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Commodities 2021: Alaska's North Slope operators on track with two projects

Highlights

FID on ConocoPhillips' Willow expected by end-2021

Oil Search to begin engineering on Pikka

ANWR lease sale faces headwinds

Anchorage — Despite a lackluster outlook for crude oil prices, North Slope operators are on track with two major projects in 2021 that could add 200,000 b/d of new production moving through the Trans Alaska Pipeline System by 2025.

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The projects would help bolster Alaska's crude production, which has declined to roughly 440,000 b/d in 2020 from nearly 1 million b/d in 2000, according to S&P Global Platts Analytics data.

ConocoPhillips will decide soon on beginning Front End Engineering and Design, or FEED, on its Willow project in the National Petroleum Reserve-Alaska. A Final Investment Decision, or FID on the $6 billion development is expected by the end of 2021, Joe Marushack, ConocoPhillips' Alaska president, told a business group in Anchorage in late November.

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Willow will produce more than 100,000 b/d, but production facilities now planned will have a capacity for 160,000 b/d, and there are nearby discoveries that are expected to add more resources.

A second project is Pikka, being developed by Papua, New Guinea-based Oil Search and its minority partner Repsol, based in Spain. Oil Search hopes to begin final engineering on Pikka in the first quarter of the year, and to also make the final investment decision by year end.

Pikka will produce 80,000 b/d in its initial phase, which is expected to cost $3 billion, and up to 120,000 b/d when the project is fully built out, with the full cost estimated at $6 billion.

Oil Search is now planning to start Pikka with a single drill and production site instead of the three that were planned before oil prices plunged in early 2020. Two other production sites are expected to be built following the phase one startup so that revenues from the project will help finance the buildout, according to Matt Elmer, chief operating officer for Oil Search Alaska.

Elmer's remarks came in a briefing with Alaska business leaders.

A project reorganization and cost reduction effort following the price collapse has effectively lowered Pikka's phase one breakeven cost to less than $40/b, Elmer said. Cost reduction efforts are still underway with a goal of lowering the project breakeven cost to the $35/b area, he said.

ConocoPhillips hasn't said what Willow's breakeven oil price will be, but in presentations to investment analysts the company has said that new technologies like horizontal drilling wells have sharply lowered per-barrel development costs in recent years.

Willow is part of a string of new discoveries ConocoPhillips is making along a broad geologic feature called the Nanushuck that extends from state-owned lands in the west-central North Slope west in the NPR-A. The Pikka discovery was also made in the Nanushuck at its eastern end on state lands east of the Colville River, the boundary between state and federal lands in the NPR-A.

ConocoPhillips has made two other recent, though smaller, finds east of Willow: GMT-1, which is now producing, and GMT-2, which is in construction and expected to be producing by the end of 2021 with a peak rate estimated at 35,000 b/d to 40,000 b/d.

The hunt is now on for other finds in NPR-A that are near Willow. One discovery already made and being explored further is "West Willow," a few miles west of the larger Willow product. Another nearby find, which needs more test drilling, is Harpoon, which is south of Willow.

Other companies are busy testing NPR-A prospects in the Nanushuck. One is at the Peregrine prospect south of Harpoon, where 88 Energy, an Australian independent active on the North Slope, is planning to spud its Merlin 1 test well on Feb. 2, the company has said.

Lease sales to test appetite

Meanwhile, two, and possibly three, lease sales planned for the North Slope this winter will test the industry's appetite for more exploration in the current price and market environment.

On Jan. 6 the US Bureau of Land Management plans the first-ever lease sale in the 1.6-millon-acre coastal plain of the Arctic National Wildlife Refuge. The refuge itself, in far northwest Alaska, covers 19 million acres but a section at its north end, near the Beaufort Sea coast, is believed to have good prospects for major discoveries.

This sale faces headwinds, however. Exploration in the refuge is a hot-button political issue with conservation groups, which have already files lawsuits, and incoming President-elect Joe Biden has said he will oppose drilling in the ANWR.

The outgoing Trump administration has planned the sale 14 days before Biden is to be sworn in, and if the sale comes off, David Bernhardt, the current Interior Secretary, may work to get leases awarded to winning bidders before Biden takes office. That would give potential leaseholders a property right that the new administration may find difficult to undo, the thinking goes.

A second lease sale planned is the state of Alaska's annual winter North Slope and Beaufort Sea "areawide" sale, technically held as two separate sales, now planned for Jan. 13. Each year the state offers all unleased land in the North Slope onshore and state-owned submerged lands out to the three-mile territorial limit. Much of this area has been explored but companies are always willing to bid and try out new ideas.

A third possible sale is the BLM's annual areawide sale in the northeast portions of the NPR-A that is open to exploration, and where ConocoPhillips has made its discoveries. This sale is usually conducted in December but was delayed this year.

BLM has told state officials that it may be scheduled for January but the agency also has its hands full with the pending ANWR sale, so that schedule could slip.