North Slope producers – full plate of projects
North Slope producers have a full plate of projects in 2020 and beyond as companies speed development of new discoveries. More new finds are coming, too. Here are key points:

• ConocoPhillips is on a streak of new discoveries, mostly in the National Petroleum Reserve-Alaska
• $24 billion investment seen by 2029 to develop new projects
• Expectation for near-term production decline; increases in longer-term
• Federal government to make new exploration acreage available in NPR-A, ANWR

ConocoPhillips has made a string of new discoveries in the National Petroleum Reserve-Alaska west of existing producing fields on the slope. This winter the company will test another of its NPR-A finds, Harpoon, and Eni Oil and Gas will continue work on a long, extended-reach exploration well drilled north from the Beaufort Sea shore to prospects in the federal Outer Continental Shelf. Oil Search, a Papua, New Guinea company, is testing new prospects detected near Horseshoe, a significant onshore find made with its partner, Madrid-based Repsol.

New exploration acreage could be available – NPR-A and ANWR
For the future, the U.S. Bureau of Land Management appears set to open prospective new acreage in the NPR-A that could be made available for leasing in 2021. In early 2020 BLM plans to hold the first of two lease sales in the prospective coastal plain of the Arctic National Wildlife Refuge, or ANWR, but lawsuits are expected from conservation groups and the schedule may slip. A significant development is the pending acquisition of BP’s Alaska assets by independent Hilcorp Energy, which is now a producer in several small fields on the slope. The sale is expected to close in early 2020. Hilcorp has a reputation for aggressive redevelopment of maturing fields, so expectations are for increased well work and new production in the large Prudhoe Bay field if Hilcorp winds up being the operator replacing BP. ConocoPhillips and ExxonMobil are also major owners in Prudhoe Bay.

Here are the projects planned
ConocoPhillips says it expects to spend $11 billion in projects in “legacy” fields (Prudhoe Bay, Kuparuk River, and Alpine), another $1.4 billion on GMT-2 in NPR-A, which is now under construction, and $4 billion to $6 billion on its new Willow project in NPR-A, which is in advanced permitting. The remaining expenditures will be by other companies on projects, mainly Oil Search and Repsol at the Pikka project, Hilcorp and ExxonMobil on their shares of new Prudhoe projects, and for Hilcorp, further expansions at Milne Point and, possibly, Liberty.

We haven’t heard much about Liberty. Is it on the back-burner? Liberty is a deposit five miles offshore of the Sagavanirktok River delta east of Prudhoe Bay. Hilcorp will acquire BP’s 40 percent share of this along with other BP assets (Arctic Slope Regional Corp. owns 10 percent). We haven’t heard about this recently and Hilcorp doesn’t provide much information to the public. We know the company is enthused about Liberty but we think it is possible that this might slip given the $5 billion-plus debt Hilcorp will take on to buy BP assets. Funding its 90 percent share of a multi-billion-dollar Liberty construction might be a stretch, although ASRC might expand its stake or a new partner could be brought in.

A sidenote: Income to ASRC from Liberty won’t be shared with other Alaska Native corporations because Liberty doesn’t involve mineral rights acquired under the Alaska Native Claims Settlement Act, where a 70 percent sharing of gross revenues is required. Other ASRC holdings, such as mineral rights in the Alpine field and at CD-5 in the NPR-A, were ANCSA land acquisitions and do require the 70 percent sharing.

New technologies drive the increase in activity
What’s driving the uptick in Alaska activity are new technologies such as advanced seismic and use of data analytics in exploration, which allow firms to find deposits undetected in previous drilling. Once found, companies are sharply lowering the expected cost of development with improved technologies like horizontal drilling. Drillers can now drill horizontal producing wells with as much as three miles of exposure to oil-saturated reservoir to the well-bore. This allows tapping oil formations previously thought uneconomic to be made viable for commercial production.

Horizontal drilling capabilities will expand when a new specialty rig being brought to the North Slope becomes operational early next year. This 9.5-million-pound unit, commissioned by ConocoPhillips, will be able to drill seven miles laterally from the surface location of the rig.

One worrisome cloud on the horizon for producers, however, is a pending citizen ballot initiative that could increase state production taxes on producers by $1 billion to $1.5 billion a year. Although the higher taxes would apply only to the older large fields on the slope, Scott Jepsen, a ConocoPhillips Alaska vice president, said this could impair development of new discoveries because, for producers like ConocoPhillips, the income from the older fields helps finance development of new ones.

Promoters of the tax initiative, the “Alaska Fair Share Act,” say the new money will be used to fund public service budgets hit by lower oil revenues, an effect of lower oil prices. Oil taxes and royalties finance much of Alaska’s state budget. However, people gathering signatures outside retail outlets say the money will be used to hike the state’s annual Permanent Fund Dividend paid to citizens. As it happens, the additional $1 billion to $1.5 billion the higher oil tax will bring is about the amount needed to increase the annual PFD from the $1,600 paid in 2019 to $3,000, the target amount for Gov. Mike Dunleavy.

The initiative hasn’t yet been cleared to appear on the state’s 2020 election ballot but if Lieutenant Gov. Kevin Meyer approves it Alaska producers and contractors will organize a major campaign to defeat it. This could be challenging, though: A similar oil tax initiative went on the Alaska ballot in 2014 and was defeated by a slim one percent margin despite the massive industry-led campaign against it.

Lower oil development costs could offset risks
Another drop in crude oil prices is always a risk along with the pending tax initiative. But thanks to the new technologies like horizontal drilling the cost of the new oil supply is lower, ranging from $18 per barrel to $45 per barrel across many of the new projects, ConocoPhillips said in a Nov. 19 presentation to analysts. This could create some margin to deal with unexpected developments. The estimates include projections of capital, operating costs and taxes. (The cost estimates cited by ConocoPhillips to analysts ause West Texas Intermediate crude oil as the benchmark.) Just a few years ago companies said they needed $65 per barrel or higher for new projects to be viable. These minimums are considered guidelines – they are not precise. Regardless, the downward trend in projected costs, thanks mainly to technology, is encouraging.

Major new North Slope projects planned, ordered by dates of expected production
• Fiord West, by ConocoPhillips in the Alpine field, is being developed with horizontal wells with the new Doyon Drilling extended-reach rig which is to be operating nearly next year. Fiord West will be producing later next year with peak production at 20,000 barrels per day
• Mustang, developed by small independent Brooks Range Petroleum, has just started production. Expansions in 2020 and 2021 are planned, with an estimated 12,000 barrels per day peak production
• GMT-2, by ConocoPhillips in the NPR-A, will begin production in 2021 with a peak rate of 35,000 barrels per day to 40,000 barrels per day
• Nuna, by ConocoPhillips in the Kuparuk field, will be producing in late 2022. There is no recent production estimate but projections in past years were at 15,000-20,000 barrels per day peak
• Pikka, by Oil Search and Repsol, will begin its initial production in 2022 at 30,000 barrels per day, expanding to full production on 120,000 barrels per day in 2024. Oil Search and Repsol are still exploring south of Pikka and delineating the known deposit, so this will likely grow
• Narwhal, by ConocoPhillips in the Alpine field, will begin production in 2025. This will be produced from an existing Kuparuk drill site, CD-4, but a new drill site, CD-8, will also be built. There is no production estimate as of yet
• North East West Sak viscous (heavy) oil, by ConocoPhillips: This expands the existing NEWS viscous oil projects in the Kuparuk River field. It will begin production in 2025. There is no production estimate yet
• Willow, by ConocoPhillips in the NPR-A: A startup is seen in 2025 and 2026 at 100,000 barrels per day-plus peak production. ConocoPhillips is still drilling to fully delineate the Willow reservoir and it is quite likely the production rate will grow
• Prudhoe Bay field: I Pad and S Pad viscous oil projects are planned by BP and it is presumed that Hilcorp will be operator and will carry the plans forward. There is no production estimate yet, or startup date
• Milne Point field new production pads: Hilcorp Energy is reportedly planning expansions at new production sites. It is also planning new projects stimulating viscous oil with polymer injection. There is no production estimate or startup date yet

380 million barrels and 150,000 barrels per day of new oil from existing “core” fields
The threat of new taxes aside the $24 billion in planned new investment in pending projects over the next ten years should at least mitigate the decline of production from its current 500,000 barrels per day. Data we have from ConocoPhillips’ presentation at the Resource Development Council’s annual conference in November estimates 380 million barrels of new oil and 150,000 barrels per day of new peak production by 2029 from the existing core fields of Prudhoe, Kuparuk River and Alpine. This does not include new discoveries in NPR-A or at Pikka. The 150,000 barrels per day projection from the core fields is peak production, so the actual amounts will vary. There will be the gradual ramp-up as different projects come on line in the core field, and at some point the onset of declines. But for these fields our math shows that 380 million barrels of new oil over 10 years works out to an average of 104,000 barrels per day per year which is still impressive, but there is still a gap from current output If we assume a 6 percent decline from 500,000 barrels per day in 2019 the cumulative decline over the next decade is approximately 185,000 barrels per day, bringing the base production from now-existing core fields to 315,000 barrels per day.

Because of this, the Department of Revenue expects short term slope production to dip to 434,000 barrels per day by 2024, although the large new projects now planned would bring this back up. If Pikka comes on as planned at 120,000 barrels per day and Willow produces 100,000 barrels per day-plus, production will be back to the 2019 rate of about 500,000 barrels per day by 2029. There will likely be more discoveries in NPR-A also, given the pace of exploration. Production could be even higher late in the decade.

Coming next issue:
• Economists say there should be more of a bounce in industry jobs given the current rate of activity.
Why could this be happening?
• Are there “reservoir” risks, a chance that the new oil finds might not produce as expected?