YEAR IN REVIEW: Credit program scrapped; Slope discoveries expand
It took six months of debate but the Alaska Legislature ended the state’s refundable oil and gas tax credit program in July — something all sides agreed needed to happen from the get-go.
The lengthy debate mostly centered on the House Majority’s push to link a production tax overhaul and increase to the tax credit legislation.
The version of House Bill 111 that Gov. Bill Walker ended up signing was much more what Senate Republicans wanted without the tax changes; it ended the 35 percent net operating loss credit for small North Slope operators and expedited the credit phase-out plan passed for Cook Inlet in 2016.
The Department of Revenue estimates repealing the cashable credits will save the state roughly $150 million per year over the long-term; however, House Majority members noted that the bill simply swaps what would have been a cash expense into less future tax revenue as companies can still apply the credits as tax deductions against their production taxes.
The House coalition did score a victory in that the bill included a provision that allows companies to hold deductions at full value for seven years, after which the value decreases by 10 percent per year. The “downlift” provision is intended to spur development activity by limiting how long the maximum value of the tax deductions can be realized.
Lesser used exploration credits for Interior Alaska — mostly used by Native corporations — and refinery and LNG storage credits were not cut in HB 111, but those generally sunset in 2020 or 2021.
No. 2: Oil Search buys into Nanushuk
Responsibility for Alaska’s largest oil prospect is going to change hands for the second time in three years in 2018 as a result of an $850 million deal between Armstrong Energy and Alaska newcomer Oil Search.
Australia-based Oil Search announced the terms of its agreement with Armstrong Oct. 31.
Under the deal, Oil Search will get a 25.5 percent stake in the Pikka Unit — which is operated by Armstrong and holds the 1.2 billion barrel-plus Nanushuk oil prospect — and a 37.5 percent interest in the “Horseshoe” leases to the south.
Armstrong currently operates the Pikka Unit for its partners Denver-based GMT and Spanish major Repsol. Armstrong is also in the midst of the environmental impact statement process to develop the Nanushuk field, which could produce up to 120,000 barrels of oil per day.
The same formation in the National Petroleum Reserve-Alaska is where ConocoPhillips announced a discovery in January it dubbed “Willow” it estimates could produce 100,000 barrels per day.
Oil Search has its primary operations in Papua New Guinea and will take over as operator of Pikka from Armstrong on June 1, 2018, according to a company release. The company also has until June 30, 2019, to buy the rest of Armstrong’s and GMT’s interests in the prospects for another $450 million.
Oil Search executives said in an interview with the Journal they expect to exercise the $450 million option.
Repsol and Oil Search are partners in oil and gas projects in Papua New Guinea.
Armstrong took the operator position at Pikka from Repsol in late 2015. The companies first partnered to explore the state lands between ConocoPhillips’ very large Kuparuk and Colville River fields in 2011.
Armstrong CEO Bill Armstrong said developing Nanushuk just became too large of a task for his small exploration company, but he plans to continue exploring on the Slope.
Armstrong subsequently was an active bidder in the state’s North Slope lease sale held Dec. 6.
No. 3: Tofkat tangle
Prized oil and gas leases surrounding the Native village of Nuiqsut got a new owner in mid-August after ConocoPhillips agreed to comply with DNR Commissioner Andy Mack’s list of contingencies for gaining control of the 9,100 acres.
The leases are now part of Conoco’s large Colville River oil unit. Mack sent a 21-page decision to the company Aug. 1, which lays out a strict drilling and payment schedule the oil major must meet in order to retain control of the area.
In it, he required ConocoPhillips to drill an oil exploration well into the Nanushuk geologic formation by May 31, 2018, and make a total of $7 million in payments to DNR.
The $7 million is in lieu of the money the department could expect to receive in winning bids if the area were to be put up for bid in the state’s annual North Slope lease sale.
Further, ConocoPhillips must also decide by Aug. 15, 2018, if it wants to continue exploration and commit to drilling another well by June 2020.
The company was first awarded the leases — this go-round — in November 2016 after a series of decisions to put the leases back up for bid by former DNR officials were reversed by Mack. ConocoPhillips chose not to drill an exploration well on the leases last winter because of concerns from Nuiqsut residents about exhaust from the diesel-powered drilling rig that would have been running continuously for several weeks about three miles from the village, the company said.
Mack took umbrage with the decision because the lease transfer was granted on the condition Conoco would drill the well.
Small oil company Brooks Range Petroleum Corp. held the leases for years but applied to transfer them to ConocoPhillips early in 2016 because it couldn’t secure an access agreement from Kuukpik Corp., which jointly holds surface rights to the area with the state, and in turn explore the area.
ConocoPhillips held the acreage in the early 2000s but had to give it back to the state after failing to meet drilling requirements.
While a relatively small area in North Slope terms, the 22 former Tofkat leases are adjacent to the southern edge of the Colville Unit and also close to the Armstrong Energy’s massive Nanushuk oil discovery in the Pikka Unit just to the east.
It’s a highly prospective area.
If the company misses any of the benchmarks or decides to give up on exploring the area it will immediately relinquish the leases back to the state, according to Mack’s ruling.No. 4: Arctic OCS projects advance
A long-anticipated North Slope oil project took a big step forward Aug. 18 when the federal Bureau of Ocean Energy Management released the draft environmental impact statement for Hilcorp Energy’s proposed offshore Liberty development.
Houston-based Hilcorp and its partners in Liberty — BP and Arctic Slope Regional Corp. subsidiary ASRC Exploration LLC — are planning to construct a 24-acre gravel island in the federally-controlled shallow waters about six miles offshore and just east of Deadhorse in the Beaufort Sea.
The island would allow Hilcorp as the project operator to access the up to 330 million barrels of light crude the companies believe are in place. With 16 wells, Hilcorp expects it could recover 41 percent to 48 percent of the oil in place. Peak production could hit up to 70,000 barrels per day a couple years after initial production, according to the company’s Alaska leaders.
Liberty would produce for 15 to 20 years based on the current reserve estimates. Hilcorp has pointed to the four large existing North Slope oil development islands — Endicott, Spy, Oooguruk and Northstar — as strong evidence that Liberty can be done safely.
Hilcorp is majority owner and operator of the Northstar and Endicott fields, after purchasing BP’s interests in them in a 2014 deal that also gave it a 50 percent interest in Liberty. BP subsequently sold 10 percent of its stake in Liberty to ASRC Exploration.
BP purchased Liberty from Shell in 1996 after Shell discovered the prospect with four exploration wells in the mid-1980s. BP first planned to build an island to develop Liberty but put those plans on hold in 2001 to further study the project.
To the west of the Liberty prospect Italian major Eni is undertaking a unique offshore exploration program.
Eni, which produces about 20,000 barrels per day from the Nikaitchuq field off of Oliktok Point, is in the midst of commencing a two-well exploration plan to reach potential oil deposits.
The first roughly 35,000-foot well will be drilled from its manmade Spy Island drill site in state waters off of Oliktok Point into formations beneath federal waters further offshore.
The company has previously drilled several wells up to 25,000 feet on its state leases, according to an Eni Alaska spokesman.
If successful, Eni plans to drill a second, similar exploration well next winter. The company currently believes the offshore reservoir it’s targeting could double the 180 million barrels of reserves the Nikaitchuq field originally held when it started producing in 2011.
No. 5: State lease sale record
Interest was again high among oil and gas lease bidders for state acreage on the North Slope in Dec. 6 lease sales but that was not the case for the federally controlled National Petroleum Reserve-Alaska.
Winning bidders spent $21.2 million for 216,000 acres of state land and water across 119 lease tracts. The vast majority of that, $19.9 million, was for 179,000 onshore acres and the remaining $1.2 million was for 37,000 acres of state-owned, near shore waters of the Beaufort Sea.
It was the third-most spent to win state lease bids in the past 20 years, Division of Oil and Gas Director Chantal Walsh said.
According to DNR, the average winning bid of $110 per acre was the largest since the current area wide lease sale format began in 1998.
Spanish major Repsol, which holds a 49 percent stake in the large and in-permitting Nanushuk oil project, dominated the onshore Slope sale, spending up to $293 per acre in some bids to win 45 tracts. Much of that acreage is in the few tracts south of the Pikka Unit that holds the Nanushuk project that were not leased and open for bidding.
Despite offering all 10.3 million acres available for leasing, the Bureau of Land Management received only seven bids for 80,000 acres in the NPR-A, all of which came from ConocoPhillips. Last year’s NPR-A sale netted more than $18 million in high bids for 613,000 acres, mostly from ConocoPhillips, which has led the foray into the vast undeveloped area.
No. 6: Point Thomson plan dispute
Division of Oil and Gas officials rejected ExxonMobil’s plan to expand the Point Thomson North Slope gas project in late August because it doesn’t live up to a prior settlement between the state and the company, according to Director Chantal Walsh.
Separate from but related to the Expansion Project POD, the division parsed out and approved the Initial Production System POD despite the company not meeting production expectations of natural gas condensates at Point Thomson because of technical challenges.
Walsh wrote a six-page letter to ExxonMobil Alaska leaders contending the Point Thomson Expansion Project Plan of Development is far too vague and offers no commitment that the company will live up to the 2012 Point Thomson Settlement Agreement.
ExxonMobil outlined its plans to move gas from Point Thomson and inject it into the Prudhoe Bay oil and gas pool as a way to further enhance oil recovery from the large oil field in the plan, but stopped short of committing to do so.
In the unique case of Point Thomson, development is prescribed by the settlement, which the Division of Oil and Gas considers to be a contract with the state, meaning its terms must be upheld regardless of extenuating circumstances, according to Walsh.
The Point Thomson Settlement, reached under former Gov. Sean Parnell, ended years of litigation between the state and the company in which the state argued ExxonMobil had not fulfilled its responsibility to develop the leases it held for many years. It also set a course for ExxonMobil to develop Point Thomson and start production by May 2016.
The field was discovered in 1977.
ExxonMobil, which operates Point Thomson, and BP, its primary working interest owner partner, spent roughly $4 billion developing the gas field since 2012. Production started in late April 2016.
For its part, ExxonMobil responded in an October letter to DNR Commissioner Andy Mack insisting it is in compliance with the settlement and has said it can’t compel its partners in either field to move forward with the expansion plan.
Walsh noted Exxon’s Point Thomson and Prudhoe partners are the same companies, meaning they would largely be negotiating with themselves.
A further ruling from DNR is expected soon.