrights.

Less than 50 percent of rigs working

Utilization of Canada’s drilling fleet hasdropped sharply before spring break-up,with less than 50 percent of the rigs at workfor the first time this year.

In the latest survey of drilling contrac-tors, 309 rigs were reported to be at work,down 111 from a year ago.

The first quarter had an average 443 rigsemployed or 67 percent of the available fleetof 663 — the lowest three-month countsince 1999 and down 22 percent from theJanuary-March 2001 total of 572 rigs, or 91percent fleet utilization.

The busiest rigs this year have been thosewith depth capacities greater than 15,000

feet, with 22 of 39 units active at the end ofMarch.

Sharply reduced capital budgets this yearare expected to show up even more dramat-ically in drilling programs in the spring andsummer.

The Canadian Association of OilwellDrilling Contractors said the spring thawwill likely see rig utilization drop to 20 per-cent, compared with the usual 40 percent atthis time of year.

Permits down

Operators in Alberta, British Columbiaand Saskatchewan have already signaledtheir intentions to back off by reducing theirdemand for new well permits by 33 percentin the first quarter — a 28 percent drop forgas-targeted well and 47 percent for oil tar-gets.

Regulators authorized 4,298 new wellsduring the quarter, down from 6,381 in thesame period last year and the lowest since1999, although not far from the seven-yearaverage of 4,343.

A total of 2,872 gas permits were issued,while oil licenses tumbled to 977.

Development and exploratory drillingwere both down by about one-third, withdevelopment authorizations at 2,665 andexploration licenses at 1,310.

Leading the pact of most active operatorsis EnCana Corp., with a combined 937 per-mits issued to Alberta Energy Co. Ltd. andPanCanadian Energy Corp. before theymerged.

Next were Husky Energy Inc. 227,Canadian Natural Resources Ltd. 204 andBurlington Resources Canada Energy Ltd.163. The most active explorers werePanCanadian 148, Husky 121 andBurlington 105. ◆

WORLD OIL8 Petroleum News • Alaska Week of April 28, 2002

er thing to serve business,” he said.“Energy is a critical cornerstone of B.C.’seconomic future.”

Campbell said there are many moregas pools in northeastern BritishColumbia to match the Ladyfern discov-ery, Canada’s largest gas find in 15 years,and “we intend to find them.”

He also said a report by an indepen-dent panel of scientists on the BritishColumbia offshore wills soon be released.

Without disclosing any details, he sug-gested the industry will like what it hears.

Coalbed methane

Among its legislative changes, thegovernment said it hopes to encouragecoalbed methane development by elimi-nating the current 2,000-foot depthrestriction on exploratory drilling, thusencouraging the industry to developunexplored resources.

Schemes that may be approved underthe British Columbia Petroleum andNatural Gas Act will be broadened toinclude projects to develop resources

such as coalbed methane, which theprovince hopes will facilitate its royaltyincentive for natural gas produced fromcoal formations. Another change to theact would eliminate the current calendar-year term for geophysical licenses andadd a provision for the term of a licensesto be prescribed by regulation.

Increased access

Neufeld said the province aims toincrease access to government-ownedlands and develop unexplored resources.

The act is also being amended toestablish a “coordinated cost-recoverysystem associated with the development,operation and maintenance of much-needed resource infrastructure. The (gov-ernment) will pursue public-private part-nerships to implement the system.”.

As an example, Neufeld cited a road innortheastern British Columbia which pro-vides access to about 10,500 square milesof oil and gas territory and resulted in theprovince collecting C$126 million in landsales and C$232 million in royalties andtaxes in 2001.

The new legislation would allow theprovince to continue that partnership andto negotiate other similar deals. ◆


CORNERSTONE


PROFILE


EXPLORATION & PRODUCTION


PRUDHOE BAYBP has spill at H pad; oilcontained on snow surface

The Alaska Department of Environmental Conservation,Division of Spill Prevention and Response, said April 18 that BPExploration (Alaska) Inc. reported a spill at well 21 at H pad inthe western operating area at Prudhoe Bay.

The spill, estimated at 63 gallons of brine and 21 gallons ofcrude oil, occurred when a well line on the H-21 well rupturedfollowing an unexpected shutdown atGathering Center 2 which occurred dur-ing maintenance work.

DEC said all GC-2 well pads shutdown as designed after the facility shut-down, causing wells that were flowinginto GC-2 to reach their static shutdownpressures.

BP spokesman Ronnie Chappell toldPNA April 22 that “all of the safety sys-tems worked exactly as they were supposedto.”

The occasion of the break was the wellshutdown caused by the CG-2 shutdown, but this break,Chappell said, occurred because of corrosion and could havebeen triggered by a planned well shutdown.

Western operating area wells have injectors on them throughwhich we inject corrosion inhibitor to protect this piping, he said.

“This particular well was one of a handful that had the injec-tor lower on the S riser than it is on most wells and the well linefailed above the injection point.”

Chappell said BP will be moving the injection point on thatwell and on about two dozen others in the western operatingarea.

Oil on snow surface

DEC said the automatic shut-in valve on well 21 activatedafter the release and stopped the flow of oil.

The oil is contained on the snow surface, DEC said, allowingfor easy recovery operations. Seventy cubic yards of contami-nated snow had been removed April 18 and the well house wasto be dismantled and removed to a wash bay for cleaning and thewell head and pipeline cleaned by hand, DEC said.

Both the well house and the well head were damaged in therelease.

DEC said cleanup continues and an investigation team hasbeen assembled to determine the root cause of the release.

High winds spread the aerosol type release over the gravelpad and tundra and approximately 1.5 acres in the vicinity of thewell house were lightly oiled, while a larger area was contami-nated with sporadic traces of oil. Contaminated snow is beingmelted for reinjection.

—Kristen Nelson, PNA editor-in-chief

Ronnie Chappell, BPExploration (Alaska)spokesman

Kri

sten

Nel

son

■ F A I R B A N K S

Tapping North Slope heavy oil Phillips Alaska uses new drilling technology to boost heavy oil production

By Patricia JonesPNA Contributing Writer

North Slope oil fields contain a number ofvery large and virtually untapped resources— several billion barrels of heavy or vis-cous oil contained in shallow deposits,

either within or just belowpermafrost layers.

How to economicallyproduce oil from thesetechnologically challeng-ing reservoirs has plaguedoperators on the NorthSlope for years, accordingto Steve Bross, PhillipsAlaska’s satellite fielddirector at the Kuparukfield.

“Over the last 15 years,there’s been about $750 million spent on heavy oilon the North Slope,” he said, during a viscous oilpresentation April 11 at an energy workshop held

at the University of Alaska Fairbanks. During his presentation, Bross outlined charac-

teristics of heavy or viscous oil on the North Slope,explained technical and economic challenges fordeveloping those resources and described somesuccessful wells that Phillips has completed inrecent months.

New drilling techniques boost production

Key to recent success has been implementationof a new drilling technique called multi-lateralwell drilling, Bross said.

Using this technique imported to the NorthSlope, drillers use horizontal directional drillingtechniques to drill multiple sidetracks out from onemain vertical well bore.

That way, a larger area of the shallow layer ofoil-rich sands can be tapped from one well bore,increasing the oil flow from conventional welldrilling.

“We made a quantum leap from wells that pro-duced 250 to 300 barrels a day, to wells making

■ F A I R B A N K S

Enhanced oil recovery methods outlinedU.S. Department of Energy funds numerous EOR research projects

By Patricia JonesPNA Contributing Writer

For years, U.S. Department of Energyresearchers have collaborated with industry tostudy various techniques to improve produc-tion levels from oil and gas deposits.

Charles Thomas, Ph.D., a U.S. Department ofEnergy representative who has participated in anumber of different enhanced oil recovery studies,presented an overview of such government-fundedresearch during an energy workshop held at theUniversity of Alaska Fairbanks on April 11 and12.

Researchers have come to some general conclu-sions about enhanced oil recovery techniques, hesaid, some of them fairly obvious to the oil and gasindustry.

“The reality is that recoverable effectiveness ofmethods are lower in the field than in the lab,”Thomas said, generating a substantial amount oflaughter from the more than 100 industry, govern-

ment and university personnel attending first dayof the workshop.

“We have also learned that we have to under-stand the geology of our target reservoir,” headded.

Knowledge about underground structures andformations hosting crude is necessary to developappropriate recovery methods, he said. “It doesn’tmatter how good the project is if you can’t contactthe oil to sweep it up.”

Finally, Thomas praised the use of certainchemicals injected underground to increase oilrecoveries. “The small slugs of high contact chem-icals do work well, and if you can control them,you can have an economic recovery.”

Yet the most common methods of enhanced oilrecovery involve thermal steaming and the injec-tion of gas liquids, he said.

EOR methods outlined

Using cartoon-like drawings to illustrate each

Steve Bross, PhillipsAlaska’s satellitefield director atKuparuk

Pat

rici

a Jo

nes

see HEAVY OIL page 10

see RECOVERY page 11

well over 1,000 barrels and even up to2,000 barrels a day,” Bross said.

And the increased production hascome with “not substantially a lot moremoney for the base well design,” headded.

As the first multi-lateral wells held andproduced at elevated rates, with 1,500-foot lateral extensions, the company has“gotten more aggressive with it,” Brosssaid. “We’ve pushed the drilling envelopewith every success we’ve had drilling.”

Currently, Phillips is operating sixmulti-lateral wells in the Kuparuk Riverunit. One well drilled was over four milesin length, but only 3,500 feet deep.

“We’re staying in the sands 100 per-cent of the time, so this is state of the artdrilling technology here,” Bross said.

The breakthrough came in 2000, whenviscous oil managers felt that a “technol-ogy step change” was necessary, Brosssaid.

Heavy oil historically expensive,low producer

During the 1990s, Alaska’s NorthSlope producers all took various shots attapping the massive-sized heavy oildeposits. From Conoco’s initial efforts atMilne Point, to BP Exploration’s work atSchrader Bluff, the combined total spend-ing on North Slope heavy oil was $750million, Bross said.

Included in that effort was Phillips’predecessor, ARCO Alaska, which spent$250 million on a pilot program thatincluded drilling 20 test wells in WestSak in 1998.

The company applied technology usedin Lower 48 heavy oil deposits, he said:“The result we were getting were these $5million, 300-barrel per day wells thatnone of our management liked.”

Even though capital costs werereduced due to the use of existing infra-structure, the crude produced from WestSak typically is lower in value. That’sbecause it lacks the higher end productsthat are more valuable to refiners, Brosssaid.

“You’re starting out several dollars abarrel deficit in price and value of thecrude when you put it in the pipeline,” hesaid.

Couple that with a slope-wide trendfor expensive operations and an increaseon top of that for the labor and equip-

ment-intensive viscous oil wells — pro-ducers are looking at marginal returns inthe best case scenario.

“If you drop a couple dollars in valuefrom low oil quality, and pick up a coupledollars per barrel in operating costs,we’re four or five dollars a barrel in thehole when we start to do viscous oildevelopment,” Bross said.

Therefore, low market prices directlyaffect progress on such programs.

“Because of higher operating costs andlower values, anytime the price takes adownturn, this is one of the first projectsthat comes up on the cutting blocks,”Bross said.

“Too good to walk away from”

Why tackle all of these technologicaland economic challenges? Because thesize of the heavy oil resource is so large,it makes these hurdles look like meremosquitoes to slap out of the way.

“There’s general agreement that it’sbig, really big, and it all underlies existinginfrastructure,” Bross said. “That’s whathas driven this $750 million investment— we keep spending money on it becauseit’s too good to walk away from.”

Estimates vary on the actual size ofheavy oil deposits, and how much of thatresource is actually recoverable. Duringhis presentation, Bross went throughsome of the known accumulations,reporting deposit size and then how muchis believed to be recoverable.

All told, he described up to 8 billionbarrels in core areas of Schrader Bluff,West Sak and Ugnu as recoverable, usingconventional heavy oil technology, thenew multi-lateral drilling and in thefuture, still different technology thatPhillips is looking at in Canada.

That new technology would be usedon the Ugnu deposit, located above theWest Sak accumulation. Estimates putUgnu’s total resource at 7 billion barrels,Bross said, all located in a shallow layerwith many areas bound by permafrost.

Yet more heavy oil resources existoutside the core areas of Ugnu and WestSak. These are considered immobile oil,and will require new technology to tap,Bross said.

Using primary and secondary recoverywith water flooding, Phillips expects toproduce 20 percent of the West Sakresource, Bross said. “That’s a good num-ber for West Sak.”

Additional enhanced oil recovery tech-niques should add another 8 to 10 percentto the amount of oil recovered, he said.

Keeping heavy oil developmentcosts down

One benefit that the North Slope heavyoil deposits can tout is an existing infra-structure network for processing andtransportation.

“Part of the attractiveness of theresource is that it sits all underneath exist-ing infrastructure, and we can developfrom existing pads,” Bross said.

Hence, the recent efforts to tap heavyoil. That’s because heavy oil can be pro-duced and processed economically onlywhen offset with a mix of higher quality,lower cost crude also flowing through thesame infrastructure.

“Time is not our friend, because weare captive of the economics of the fieldthat anchor us,” Bross said. “It’s impor-tant to do these projects while the basefield is healthy, and we have the infra-structure to support us.” ◆

EXPLORATION & PRODUCTION10 Petroleum News • Alaska Week of April 28, 2002


HEAVY OIL “Time is not our friend... It’simportant to do these projects whilethe base field is healthy, and we have

the infrastructure to support us.” —Steve Bross, Phillips Alaska Inc.

SAN FRANCISCOBP’s Laird wins award for speech

Paul Laird of BP Exploration (Alaska) Inc. has received an award for his speech-writing. Laird won the award for a speech he wrote for Richard Campbell, former headof BP in Alaska. The speech, titled “Following the Yellow Brick Road,” was given atthe Resource Development Council’s annual meeting last June.

The Gold Quill Excellence Award comes from the International Association ofBusiness Communicators in San Francisco. It was one of just 46 of the awards givenout to public relations workers in a competition spanning more than 20 countries.There were more than 1,300 entries.

process, Thomas outlined severalenhanced oil recovery methods that thefederal energy department has spent timeand money researching.

One process he described was steamflooding, injecting steam into the under-ground formation. As the steam cools, itcondenses to water. “In the same process,it heats the oil and causes it to flow.”

In situ combustion achieves the sameresult, Thomas said, except that air isinjected into the reservoir to create a com-bustion front.

He briefly talked about gas flooding,which involves injecting natural gas liq-uids or even CO2 into underground reser-voirs to increase oil flow. This techniqueworks on the North Slope, Thomas said,because of the large quantities available.“This is just a case of looking at the spe-cific needs and having the opportunity totake advantage of it.”

“What we usually find in carbon diox-ide flooding or any other gas project isthat you use the gas — CO2, nitrogen orinjectant, followed by water, followed byanother slug, followed by water,” headded.

Researchers have also tested the injec-tion of certain chemicals, which will con-tact crude oil and help to mobilize it.

“In this process, to protect your poly-mers you have to pre-flush the reservoirs,then inject the chemicals,” Thomas said.“These are the kinds of innovative tech-nologies that we’ve been working on formany years.”

Finally, researchers have also investi-gated the use of microorganisms in aprocess similar to the chemical injectantmethod. “It’s complicated like the chemi-cal processes, but with this, you also havemicro-organisms to manage.”

EOR benefits North Slopeproducers

Thomas pointed out how enhanced oilrecovery methods have already benefitedAlaska’s North Slope producers.

“Prudhoe Bay got into gas and waterinjection — it started very early (in thefield’s life), which was the right thing todo,” he said. “As technology came along,it was either applied or developed atPrudhoe Bay, where it was all put togeth-er in a very intelligent way.”

At the start of Prudhoe Bay’s develop-ment, producers estimated the field con-tained about 9 billion barrels of recover-able crude, Thomas said. “By 1986, thishad already increased to 10.2 billion, withthe introduction of these technologies ofrecovery,” he said. “In 2000 it was up toaround 13 billion barrels and now it’s over14 billion.”

Miscible injectant projects at Kuparukhave also helped to increase production atthat field, which contains some heavy oildeposits.

Continued research is focused onheavy oil, Thomas said.

“Outside of finding new fields, we’relooking at enhanced oil recovery inheavy oils, which is a major target ofabout 25 to 30 billion barrels of oil,” hesaid. “Maybe 3 to 6 billion barrels is areasonable target — we certainly hopeso.”

Continuing the flow of crude oilthrough the trans-Alaska pipeline is cru-cial to the North Slope oil industry,Thomas said.

“As oil throughput declines, tariffscontinue to go up,” Thomas said. “It’simportant to maintain throughput …important not just for new projects, butit’s important to everything existing onthe North Slope.” ◆

EXPLORATION & PRODUCTIONPetroleum News • Alaska 11Week of April 28, 2002


RECOVERY

Continued research is focused onheavy oil. “Outside of finding new

fields, we’re looking at enhanced oilrecovery in heavy oils, which is amajor target of about 25 to 30

billion barrels of oil. Maybe 3 to 6billion barrels is a reasonable target

— we certainly hope so.” —Charles Thomas,

Department of Energy

WASHINGTON, D.C.Heavy oil tax incentive amendmentpasses U.S. Senate

The United States Senate approved an amendment April 24 to the energy billwhich includes language by Alaska Sen. Frank Murkowski that will encourageproduction of viscous oil from Alaska’s North Slope and help Alaska coal to beused to produce synthetic fuels, the senator’s office said.

The amendment calls for Alaska heavy oil to receive a $3 per barrel federal taxcredit, an incentive designed to encourage production of an additional 200 millionbarrels of heavy oil from Phillips Alaska Inc.’s West Sak field over the nextdecade.

The amendment also provides a $3 credit (equivalent to oil-produced energy)for low-pollutant synthetic fuels to be produced from coal. The measure specifi-cally expands and extends an existing tax credit to apply to fuels produced fromeither tar sands, brine, biomass or coal before 2007.

The Murkowski language was included in the tax portion of a FinanceCommittee amendment to the energy bill.


Unocal Alaska anticipates that its KingSalmon platform in northern CookInlet will be back in full productionbetween April 27 and May 10 after a

fire April 20, Unocal Alaska spokeswomanRoxanne Sinz told PNA April 22.

In an April 23 statement the companysaid “the K-17 well has been shut in withnew blow-out prevention equipment and issafe. The structural integrity of the facilityhas been assessed as suitable for currentoperations.”

A pressure seal will be installed in thewell to facilitate investigation and to restorethe facility to production, and the platformis expected to be back in full productionbetween April 27 and May 10.

Unocal had said April 22 that no struc-tural damage to the rig was apparent andthat production areas and the platformstructure were not effected.

Cause under investigation

The fire started when gas was releasedduring well work, Sinz said. The cause isstill under investigation.

Four people were injured. Three weretreated and released at local hospitals, shesaid. The fourth person was sent toHarborview Medical Center in Seattle as aprecautionary measure with a burn to hishand and a burn to his face, Sinz said. Thecompany said April 22 that the worker atHarborview was in satisfactory condition.

Of the workers treated and released inAlaska, one received a shoulder injury, onewas treated for smoke inhalation and onereceived a first-degree burn.

Damage occurred to the drilling rig atthe platform, which had been producing7,000 barrels per day of crude oil gross, aswell as natural gas which is used as fuel onthe platform.

Although the U.S. Coast Guard respond-ed, Sinz said workers on board the platformput out the fire within 45 minutes.

“We’re very proud of employeesbecause they responded in accordance withthe emergency training they have received,”she said.

Sinz also said that Unocal was pleasedwith the cooperation the company receivedfrom governmental and regulatory agen-cies.

Blowout preventer damaged

Unocal said April 22 that the K-17 wellhas been stable since the initial incident, butthat a small amount of gas flowed to the sur-face and was vented early in the morning ofApril 22.

The blowout prevention system on theK-17 well is functioning, the company said,but the system was damaged in the fire andits integrity is uncertain.

Unocal said April 22 that “until a newblowout preventer can be installed on top ofthe damaged preventer and a plug placed inthe well, the condition is considered stablebut serious” and only personnel essential tocurrent operations are being allowedonboard the platform.

Unocal said all production for the plat-form has been shut in and will remain shutin until the assessment is complete.

The Unocal Corp. investigation hasbegun. “The investigation team is not con-sidered essential to the current assessmentand repair operation. As such, they do nothave access to the platform at this time,” thecompany said April 23. Both the UnocalCorp. investigation team and the U.S.Occupational Safety and HealthAdministration have been provided officespace in Kenai to begin reviewing docu-ments, Unocal said April 23.

Safety and rescue equipment, includingtwo helicopters and work boats, continue onstandby.

Replacing a pump in the well

The fire began about 3:30 p.m. April 20while crews were replacing a pump in thewell.

Unocal said the well and platform imme-diately ceased operations and there was nooil spilled.

COOK INLET12 Petroleum News • Alaska Week of April 28, 2002

■ K I N G S A L M O N P L A T F O R M

Platform to be operational againby May 10 after April 20 fireUnocal has shut in well with new blowout preventionequipment; no structural damage apparent to rig;production areas and platform structure not effected

see PLATFORM page 13

COOK INLETPetroleum News • Alaska 13Week of April 28, 2002

ANCHOR POINTAnchor Point may study constructionof harbor to boost local economy

Residents of Anchor Point are exploring the possibility of constructing a harborto help boost the local economy.

Backers of the project say a harbor would make it much easier to launch boatsat Cook Inlet. The area’s economy is heavily dependent on recreation, tourism andfishing.

“From the chamber’s perspective and from a business perspective, a harborhere would be of just critical importance,” said Tom Clark, chairman of theAnchor Point Chamber of Commerce. “Anything you can do to improve the infra-structure is very important to business.”

The Kenai Peninsula Borough clerk’s office certified a petition in March thatwould create a service area, allowing backers of the harbor proposal to partnerwith the borough government.

Residents and businesses in the service area could be taxed to fund a feasibili-ty study. The establishment of a service area would also allow the borough to seekgrants for the study.

Borough mayor Dale Bagley estimates the cost of the study at about $1 million.A public hearing on the harbor proposal is scheduled for May 8.


Unocal said its incident commandresponse structure was immediately initiat-ed April 20. Teams secured the platformand the company said it is working closelywith all appropriate agencies.

Fifty-two workers were on the platformat the time of the incident. Twenty-six non-

essential personnel were evacuated by heli-copter to nearby platforms within the hour.

The King Salmon platform is 55 milessouthwest of Anchorage and 24 milesnorthwest of Kenai.

King Salmon is one of four platforms atthe McArthur River field in Cook Inlet.King Salmon, along with Grayling andDolly Varden, was installed in 1967;Steelhead was installed in 1986. ◆


PLATFORM

■ C O O K I N L E T

Marathon announces two moresuccessful tests at Ninilchik unit

By Petroleum News • Alaska

Two more wells at Marathon Oil Co.’sNinilchik exploration unit south ofKenai have been successfully tested fornatural gas, the company said April 24.

The discovery well, the Grassim OskolkoffNo. 1, was announced earlier in the year.

Marathon is operator of the Ninilchikunit, which is 35 miles south of Kenai. Thecompany holds a 60 percent working inter-est in the unit; Unocal Alaska holds theremaining 40 percent.

The recently drilled Grassim OskolkoffNo. 2 well, drilled off the same pad as theGrassim Oskolkoff No. 1, “separately testedthree sands at a combined restricted gas rateof 11.9 million cubic feet per day,” the com-pany said. “The three tests were from a totalperforated interval of 169 feet, ranging indepth from 8,048-9,440 feet.”

The Falls Creek Unit No. 1 redrill testedgas at a restricted rate of 6.8 million cubicfeet per day from 36 feet of perforations in asingle sand at a depth of 8,714 feet. “Severalpromising intervals shallower in the well

were not tested,” Marathon said. The small-er Falls Creek unit, which lies in the north-ern third of the Ninilchik unit, is completelysurrounded by Ninilchik unit acreage andhas been incorporated into the Ninilchikunit, John Barnes, manager of Marathon’sAlaska business unit, told PNA April 24.

“Marathon is very encouraged by threesuccessful wells at Ninilchik, which havetested at a combined gas rate of nearly 30million cubic feet per day. Additionalexploratory drilling is expected in 2002 and2003 in preparation for first gas sales by thebeginning of 2004,” Barnes said.

As reported in the April 21 edition ofPetroleum News Alaska, Marathon plans tobegin gas development activities at theGrassim Oskolkoff drill pad approximatelynine miles north of Ninilchik in August andstart producing gas from the pad inDecember 2003.

Ninilchik gas will be transported to exist-ing or new markets through the proposedKenai-Kachemak Pipeline, a company joint-ly owned by Marathon and GUT, a sub-sidiary of Unocal. ◆

CONFERENCE14 Petroleum News • Alaska Week of April 28, 2002

By The Associated Press

Asix-person team is traveling fromNome to Barrow by snowmobile thismonth, hauling a compact computerlab on skis, as part of a scientific inves-

tigation of snow cover, climate change andArctic haze pollutants.

The SnowSTAR 2002 traverse includesresearchers from the U.S. Army’s ColdRegions Research and Engineering Lab inFairbanks. The team will measure the snowat more than 75 locations during its 700-mile trek across the Seward Peninsula, theBrooks Range and the North Slope.

“We’re trying to catch the broad regionaltrends of the snow — how it varies — andthat’s why it takes us so long,” expeditionleader Matthew Sturm, of the Cold Regionslab, said during a phone interview fromSelawik. “We’ve been taking samples allalong the way. We go no more than 10miles, and we stop.”

The expedition set out from Nome onMarch 22 and has passed through WhiteMountain, Council, Buckland, Selawik andAmbler. After crossing the Brooks Range,the team expects to reach the village ofAtqasak April 16.

Supported by the National ScienceFoundation, the project is part of a largerresearch effort into Arctic climate change,under the foundation’s Office of Polar

Programs.Building on previous research by Sturm

and others, the team will measure depth,density and layering with a battery ofsophisticated instruments. One test usesfiber optics and sensors to detect how muchlight filters through the snowpack.

“The team is documenting how depthcorresponds to geography,” Sturm said.“We’re trying to find out where the moisturecomes from. We’re particularly interested inwhether the storms that produce snow southof the Brooks Range are related to thestorms that produce snow north of theBrooks Range.”

Knowing the source of storms and snowcould help address other questions about thechanging Arctic climate, Sturm said.

Other tests involve collection of samplesfor lab analysis to track pollutants that mayhave drifted into Alaska from sources inAsia, a phenomenon known as Arctic haze.Gathering such detailed information aboutsnow along a 700-mile traverse in a singleseason will ultimately give scientists base-line data for gauging climate change. ◆

SAFETY & ENVIRONMENTPetroleum News • Alaska 15Week of April 28, 2002

HOUSTONBP’s Glover receives national MMScorporate leadership award

Nick Glover, crisis management coordinator for BP Exploration (Alaska) Inc.,received the U.S. Minerals Management Service Corporate Leadership Award for 2001at an April 11 ceremony in Houston, Texas.

MMS recognized Glover for his contributions in response planning and coordinationwith regulatory authorities, oil spill response research, and risk assessment which haveenhanced Arctic oil spill response preparedness. The agency said Glover is a key play-er in developing response strategies and tactics that represent the most realistic scenar-ios for responding to an oil spill in the Beaufort Sea, including broken ice conditions.

“Mr. Glover continues to be a positive force in expanding the knowledge and capa-bilities of response to oil spills in arctic waters,” said MMS Alaska Regional DirectorJohn Goll. “He willingly shares his extensive knowledge and experience in Arctic spillresponse with federal, state and other industry personnel to develop an effective arrayof response options to protect the Alaska environment,” he added.

The Corporate Leadership Award is given to individuals who have worked closelywith MMS to improve revenue collection and processes for offshore development.

■ N O R T H E R N A L A S K A

Science team studies Arcticsnow cover, climate change

The team will measure the snow atmore than 75 locations during its700-mile trek across the SewardPeninsula, the Brooks Range and

the North Slope.

ExxonMobil wins safety, goodcitizen national MMS award

Exxon Mobil Corp. said April 11 that the U.S. Department of Interior’sMinerals Management Service has selected ExxonMobil to receive its 2001National Safety Award for Excellence and the Corporate Citizen Award.

ExxonMobil received the National SAFE Award in the high-activity categoryfor the outer continental shelf in recognition of the company’s safety record andoperational performance at its offshore facilities in the Gulf of Mexico and off thecoast of California. The award honors companies for outstanding safety and envi-ronmental results and for demonstrating notable efforts to train and motivate theiremployees to conduct offshore operations in a highly responsible manner.

WASINGTON, D.C.Barrow slated for $35 million project

An amendment adopted April 23 to the Senate energy bill includes languageauthored by Sen. Ted Stevens for the creation of a Barrow arctic research center for cli-mate change research and scientific activities. The $35 million project is intended toreplace the decades-old Naval Arctic Research Laboratory in Barrow.

The amendment establishes a national climate change strategy to stabilize green-house gas levels without harming the economy, doubles the investment in energy tech-nology research and development, identifies response actions, and expands climatechange research, according to a statement by Stevens.

“Regardless of cause there has been a dramatic warming trend in the Arctic areas ofAlaska,” Stevens said. “Pack ice, which insulates our coastal villages from winterstorms, has shrunk. Increased storm activity has caused significant beach erosion thatmay displace entire communities along the coastline of Alaska.”

— Steve Sutherlin

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LAND & LEASING16 Petroleum News • Alaska Week of April 28, 2002

Major state oil and gas lease holdersMarch Sept. Mar. 30, 2002 Difference Mar. 30, 2002 Sept. 1, 20012002 2001 total March '02 % total totalranking ranking company acres to Sept. '01 acres acres

1 1 Phillips Alaska 1,045,320 11.30% 25.13% 939,1612 2 BP Expl (Alaska) 785,358 14.15% 18.88% 688,0333 4 Anadarko Petroleum 361,319 62.64% 8.69% 222,1534 3 Chevron USA Inc 307,465 20.24% 7.39% 255,7025 5 Union Oil Co 217,357 4.06% 5.23% 208,8866 6 ExxonMobil 185,738 -0.26% 4.47% 186,2167 7 Forest Oil Corp 171,102 0.76% 4.11% 169,8168 23 EnCana (AEC) 164,940 630.21% 3.97% 22,5889 no acres BBI Inc 101,828 2.45% 010 8 Marathon Oil Co 56,354 -2.58% 1.36% 57,84511 9 Evergreen Resources 48,573 -5.92% 1.17% 51,62812 44 AVCG LLC 47,018 2348.84% 1.13% 1,92013 11 * Lappi, Cory 44,919 no change 1.08% 44,91914 12 * Lappi, Troy 44,091 no change 1.06% 44,09115 13 * Bradshaw, Kory 43,669 no change 1.05% 43,66916 14 * Lappi, Linda 43,210 no change 1.04% 43,21017 15 * Orell, Elizabeth A 42,738 no change 1.03% 42,73818 16 * Bradshaw, Caroline 42,707 no change 1.03% 42,70719 17 * Fitzpatrick, Karen 41,728 no change 1.00% 41,72820 no acres 3793885 Canada Ltd. 35,348 0.85% 0

totals this group 3,830,782total leased acreage 4,158,845 18.972% 3,495,637

* shallow gas leases only

NOTE: BBI Inc. has acquired acreage formerly held by Escopeta.NOTE: EnCana is the new company formed by the recent merger of AlbertaEnergy Co. and PanCanadian Energy Corp.

Editor's Note: Acreage totals shown do not include results of the state's 2001 North Slope Foothills sale, the 2001 NorthSlope sale or the 2001 Beaufort Sea sale because leases for those tracts have not yet been issued.

STATEWIDEPotential State and Federal Oiland Gas Lease SalesAgency Sale and Area Proposed Date

DNR Cook Inlet Areawide May 1, 2002DNR Foothills Areawide May 1, 2002BLM NE NPR-A June 3, 2002MHT Cook Inlet Fall 2002 DNR North Slope Areawide Oct. 23, 2002DNR Beaufort Sea Areawide Oct. 23, 2002MMS Sale 186 Beaufort Sea 2003MMS Sale 188 Norton Basin 2003DNR Cook Inlet Areawide May 2003DNR Foothills Areawide May 2003DNR North Slope Areawide October 2003DNR Beaufort Sea Areawide October 2003MMS Sale 191 Cook Inlet/Shelikof Strait 2004MMS Sale 193 Chukchi Sea/Hope Basin 2004DNR Cook Inlet Areawide May 2004DNR Foothills Areawide May 2004BLM NW NPR-A mid-2004DNR North Slope Areawide October 2004DNR Beaufort Sea Areawide October 2004MMS Sale 195 Beaufort Sea 2005DNR Cook Inlet Areawide May 2005DNR Foothills Areawide May 2005DNR North Slope Areawide October 2005DNR Beaufort Sea Areawide October 2005MMS Sale 199 Cook Inlet/Shelikof Strait 2006MMS Sale 202 Beaufort Sea 2007MMS Sale 203 Chukchi Sea/Hope Basin 2007

Agency key: DNR, Alaska Department of Natural Resources, division of oil and gas, managesstate oil and gas lease sales onshore and in state waters; MHT, Alaska Mental Health TrustLand Office, manages sales on trust lands; MMS, U.S. Department of the Interior’s MineralsManagement Service, Alaska region outer continental shelf office, manages sales in feder-al waters offshore Alaska.

This week’s lease sale chartsponsored by:

PGS Onshore, Inc.

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The answer: Petroleum News • Alaska.

Go to the world’s most popularsearch engine, Google.com, andsearch for Alaska + petroleum.

The first publication web site you findis www.PetroleumNewsAlaska.com.

So, if someone is interested ininvesting in oil and gas leases orrelated business ventures in Alaska,where do you think they will look?

And soon they will have another rea-son to look at our newspaper andweb site because Petroleum News •Alaska will soon carry a classifiedssection that will have several cate-gories, including Leases for Sale andInvestment Opportunities.

If you’d like to place an ad, contactEd Brandt at Petroleum News •Alaska today. (907) 644-4444 [email protected]

Oil and Gas Leases For Sale

THE REST OF THE STORYPetroleum News • Alaska 17Week of April 28, 2002

the administration negotiate fiscal termsfor a project.

Kott disagreed with administration fis-cal notes for the bill: there is no loss ofrevenue, he said, because without this billthere won’t be anything to tax.

As this issue of PNA went to press, thebill was being held in House Finance fora second day of hearings and was tenta-tively scheduled to be heard in HouseRules April 29.

Action needed now

David Marquez, an attorney represent-ing VECO Corp., said the companybelieves Alaska’s economy desperatelyneeds a gas pipeline. The producers haveindicated that federal legislation is neces-sary, he said, but so is Alaska tax certain-ty and clarity.

“VECO feels a sense of urgency,” hesaid: “If action is not taken this year theonly opportunity for a significant boost inthe state economy may be lost.”

Asked about differences between thisbill and Senate Bill 360, the proposal forpipeline relief that is moving in theSenate, Marquez said SB 360 requires“clear and convincing” evidence that taxrelief is needed. That is a very vague test,and may be insurmountable, he said, andpredicted it would be a test that woulddiscourage producers from taking it on.

VECO Chairman and CEO Bill Allenand Vice President Rick Smith told thecommittee that VECO believes the stateneeds to act quickly to seize uniqueopportunities to market North Slope gas

while the window of opportunity is open. VECO “strongly suspects,” Allen said,

that “if the window shuts it may neveropen again.”

They also said that Sen. FrankMurkowski said recently that opponentsof an Alaska gas pipeline are now point-ing to a lack of commitment from Alaska.

BP, Phillips support bill

Both Ken Konrad, BP’s vice presidentfor gas, and Joe Marushack, PhillipsAlaska’s vice president for gas commer-cialization, told the committee their com-panies support the bill.

Konrad said HB 519 is modeled afterthe 1998 stranded gas act. It updates that

act and makes it available for a gaspipeline project.

There would be negotiations, he said,negotiations which both the executivebranch and the Legislature would need toapprove under the stranded gas act provi-sions, because that is the only way for theproducers to ensure fiscal certainty overthe life of the project.

Marushack said Phillips does notbelieve federal legislation is not a certain-ty.

State participation is important, hesaid, and HB 519 would be an “importantsignal to Congress” that Alaska hasstepped up to the plate on the project. ◆

Administration wants negotiation The administration opposes the tax incentive portion of House Bill 519 and

supports the portion reviving the Alaska Stranded Gas Development Act, whichexpired last June.

Commissioner of Natural Resources Pat Pourchot said April 19 in the HouseSpecial Committee on Oil and Gas that the administration opposes the bill becauseit would provide a grant of up to $500 million of state and local taxes and theadministration does not support tax relief outside of a negotiated process. By April24, however, when the bill was heard in House Finance, administration estimatesof lost revenues had risen to between $760 million and $900 million.

Deputy Commissioner of Revenue Larry Persily said Revenue prefers negoti-ation under the framework of the stranded gas act. He said the state could negoti-ate a lower take during construction and in the early years, but a higher rate whenthe line was profitable.

Asked to explain the changing fiscal note, Persily told House Finance that thefirst fiscal note was based on the proportion of the line which would be built inAlaska and assumed an average cost per mile of pipe. But the department lookedat it again, he said, and realized it would probably cost more to build in Alaskathan in Canada. Alaska is about 20 percent of the pipe by miles, but would prob-ably be 30 percent of the cost, he said.

The $760 million lower end of the estimated range would be one-quarter of allproperty tax revenue the department estimates over a 35-year project; at the high-er end, $900 million, it’s the equivalent of one-third of the total take, Persily said.

Pourchot also said the administration sees no link between the bill’s tax exemp-tion and the application under the stranded gas act — once granted, the propertytax exemption is granted, he said, it’s not something to be negotiated under thestranded gas act.


HB 519

VECO “strongly suspects (that) ifthe window shuts it may never open

again.” —Bill Allen, VECO Corp.

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Permanent protection the goal

The Canadian government wants theUnited States to join in giving permanentprotection to wildlife populations on bothsides of the Alaska-Yukon border, rein-forcing Canada’s development ban on thehabitat of the Porcupine caribou herd.

Anderson said that if forecasts areaccurate that it would take 10 years forany ANWR oil to reach market “theAmericans have a much bigger problemthan they’ve been willing to admit on theissue of supply of energy.”

Loan guarantees to support develop-ment of a pipeline from the North Slopethrough Canada to the Lower 48 woulddestroy the economics of gas developmentin the Mackenzie Delta, said Kakfwi at thesame time that he welcomed the Senatestance on ANWR.

“We are afraid that the Americans,who are supposed to be champions of freeenterprise, are now starting to talk aboutsubsidizing these huge volumes of Alaskagas,” he said.

government granted exemption vs. negotiation · 2007. 10. 1. · government government government...

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