Alaska North Slope development progressing in 2020

Anchorage, Alaska — 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.

The activity is needed to keep long-term slope production at, or slightly below, the 500,000 b/d level. A recent state long-term production forecast foresees a short-term dip to 434,000 b/d in 2024 and then a return to 490,000 b/d by 2029 as new projects kick in.

But challenges remain, including a proposal to significantly boost state production taxes, as well as the price of crude, which has a major impact on Alaska, where the cost of production in a frontier environment is high.

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.

Eni Oil and Gas will continue work on a long, extended-reach exploration well drilled north from the Beaufort Sea shore to prospects in Outer Continental Shelf acreage.

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.

The US 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 coastal plain of the Arctic National Wildlife Refuge, or ANWR, but lawsuits are expected from conservation groups and the schedule may slip.

TECHNOLOGY DRIVING DEVELOPMENT

A significant development is the pending acquisition of BP's Alaska assets by independent Hilcorp Energy, 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.

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 cost of development with new technologies like horizontal drilling. Drillers can now drill horizontal producing wells with as much as three miles of exposure to oil-saturated reservoirs to the well-bore, achieving as much as 4,500 b/d.

Their capabilities will expand further 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.

HIGH COSTS COULD SLOW GROWTH

"We concur that Alaska has good prospects, but caution is warranted," said Rene Santos, manager of North America supply, Analytics for S&P Global Platts. "Alaska is still expensive and will continue to face stiff competition from US producers in the shale basins.

"New technologies are helping Alaska, but the equally help competitors in shale oil and other areas such as deepwater," Santos said. "We do see eight or 10 prospective new Alaska projects, but these have to be heavily risked due to high cost and uncertainties in oil markets."

Dudley Platt, an independent Alaska consultant, is more upbeat.

"I see companies like ConocoPhillips, Armstrong Oil and Gas and Oil Search that are enthusiastic about exploring there, and companies like Hilcorp Energy who see great value in buying and operating existing mature fields," he said.

Small independents like Jade Energy are also chasing undeveloped oil discoveries made decades ago, and all of this in an oil price environment that just a few years ago would tend to dampen enthusiasm," Platt said.

TAX PROPOSAL WORRISOME

A worrisome cloud on the horizon for Alaska producers, however, is a pending citizen ballot initiative that could increase state production taxes on producers by $1 billion - $2 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 it still would impair development of new discoveries because, for some producers, income from the older fields helps finance development of new ones.

Promoters of the tax initiative say the new money will be used to hike the state's annual Permanent Fund Dividend paid to citizens as well as 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.

The initiative hasn't yet been cleared to appear on the state's November, 2020 election ballot. But if Lieutenant Gov. Kevin Meyer gives it a thumb's up, Alaska producers and contractors will have to organize a major campaign to defeat it. A similar oil tax initiative went on the Alaska ballot in 2014 and was defeated by a slim 1% margin despite the massive industry-led campaign against it.

That threat aside, companies see as much as $24 billion in new investment in pending new projects in the next ten years that should at least keep slope relatively stable. ConocoPhillips says it will spend over $15 billion in its new projects with the remaining $8 billion to 9 billion investment planned by other companies for projects that have been identified.

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/b to $45/b across many of the new projects, so there appears some margin to deal with unexpected developments.

Just a few years ago companies said they needed $65/b or higher for new projects to pencil out.

-- Tim Bradner, newsdesk@spglobal.com

-- Edited by Gary Gentile, newsdesk@spglobal.com