Moving ANS syrup

Alaska Oil & Gas Association saysBallot Measure 4 bad public policy

Vol. 13, No. 34 • www.PetroleumNews.com A weekly oil & gas newspaper based in Anchorage, Alaska Week of August 24, 2008 • $1.50

● E X P L O R A T I O N & P R O D U C T I O N


B R E A K I N G N E W S

● P I P E L I N E S & D O W N S T R E A M

3 Class I permit for Nikaitchuq: Deep injection wells

involve pumping industrial waste into underground reservoirs

5 Mac threat to bird life? Agency wants restrictions on gasline impact; tensions in government over Canada’s reputation

6 Feds expect ‘interesting’ NPR-A sale: September salenow past the date of appeal, Interior official expects bidders

JUD

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ATR

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TAPS owners respond Say shippers falsely criticized efforts to follow FERC order to lower rates

By ROSE RAGSDALEFor Petroleum News

n a spate of filings Aug. 14 and 15 in response toshipper protests, owners of the trans-Alaska oilpipeline defended their proposals for loweringthe line’s 2005 and 2006 interstate tariffs and

their plans for tallying shipping rates in subsequentyears.

The 800 mile pipeline runs from Prudhoe Bay onAlaska’s North Slope south to the Port of Valdez.The five owners, BP Exploration (Alaska) Inc.,ConocoPhillips Alaska, ExxonMobil ProductionCo., Unocal Pipeline Co. (now a subsidiary ofChevron), and Koch Alaska Pipeline Co. LLC, alsocriticized the shippers’ objections, calling them

I

The 800-mile trans-Alaska pipeline takes North Slopeoil south to the Port of Valdez for transport to market.

JUD

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see OWNERS page 14

Masters of their destinyNewfoundland leader hails Hebron advance, oil to yield $28B in royalties, taxes

By GARY PARKFor Petroleum News

anny Williams, the tough-talking,brawling premier of Newfoundland,has achieved his own version of anOlympic gold medal.

And, more importantly for the petrole-um industry, the East Coast offshore willapparently live to fight another day.

In signing a landmark agreementAugust 20, the Williams government and aChevron Canada-led consortium, have set the stagefor initial production from the Hebron/Ben Nevis oil-field in the 2016-2018 period, peaking at 150,000barrels per day from reserves of about 700 million

barrels.The government will take a 4.9 percent

equity stake in the project for an upfrontpayment of C$110 million and a contribu-tion to its share of pre-production and con-struction costs, estimated last year at C$5.8billion.

That will leave Chevron with 26.63 per-cent, ExxonMobil Canada with 36.04 per-cent, Petro-Canada with 22.73 percent andNorway’s StatoilHydro Oil & Gas 9.7 per-cent.

As a result, Petro-Canada will have a stake in allfour of Newfoundland’s producing fields — 20 per-cent of Hibernia, 34 percent of Terra Nova (where it

DNewfoundlandPremier DannyWilliams

see DESTINY page 17

Moving ANS syrupBP in initial testing phase for extracting Ugnu heavy oil at Milne Point

By ALAN BAILEYPetroleum News

ingers are crossed at BP as the company’sheavy oil project at S-Pad in the Milne Pointunit on Alaska’s North Slope moves into itsfirst test phase. The company is lowering a

pump into a well designed to extract oil with theconsistency of chocolate syrup from the Ugnu for-mation, 4,200 feet below the surface. The test wellis located on an S-pad extension that was con-structed for the project.

An initial test should take about three weeks,with a phase one testing project continuing into2009 and involving the drilling of three more wells

see ANS SYRUP page 18

F

Heavy oil recovered from the test well during prepa-rations for installation of the downhole pump. Aweight dragged in the oil surface shows the syrupyconsistency of the liquid.

ALA

N B

AIL

EY

Pacific Energy looking for partners; wants to sell down, farm-out Cook Inlet assets

In a continuing effort to pay down its debts, Pacific EnergyResources Ltd. is weighing its options for selling down orfarming out some of its assets in Alaska, company directorssaid during a second quarter conference call on Aug. 19.

More streamlined since bringing in $135 million through atwo-part sale of onshore assets in California last month,

Anchorage to study geothermalThe Municipality of Anchorage and a company with ties to

Iceland have partnered to study whether geothermal energycould be used to help power the largest city in Alaska.

Through a memorandum of understanding signed Aug. 15,Iceland Energy America Inc. will fully fund a study to gaugethe feasibility of tapping regional geothermal reservoirs forelectric generation and direct-use hot water in Anchorage.

In return, the municipality will provide “informationalsupport” by identifying facilities, land ownership, lease

Buffet, Gates causebuzz in Alberta

If you were looking for two guys notlikely to be fazed by the financial scaleof Alberta’s oil sands would you need tolook beyond Bill Gates and WarrenBuffett?

But what do you conclude when two

Osprey platform at Redoubt unit

see PACIFIC ENERGY page 12

see GEOTHERMAL page 13

see INSIDER page 13

http://www.PetroleumNews.com/

contents Petroleum News A weekly oil & gas newspaper based in Anchorage, Alaska

2 PETROLEUM NEWS • WEEK OF AUGUST 24, 2008

10 Canada, U.S. share Arctic expertise

Canada, U.S. set aside differences to conduct Beaufortseismic survey for purpose of defining continental shelf

NATURAL GAS

OIL PATCH INSIDER

INTERNATIONAL

MINING

13 Mexico to open consulate in Anchorage

13 Study: Seismic doesn’t impact Gulf whales

11 Politicians make promises on Arctic policy

1 Buffett, Gates cause buzz in Alberta

PIPELINES & DOWNSTREAM

7 Offshore Newfoundland output pushes 1 billion bpd

7 Denali gets North Slope fieldwork permit

5 Oglander tapped for federal pipeline office

6 Gulf of Mexico lease sale draws $487M

7 Prices rebound even as inventories jump

8 Barents electromagnetic survey data available

8 Gazprom starts undersea pipeline section

8 New company to manage Kola Bay terminal

8 Technology not ready for Lofoten drilling?

7 More pipelines in works to handle Alberta’s growing heavy oil load

LAND & LEASING

FINANCE & ECONOMY

EXPLORATION & PRODUCTION

ENVIRONMENT & SAFETY

3 EPA plans Class I permit for Nikaitchuq

Deep injection wells involve pumping industrialwaste into underground reservoirs

5 Mackenzie line threat to bird life?

Agency wants restrictions on gas line impact; reportsshow tensions within government circles over Canada’s investment reputation

6 Feds expect ‘interesting’ NPR-A sale

With September NPR-A lease sale now past the date of appeal, Interior Department official expects companies to show up and bid

4 Refinery newcomer on the prowl

Trust prepared to gamble C$2B on an expansion of itsNewfoundland plant, looks for a partner to share the risk

Pacific Energy looking for partners; wants to sell down, farm-out Cook Inlet assets

Anchorage to study geothermal

ON THE COVERMoving ANS syrup

BP in initial testing phase for extracting Ugnu heavy oil at Milne Point

Masters of their destiny

Newfoundland leader hails Hebron advance, oil to yield $28B in royalties, taxes

TAPS owners respond

Say shippers falsely criticized their efforts to follow FERC order to lower rates

OIL PATCH BITS

OUR ARCTIC NEIGHBORS

17 Nabors names new leadership

17 State keeps LNG pipeline on the table

15 AOGA opposes ballot measure

17 American Tire acquires land for new plant

17 GCI gives UA broadband gift

http://www.petroak.com/

By ERIC LIDJIPetroleum News

s Eni Petroleum works to become thefourth operator to produce oil fromAlaska’s North Slope, the Italiansuper major is turning to a familiar

strategy for disposing of the large amountsof industrial waste associated with develop-ment drilling.

Like BP, ConocoPhillips and PioneerNatural Resources before it, Eni plans topump millions of barrels of drill cuttings,slurry and wastewater around one mileunderground beneath the offshoreNikaitchuq unit, located in the Beaufort Seanear Oliktok Point.

These “deep well injections” havebecome increasingly common on both theNorth Slope and the Cook Inlet basin overthe past five years as a way to avoid thepotential hazards of trucking industrialwaste to a more traditional disposal site,according to Thor Cutler, with the U.S.Environmental Protection Agency.

“They are a very expensive alternative,but they’re more environmentally soundthan to transport over the tundra,” Cutlersaid.

The EPA plans to issue a permit for Enito drill four of these Class I injection wellsat Nikaitchuq, two from a drill pad beingbuilt at Spy Island and another two from anew pad under construction at OliktokPoint. The permit would last for 10 years.

The federal regulatory agency is takingcomments about the project through Sept.15 when it plans to hold a public meeting inAnchorage on the issue.

Eni is currently spending around $1.45

billion to bring Nikaitchuq into productionby the end of next year. With constructionunderway in the shallow waters of theBeaufort Sea as well as on land at OliktokPoint, Nikaitchuq will have the first pro-duction facilities in northern Alaska notowned or operated by BP, ConocoPhillipsor Exxon.

Wells now used across AlaskaState and federal governments regulate

several different kinds of deep injection

wells.In Alaska, the state government is

responsible for Class II wells used exclu-sively by oil and gas companies trying toenhance recovery by injecting salt-brineinto the ground.

More than a decade ago, federal regula-tors fined Doyon Drilling for disposing ofhazardous Class I fluids into a Class II wellat the BP-operated Endicott field.

Class I wells are used by oil, chemicaland pharmaceutical companies, as well asother facilities like municipal wastewater

treatment plants, to pump industrial wastebelow known sources of drinking water. Toqualify for the EPA permit, a company mustprove that any water in the reservoir is toosalty for drinking.

“This deep well injection is into an areathat is not a potential source of drinkingwater in the future,” Cutler said.

As of February 2008, the EPA countedaround 550 Class I wells in the UnitedStates, mostly in the Gulf Coast and theGreat Lakes regions, but also across Alaska,where access to traditional landfills isscarce and traditional aboveground reservespits are discouraged.

Although expensive, with each wellcosting around $3 million, the process hasbecome more popular across Alaska overthe past five years, although some Class Iwells at Prudhoe Bay date back almosttwenty years.

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EPA plans Class I permit for NikaitchuqDeep injection wells involve pumping industrial waste into underground reservoirs; technique used extensively across Alaska

A

see PERMIT page 4

http://www.anvilcorp.com/

http://www.miswaco.com/


anadian refining novice, HarvestEnergy Trust, is ready to gamble C$2billion on an expansion of itsNewfoundland plant, so long as it can

find a partner willing to share the risk.The trust’s daring move into the high-

stakes refining sector two years ago hasconvinced it there is demand for a 75,000-barrel-per-day addition to its 115,000 bpdNorth Atlantic refinery, allowing the pro-

cessing of heavier crudes that yield betterreturns.

The plan involves upgrading the “nega-tive-margin, high-sulfur” fuel it currentlyproduces into higher-margin distillate andgasoline products, Harvest chief executiveofficer John Zahary said, noting that theobjective is to steer the facility toward pro-cessing more diesel fuel oil and less gaso-line and heavy heating fuels.

“The project is all about more andcheaper feedstock making more and betterquality products,” Zahary said.

Must like the refinery businessHe said the trust has been approached by

potential partners in the two years since itpaid C$1.44 billion to acquire the refinery,formerly known as Come By Chance, fromSwiss oil trader Vitol.

But, acknowledging the shaky state ofglobal markets as a possible deterrent toinvestors, Zahary said anyone thinking ofbecoming a partner “won’t be interested inthis sort of refinery investment if you don’tlike the refinery business … that’s a non-starter.”

As a result, he agreed the search will bechallenging.

To aid the process, Harvest has hiredDeutsche Bank, which advised Vitol on the2006 deal with harvest, to flush out interest-ed parties.

Harvest itself is certain it is on the righttrack in eying an expansion based on pre-liminary studies covering technical feasibil-ity and plant reconfiguration designs.

In addition, a recently completed analy-sis by construction engineers SNC-Lavalinhas “validated” the trust’s internal work.

Prize is 25-30% stake in refineryZahary said the upgraded facility would

continue buying crude from South America,Russia and the Middle East, but it wouldadd heavier crudes, with the products tar-geted at the same markets the refineryserves today, with distillate going to Europeand gasoline to New York and Boston.

He indicated Harvest would expect apartner to potentially finance all or most of

the upgrade costs in exchange for a 25 to 30percent stake in the refinery.

He said the estimated return on invest-ment and other financial metrics are “com-pelling.”

Jason Crumley, a Salman Partners ana-lyst, said that given Harvest’s “fairly lev-ered” balance sheet, a partner would reducethe trust’s exposure in a volatile refiningmarket.

However, he said that if the upgrade canbe completed it would be a “fairly signifi-cant” refinery in North America and shouldbe able to generate a fairly strong cash flow.

UBS Securities Canada analyst GrantHofer said in a note to clients that lining upa partner could be “very challenging”because of the project risks.

Partner wanted for Alberta heavy upgrader

On another Canadian refining front, pri-vately-held North West Upgrading hasrecruited a new top executive to improve itschances of finding a partner for a plannedmerchant heavy upgrader in Alberta.

The company has appointed DougQuinn, a former manager with ShellCanada during the design and constructionstages of its Athabasca oil sands project andwho has since worked with WashingtonState’s Puget Sound refining, as its newchief executive officer.

He will take over as CEO from RobPearce, who will become senior vice-presi-dent of corporate development.


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More recently, BP applied for Class Iwell permits at Milne Point in 2004,Prudhoe Bay in 2006 and Badami in 2007.In recent years, ConocoPhillips and Pioneerboth used deep injection wells on develop-ment at Alpine and Oooguruk respectively,while Forest Oil and Unocal applied forpermits on efforts in the Cook Inlet basin.

“This is a common practice,” Cutlersaid.

Eni plans to drill its injection wells intothe Canning and Hue Shale formations, a3,000-foot thick block of shale-rich geologylocated just below the Schrader Bluff oilformation.

The Canning formation sits about 3,600to 4,200 feet underground, while the HueShale formation is about 6,500 feet belowground. Eni plans to pump its waste intomany thin sand intervals in the two forma-tions.

According to the EPA, reservoirs deeperthan 4,300 feet below sea level are notunderground sources of drinking water.

Nearly 3 million barrels Of the nearly 3 million barrels of indus-

trial waste expected to be generated overthe 30-year life of Nikaitchuq, almost half

will come from drill cuttings and mud dur-ing the initial seven year developmentphase. Eni plans to drill up to 76 wells atNikaitchuq.

Most of the remaining waste will comefrom sand slurry, wastewater from the pro-duction camps and work-over fluids andflushes used on the wells.

Eni did not apply for an additional per-mit to pump hazardous waste underground,which means any hazardous waste willhave to be moved to an approved disposalfacility. ●

continued from page 3

PERMIT On the WebSee previous Petroleum News coverage:

“Eni plans summer seismic atNikaitchuq” in May 18, 2008 issue athttp://www.petroleumnews.com/pnads/73482487.shtml

“For Eni, size matters at Nikaitchuq” inFeb. 24, 2008, issue at http://www.petro-leumnews.com/pnads/432209105.shtml

“ENI sanctions $1.45 billion Nikaitchuqdevelopment” in the Feb. 3, 2008, issueathttp://www.petroleumnews.com/pdfarch/333389485.pdf#page=1

Contact Eric Lidji at 907-770-3505or [email protected]

● P I P E L I N E S & D O W N S T R E A M

Refinery newcomer on the prowlTrust prepared to gamble C$2 billion on an expansion of its Newfoundland plant, looking for a partner to share the risk

C

see NEWCOMER page 5

http://www.hawkpros.com/


he sole protected wildlife area inCanada’s Mackenzie Delta isthreatened by the Mackenzie gasproject, claims a study by the fed-

eral government’s conservation branch.But shelving the project could have

damaging consequences for Canada’sinvestment reputation, the CanadianWildlife Service (CWS) warned.

The CWS is urging the physicalimpact of a Mackenzie Valley pipeline,if it proceeds, should be restricted to 1percent of the Kendall Island BirdSanctuary, a 240-square-mile blip nearthe coast of the Beaufort Sea.

The sanctuary was created in 1961 asa shelter for migratory birds such assnow geese and tundra swans and ishome base for grizzly bears, polar bearsand wolverines.

CWS regional director Bill Gummertold a federally-appointed environmen-tal assessment panel almost two yearsago that if Mackenzie Delta gas isdeveloped in a “manner which reflectsthe highest standards of environmentalpractice,” the impact would be minimal.

But Canwest News Services hasobtained federal documents indicatinggovernment officials fear the pipelinefootprint could be greater than 1 per-cent.

A February 2006 draft briefing noteattributed to Giles Morell, assistantdirector of the Northern Oil and GasDirectorate of Indian and NorthernAffairs Canada, said that any “futuresubsidence and destruction of habitatthrough flooding” that is linked to theMackenzie project could surpass thebasic threshold.

Gummer told the regulatory hearingthat although subsidence is a “majorconcern,” there was no consensus onhow much of the region would be affect-ed.

A briefing note by Morell in early2007 indicates Environment Canadafears the 1 percent level may already

have been exceeded.According to a briefing note by

Morell, the CWS can refuse permits forthe project, adding the Kendall Islandsanctuary “has been identified as apotential show stopper … and is one ofthe top concerns for the proponents.”

But the note also warns that if theMackenzie project is halted “the com-petitiveness of Canada will be put intoquestion, with negative implications forCanada’s investment climate.

“Canada could also lose an opportu-nity as a member of circumpolar coun-tries to become a global model for sus-tainable development in the Arctic.”

Hinting at disagreement within thegovernment, the 2007 note said Indianand Northern Affairs Canada is worriedthat “lands with high resource values arenot sequestered indefinitely.”

Environment Canada, which over-sees the CWS, has suggested a Delta-wide land-management approach, whichIndian and Northern Affairs believescould “add to the burden of obtainingregulatory approvals, increase costs andlimit exploration and development” —all matters of special concern to theCanadian government of Prime MinisterStephen Harper, the NorthwestTerritories government and the industry.

The issue has surfaced prior to ascheduled visit by Harper to theMackenzie region later this month toreinforce his administration’s pledge toadvance Canada’s claims to Arctic sov-ereignty.

He has promised to introduce an“integrated northern strategy” that givesequal weight to sovereignty, the envi-ronment, economic development andthe social concerns of aboriginal com-munities.●


Pearce said the hiring will allowNorth West to take the next step in itsC$4 billion-$5 billion upgrading project“subject to financing.”

So far the company has lined up onlyone supply agreement with oil sands pro-ducers to secure bitumen feedstock and isat least a year away from starting con-struction of the upgrader near Edmonton.

The plant is designed to process bitu-men into low-sulfur diesel and diluent.

The first phase was supposed to havecome on stream in spring 2009, handling70,000 bpd of bitumen, but North Westwas unable to arrange financing. Thestartup has since been postponed to 2012.

During these delays, the anticipatedcost of the upgrader has climbed fromC$1.6 billion to C$4.2 billion in 2007,partly because of a lawsuit from a groupof unhappy investors. ●


NEWCOMER

● N A T U R A L G A S

Mackenzie linethreat to bird life?Agency wants restrictions on gas line impact; reports show tensionswithin government circles over Canada’s investment reputation

T

Frustrations boil over Norman Wells, which stands to be one of the major beneficiaries of a Mackenzie

Gas project, is growing edgy over continuing delays in the regulatory process.The Town of Norman Wells, with a shrinking population of less than 800, and its

business community have reacted sharply to word that the Joint Review Panel,charged with evaluating the environmental and socio-economic impact of aMackenzie pipeline, does not expect to deliver its final report until2009.

The town, along with the Norman Wells & District Chamber of Commerce, hasrejected claims by the panel that the volume of material under review needs moretime to sift through than originally anticipated.

A joint new release said: “Why the JRP wasn’t better prepared to manage the vastamount of evidence and produce a report on time is a mystery to us and — we wouldassume — potential developers.

“This type of bureaucracy is unacceptable and will only serve to harm — not help— the economy and people of the North.”

A succession of regulatory delays has been the major factor in stretching the pro-jected start of gas deliveries from the Mackenzie Delta to 2014 from 2010.

Norman Wells in the central Northwest Territories is the service hub of the pio-neering oilfield north of the 60th parallel in Canada, which was discovered almost acentury ago by Imperial Oil, although initial production did not start until the 1940s.

Volumes on the existing Enbridge pipeline out of Norman Wells has been indecline, with hopes for its revival pinned on the Mackenzie project and successfulexploration in the Central Mackenzie Valley.

The Mackenzie proposal includes a gas line from the Delta to southern marketsand a separate liquids pipeline feeding into the Enbridge system.

A succession of regulatory delayshas been the major factor in

stretching the projected start ofgas deliveries from the Mackenzie

Delta to 2014 from 2010.

NATURAL GASOglander tapped for federal pipeline office

Joseph “Joe” Oglander has been appointed as general counsel for the Office of theFederal Coordinator for Alaska Natural Gas Transportation Projects. The coordina-tor’s office is responsible for expediting the response of federal agencies to the con-struction of a pipeline for commercializing North Slope natural gas and for ensuringthat the agencies comply with the Alaska Natural Gas Pipeline Act of 2004.

Oglander will provide guidance on various legal matters, including legislation thatapplies to the gasline construction, the development of regulations and the develop-ment of coordinator office policies.

“There are two competing pipeline proposals and both proponents are aggressive,”said Federal Coordinator Drue Pearce. “We will face any number of unique legal andpolicy questions over the coming months. I’m pleased to welcome Joe Oglander tomy senior management team to provide advice at critical junctures.”

Prior to this appointment, Oglander served as an attorney at the U.S. Air ForceLegal Operations Agency, Civil Litigation/Environmental Law Division. Oglanderhad previously worked in the U.S. Department of the Interior and in the private sec-tor.

—ALAN BAILEY

http://www.efs-fire.com/


● L A N D & L E A S I N G

Feds expect ‘interesting’ NPR-A saleWith September NPR-A lease sale now past the date of appeal, Interior Department official expects companies to show up and bid

By ERIC LIDJIPetroleum News

ith a series of lawsuits finally resolved, a new roundof environmental studies completed and calls inWashington for increased domestic oil production,an upcoming federal lease sale in the National

Petroleum Reserve-Alaska should be worth watching,according to a U.S. Interior Department official speaking inAlaska on Aug. 14.

“I think we’re anticipating that it will be a very interest-ing sale,” said Stephen Allred, assistant Interior Secretaryfor land and minerals said during a speech to the ResourceDevelopment Council for Alaska.

Speaking to the Reuters news agency after his talk,Allred said the Sept. 24 lease sale covering around 4.8 mil-lion acres of the reserve should draw bidding from oil com-panies.

“I think we’re going to see a lot of interest,” Allred toldReuters. “We know there’s a substantial resource up there.We also know it’s a challenge to develop it.”

Officials with the Bureau of Land Management inAlaska, the branch of the federal agency responsible for the

sale, couldn’t elaborate about which companies or howmany companies have expressed interest, citing the “sealedbid” nature of the sale.

The NPR-A lease sale follows a sale of federal leases inthe Chukchi Sea back in February that brought in $2.7 bil-lion in high bids.

Shift to federal landsMuch of the existing oil and gas development across the

country is on state and private land, but Allred expects a“shift” toward federal property in the coming years asdeclining productions prompts a search for large resources.

“Because that’s where those energy sources are,” Allredsaid.

Only around 30 percent of domestic energy production,both traditional and renewable, occurs on federal lands andwaters, but Allred said the government believes its onshore

and offshore properties contain 62 percent of the oil and 40percent of the natural gas remaining to be found in theUnited States.

“Onshore, we still have tremendous amounts of energythat are available… A lot of that’s in northern Alaska,”Allred said, citing the conventional oil resources of theNPR-A and the Arctic National Wildlife Refuge on oppo-site ends of the North Slope.

The federal government believes the 23-million acreNPR-A holds 10 billion barrels of technically recoverableoil and 70 trillion cubic feet of natural gas, Allred said.

The land up for sale next month could hold around 8 bil-lion barrels of oil, Allred said.

Even though the prospective nature of the reserve is gen-erally accepted, previous oil prices weren’t able to offset thehigh costs of connecting the isolated region back to existinginfrastructure in the central North Slope.

Last year, ConocoPhillips and partners AnadarkoPetroleum and Pioneer Natural Resources gave backaround 300,000 acres of leases in the reserve because ofnoncommercial finds and high costs.

Currently, only around 3 million acres of the reserve are

“Onshore, we still have tremendous amountsof energy that are available… A lot of that’s innorthern Alaska.” — Stephen Allred, assistant Interior

Secretary for land and mineralsW

see NPR-A SALE page 7

● L A N D & L E A S I N G

Gulf of Mexico lease sale draws $487MExxon, Chevron, Statoil account for 70 percent of total winning bids, some 68% more than last year’s Western Gulf sale generated

By RAY TYSONFor Petroleum News

estern Gulf of Mexico Lease Sale 207 drew ahealthy $487.3 million in apparent high bids,some 68 percent more than what last year’sWestern Gulf sale generated, and bringing the

total high bids of all federal offshore lease sales from theU.S. Gulf and Alaska this year to $9.5 billion. That per-formance certainly ranks 2008 among the more successfulyears in the history of the U.S. leasing program, no doubtgreatly helped by the extraordinary run up in world oilprices.

“In the middle of the national discussion about energyproduction, the activity at today’s sale (207) signals thatthe offshore oil and gas industry is serious about develop-ing our nation’s resources,” said U.S. Interior SecretaryDirk Kempthorne, who attended the Aug. 20 lease sale inNew Orleans, La.

Fifty-three companies bidOne thing is certain about the financial outcome of lat-

est Western Gulf sale: the government’s take in high bidswould have been far less had high rollers ExxonMobil,Chevron and StatoilHydro decided to sit this one out. Thetwo U.S.-based supermajors and Norway’s Statoil doled

out a combined $342 million, representing just more than70 percent of the total winning bids in the sale. Moreover,the highest 10 single bids submitted, including three byChevron and two by Statoil, totaled $230 million, or justmore than 47 percent of total high bids.

Western Gulf of Mexico Lease Sale 207, the final off-shore sale of this year, drew 423 bids on 319 blocks with53 companies participating. Last year’s Western Gulf Sale204 received 358 on 282 blocks with 47 companies par-ticipating. Though comparable in size, Sale 204 drew just$289.95 million versus the $487.3 million for this year’sSale 207. In part, the difference might be attributed to there-emergence of Chevron and particularly Exxon as majorlease sale players in the Western Gulf, at least in terms ofthe amount of money they spent.

Other top bidders included Shell, Eni, ConocoExxon was tops capturing 130 blocks for apparent high

bids of $127.33 million, while Chevron collected just 20blocks for $127.28 million. Statoil, which over the pastseveral years has emerged as a major U.S. Gulf player,came in third with $87.35 million for just five blocks.Other top 10 finishers in Sale 207, in terms of the sum ofhigh bids submitted, were: LLOG Exploration Offshore,$23.17 million for 11 blocks; Shell Gulf of Mexico,$20.19 million for 15 blocks; Anadarko E&P Co., $14.80

million for 19 blocks; Hess Corp., $14.16 million for 22blocks; Eni Petroleum US, $11.12 million for five blocks;ConocoPhillips Co., $10.50 million for two blocks; andDevon Energy Production Co., $6.67 million for 20blocks.

Ultra-deepwater Alaminos CanyonUltra-deepwater Alaminos Canyon, home to the multi-

field Perdido Hub Lower Tertiary development, receivedsome of the largest bids in the entire lease sale, includingStatoil’s sale-high $61.1 million for Block 380, which alsoranks among the five highest single bids ever submitted ina federal offshore lease sale in the Gulf of Mexico, accord-ing to U.S. Minerals Management Service (MMS)records.

Statoil also captured Alaminos Canyon Block 424 for$22.3 million, the fourth highest single bid submitted inSale 207. Shell and Chevron, both Perdido Hub producers,also weighed in on Alaminos Canyon – Chevron’s $20.12million for Block 775 and Shell’s $11.99 million for Block771. Blocks 775 and 771 also made the top ten for blocksreceiving the highest bids.

Located at Alaminos Canyon 857 in 8,000 feet ofwater, Perdido is expected to begin processing oil from theWestern Gulf in 2010. That’s a trend, as wells are drilled

W

see GULF SALE page 7

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Welcome to productive drilling

under lease.

Lease sale past appeal dateThe upcoming lease sale covers portions

of the northeastern and northwestern plan-ning areas of the reserve, some of whichfederal officials originally intended to offerin 2006.

But a coalition of environmental groupschallenged that proposal, citing concernsabout the impacts oil and gas drilling might

have on the wildlife around TeshekpukLake.

The matter wound through federal court,eventually leading to a new environmentalreview of the region and a July decision todefer leasing any land north and east of thelake for 10 years. The environmentalgroups involved in the lawsuit accepted thatdecision.

“For once, we may have a document thatwe can rely upon as we go forward withoutadditional litigation,” Allred said. ●


NPR-A SALE


EXPLORATION & PRODUCTIONOffshore Newfoundland productionpushes 1 billion barrels per day

Husky Energy said its White Rose oil field offshore Newfoundland has pumped itsfirst 100 million barrels, 27 months after coming on stream, pushing the region‘s threeproducing fields close to the 1 billion barrel mark.

Husky, with Petro-Canada as its partner, said the White Rose field has been a“tremendous success … providing strong reservoir performance and high facility upti-mes.” The current reservoir production capacity is 120,000 barrels per day. An infillwell is currently being drilled and is due on stream in the current quarter.

Work is also underway at the North Amethyst satellite field, the first of threetiebacks identified at the White Rose satellite development with the first oil projectedfor early 2010 and major contracts have been awarded.

Of Newfoundland’s other two fields, Hibernia has yielded 594.4 million barrelssince its launch in 1997 and Terra Nova has delivered 240 million barrels sinceJanuary 2002.

—GARY PARK

More pipelines in works to handleAlberta’s growing heavy oil load

Another C$2.4 billion worth of pipelines are in the works to handle growing volumesof heavy oil in Alberta.

Enbridge is applying for environmental approval of two lines — one carrying 250,000barrels per day of diluted bitumen and the other 70,000 bpd of diluent — to serve the FortHills oil sands project, operated by Petro-Canada, with UTS Energy and Teck Comincoas junior partners.

Subject to regulatory clearance, construction will start late in 2009 on the twopipelines, which will follow a common right-of-way, mostly along existing routes.

Separately, Pembina Pipeline Corp., with EnCana and Canadian Natural Resources asfounding customers, is starting public consultation on its proposed C$400 million Nipisiand Mitsue pipeline systems in the Pelican lake area of west-central Alberta.

Nipisi will provide capacity of 100,000 bpd of blended heavy oil service for shipmentto the Edmonton area. The Mitsue line will combine new and existing pipelines tocarry 22,000 bpd of condensate as a diluent for heavy oil.

The facilities are due to come on stream by mid-2011 and each is expandable byabout 50 percent of its current design capacity.

—GARY PARK

PIPELINES & DOWNSTREAM

and key infrastructure allows for subseatiebacks, explained one MMS official.

Two shallow water blocks in top 10 Chevron also submitted the second and

third highest single bids in the sale —$52.1 million for Garden Banks Block 973and $34.60 million for Garden BanksBlock 972.

The highest bids are usually submittedon deepwater and ultra-deepwater blocks,areas with the greatest potential for largereserves. So the presence of two shallowwater High Island blocks among the 10largest single bids, both by LLOGExploration Offshore for $8 million and $6million, would have to be considered asale surprise.

One highlight of the sale involved keeninterest in a cluster of blocks on the bound-ary line between Keathley Canyon andGarden Banks where Chevron submittedtwo of its three top ten winning bids. Thatregion of the U.S. Gulf also included six ofthe 44 blocks with two bids and an addi-tional seven nearby blocks attracting sin-gle bids.

Century Exploration of New Orleanssubmitted the apparent high bid of $2.7million for the sale’s most hotly contestedblock, topping six other bidders for HighIsland Block 469, a shallow-water blockpreviously leased by Mariner Energy.MMS said its records show the block as aproducing field as long ago as 1980. ButMMS said production had ceased allowingthe lease to expire. The agency said thekeen interest in that recycled block mightreflect an interest in drilling deeper zonesfor natural gas. ●


GULF SALE

NATURAL GASDenali gets North Slope fieldwork permit

Denali — The Alaska Gas Pipeline LLC is expanding its fieldwork to theNorth Slope.

The pipeline company jointly owned by BP and ConocoPhillips received astate permit on Aug. 20 to start hydrology studies along the Dalton Highway andYukon Pacific Corp. right of way between Galbraith Lake and Prudhoe Bay.

Through the studies, the company will collect information about the streamsand rivers that would be crossed by a natural gas pipeline running into Canada.That pipeline is competing with a similar state-sponsored effort by TransCanada.

Earlier this summer, Denali opened a field office to support work between Tokand the Canadian border, a 200-mile stretch of Alaska that hasn’t been studied asthoroughly as the corridor of the trans-Alaska oil pipeline in the northern part ofthe state. The trans-Alaska oil pipeline corridor, which includes the DaltonHighway in many places, is often called the most studied piece of land in the state.

— ERIC LIDJI

Prices rebound even as inventories jump The price of oil bounced back near $115 a barrel on Aug. 20, as traders

shrugged off a massive increase in U.S. crude inventories and a stronger dollarand focused on possible supply threats.

It was a volatile day for energy prices, which initially retreated after the U.S.Energy Department said a big gain in imports drove crude inventories up by ahefty 9.4 million barrels in the week ended Aug. 15.

And given that the hurricane season is not even halfway over, traders remainnervous about the possibility of storms striking oil facilities in the Gulf ofMexico. The delivered priced of Alaska North Slope crude oil rose 45 cents to$114.28 a barrel. futures exchange in London rose $1.11 to $114.36 a barrel.

—THE ASSOCIATED PRESS

FINANCE & ECONOMY

http://www.slb.com/drilling

http://www.nstiak.com/


Technology not ready for Lofoten drilling?

A Norwegian parliamentarian who represents com-munities in the Lofoten area says the seismic surveysconducted this summer were necessary to obtainknowledge about oil and gas resources, in accordancewith the government’s explo-ration management plan.Hill-Marta Solberg, who isalso chair of the StandingCommittee ofParliamentarians of theArctic Region, toldPetroleum News that new tech-nology should make drilling in the important fisherypossible in the future, but the technology is not ready

today. Solberg was in Fairbanks in

August for the Conference ofArctic Parliamentarians. She is amember of the Labor Party,which is part of a coalition gov-ernment that includes theSocialist Left Party and theCenter Party. Solberg is alsooptimistic about the Snohvit nat-ural gas project in the BarentsSea, operated by StatoilHydro.“I’m sure that the companieswill solve the problems – this is

kind of a pioneer project, so we have to understandthat there will be problems in the early stages,”Solberg said.

—SARAH HURST

New company to manage Kola Bay terminal

As part of a major consolidation of assets, Russia’slargest ship owner, state-owned Sovcomflot, hasannounced the creation of a new ports company calledSCF Terminals. In addition to ports in the Baltic andthe Far East, SCF Terminals will manage the

Belokamenka floating oil terminal in the Kola Baynear Murmansk. But Sovcomflot is also consideringreplacing the Belokamenka with a double hull floatingproduction storage and offloading vessel, according toLloyd’s List.

The Belokamenka acts as a collection point forsmall tankers delivering oil from the ports of Varandey,Arkhangelsk and the Gulf of Ob and reloads oil into100,000-150,000-metric-ton carriers for export to theUnited States, Canada and northwest Europe.

—SARAH HURST

Gazprom starts underseapipeline section

Russia’s state-owned majorGazprom has begun construc-tion of an undersea sectionof gas pipeline acrossBaidarata Bay in thesouthern Kara Sea,the companyannounced in arelease Aug. 12.The 660-milepipeline willtransport gasfrom theBovanenkovskoefield on the YamalPeninsula southwest tothe city of Ukhta in theKomi Republic. The sectionthat crosses Baidarata Bay isabout 43 miles long and is scheduledto be completed in 2011. The steel pipes forthis technically challenging part of the project weredeveloped and manufactured by Russian companies,Gazprom stressed.

Gazprom also said recently that it will increaseinvestment in the Bovanenkovskoe field for 2008 by10 billion rubles ($406.1 million) to around 105 billionrubles ($4.3 billion). At the same time, the companywill cut this year’s spending on the Shtokman project

in the Barents Sea from a planned 16.2 billion rubles($657.9 million) to 14.7 billion rubles ($597 million).

—SARAH HURST

Barents electromagnetic survey data available

Trondheim-based Electromagnetic Geoservices(EMGS) has completed the world’s largest multi-clientelectromagnetic (EM) survey in the Barents Sea, aheadof Norway’s 20th exploration licensing round, the com-pany announced in a release Aug. 15. The survey area,at more than 9,000 sq. km (3,475 sq. miles) and cover-ing 30 blocks, includes all the Barents Sea acreage in

the licensing round. “The program has been heavily

pre-funded and has generated agreat deal of interest,” said

EMGS CEO TerjeEidesmo. “We are excit-

ed by the results,which reveal valuableinformation relatedto the prospectivityof the survey areas.The EM data willgive potential bid-ders a competitive

advantage during thelicensing round, and

will help them to targettheir exploration resources

more effectively.” The data is available in the

Clearplay Find format, which is a fur-ther development of the company’s 3D scanning

service. Clearplay Find offers the display of EM dataas maps and 3D volumes and is easily integrated withseismic information and geological models, accordingto EMGS. Combining EM techniques with convention-al methods gives a clearer and more complete under-standing of the subsurface, the company adds.

—SARAH HURST

Hill-Marta Solberg ischair of theStanding Committeeof Parliamentariansof the Arctic Region

NO

RW

EGIA

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TORT

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http://www.peakalaska.com/


“ ”– Scott Digert, Prudhoe Bay Waterflood Team, BP

alaska.bp.com/


anada has found allies in the UnitedStates and Denmark on a couple ofissues as the Arctic sovereigntydebate heats up.

Canada and the U.S. have teamed up toconduct a seismic survey of the Beaufortseabed north of the Yukon-Alaska border, achange from the recent tensions over con-trol of the Northwest Passage and jurisdic-tion over a portion of the Beaufort Sea.

Meanwhile, a Danish admiral hasechoed Canada’s campaign for improve-ments to safety regulations governingArctic shipping, saying there should bemandatory rules for equipment and prepara-tion before vessels can sail into Arcticwaters.

The joint seismic study will involve theU.S. Coast Guard icebreaker Healy in cre-

ating a “straight and open path through theice” for the Canadian Coast Guard shipLouis St. Laurent as its crew undertakessonar scans on the Beaufort Sea bottom.

A U.S. State Department release said the“collaboration will assist both countries indefining the continental shelf in the ArcticOcean” — a crucial element in determining

sovereignty over the region.The joint effort will “save millions of

dollars for both countries, provide data ofgreater interest to both countries andincrease scientific and diplomatic co-opera-tion,” the State Department said.

Canadian federal geoscientist JacobVerhoef, who is heading Canada’s seabedmapping project, said the bilateral programstemmed from a sharing of information lastyear about previous mapping missions, atwhich time Canada and the United Statesrealized each had specialized equipmentand techniques that could be beneficiallyshared.

He said the United States was“impressed” with Canada’s seismic meth-ods for measuring the thickness of seabedsediments, while Canada was equallyimpressed with United States success inusing a “high-resolution bathymetric sys-tem” that profiles the shape of the oceanfloor.

The joint work is expected to help pre-pare submissions to claim jurisdiction overseabed areas beyond the 225-mile coastaleconomic zones. Canada faces a 2013 dead-line to file its submission.

Mandatory codes neededRear Admiral Henrick Kudsk of

Denmark’s Greenland Command said thereis a need for “mandatory codes” applying toArctic and Antarctic navigation, especiallyas the number of vessels entering Arcticwaters increases.

He predicted 45 cruise ships carrying55,000 passengers will sail into Greenlandwaters this summer, up 60 percent from lastyear.

Dennis Bevington, a member ofCanada’s parliament from the WesternArctic, issued a call making it mandatoryfor all ships sailing into the Canadian Arcticto register with the Coast Guard, sayingCanada’s ability to clean up oil spills is lim-ited by the amount of ice in the water.

Kudsk noted that vessel registration ismandatory in Greenland and those that failto comply are fined.

Canada does not have effective controlRon Huebert, associate director for the

Center of Military and Strategic Studies atthe University of Calgary, said in a Globeand Mail article Aug. 16 that melting ice inthe Northwest Passage will see more inter-national shipping in the Arctic, meaning“Canada needs to be prepared for when itcomes, or else the world will simply ignoreCanada.”

He said that strictly speaking all foreignvessels entering what are deemed to beCanadian Arctic waters must follow theArctic Water Pollution Prevention Actintroduced in the early 1970s, but “they donot have to tell Canadian authorities.”

Until now most ships have complied togain access to Canadian reports on ice con-ditions, but in 2007 two cruise shipsdeclined to report to the Arctic marine traf-fic system.

“This is very troubling,” Huebert said.“Why they suddenly decided to do this isunknown. But it reminds the world thatCanada does not have effective control.”

Ice-breaking fleet small, agedEven if Canada were to prohibit the

ships from entering its waters it would haveto have required vessels to support the ban,


● I N T E R N A T I O N A L

Canada, U.S. share Arctic expertiseCanada, United States set aside differences to conduct Beaufort Sea seismic survey for purpose of defining continental shelf;Danish admiral agrees with need for tougher controls over Arctic shipping; Canadian researcher worries about foot-dragging

C

U.S. Coast Guard icebreaker Healy

see EXPERTISE page 11

U.S

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http://www.nabors.com/

By SARAH HURSTFor Petroleum News

hile President George Bush andJohn McCain were denouncingRussia’s actions in Georgia, parlia-mentarians from the United States,

Russia and several other countries weregetting together to seek cooperative solu-tions to burning issues in the Arctic. Talk ofthe war on the southern border betweenEurope and Asia was diplomatically avoid-ed at the Eighth Conference of ArcticParliamentarians, which took place at theUniversity of Alaska Fairbanks in mid-August.

The conference ended with the adoptionof a statement that included numerousaction items. On energy, the parliamentari-ans pledged to “promote and invest inresearch, development and deployment ofalternative and renewable energy sourcessuitable for the Arctic region. Specialemphasis should be placed on the replace-ment of fossil fuels by solar, wind, biomassand other alternative energy sources,” thestatement said.

150 attendees in FairbanksAbout 150 participants came to

Fairbanks at the invitation of U.S. Sen.Lisa Murkowski, who summed up theresults of the conference in an Aug. 14 callwith journalists. The three main themes ofthe conference were adaptation to climatechange, development of rural energyresources and human health in the Arctic,Murkowski said. Presentations were madeon topics ranging from Arctic marine poli-cy to the use of geothermal power inIceland.

“We can learn so much from one anoth-er, and when you recognize that we’ve gotso much in common, it’s not just our

weather and thegeography, being inthe high north, wedeal with small popu-lations in large geo-graphic areas,”Murkowski said.“We’re faced withchanging conditionsto our lands thatmake developmentof infrastructure more problematic. We’reseeing a great rush to resource wealth,energy resource wealth, and how you man-age that,” she added.

Murkowski said she had to constantlyremind her colleagues in Congress that theUnited States is an Arctic nation and needsto act like an Arctic nation.

“So let’s be sharing some of these bestpractices, learn from some of the mistakes,and try to advance an area of the globe thatis really — I hesitate to say we’re being

discovered; we know we’ve been here allalong, but for many on the planet, theArctic is just kind of this forgotten, coldplace, and now that we’re learning howrich we are in energy resource up here, forinstance, all of a sudden everyone’s payingattention. All eyes are upon us as we see theimpact of a changing climate, because it’smore readily apparent here in the Arctic,”Murkowski said.

Tourism on the riseTourism in the Arctic is another indica-

tor of the world’s increased interest in theregion, she said, and the opening up of newshipping routes due to reduced ice covermakes that tourism possible, Murkowskinoted. Last year ships brought about 3,000tourists to Greenland; this year the figurewas up to 55,000 – almost the same as thetotal population of the country.

“Last year for the first time theNorthwest Passage was wide open... Think

what that means to us in terms of com-merce and opportunity. But it’s also verychallenging because we don’t have theinfrastructure in place,” Murkowski said.“How do you provide for search and rescuein an area where you don’t have ports andharbors? How do you provide for any kindof clean-up if you have an accident in thesewaters? How do you provide just for thingslike communication when we really don’thave a level of communication ability upthere?”

International Arctic shipping rules needed

After listening to presentations by anadmiral from Denmark and an admiralfrom the U.S. Coast Guard, conference par-ticipants agreed that there is a need toestablish international guidelines for shipsoperating in ice-covered waters. An aerial


he said.Because the Canadian Coast Guard’s

ice-breaking fleet is so small and aged andits search-and-rescue capability is basedfarther south and the navy has only limitedability to venture north, Canada is ill-equipped to exercise control over theArctic, Huebert said.

He said successive Canadian govern-ments have failed to develop a comprehen-sive policy framework for the Arctic and“time is running out.”

Unless clear rules are introduced “it willbe too late to do so after new shippingarrives. Already some foreign companiesare beginning to resist Canadian efforts tocontrol their activities,” Huebert said.

He noted that rising oil and gas pricesare renewing interest in Arctic exploration,with ExxonMobil, Imperial Oil and BPinvesting heavily in Beaufort Sea rights, butclimate change is making pipeline con-struction more problematic.

Huebert said melting ice and the loss ofpermafrost is shifting the spotlight to thepossible use of tankers for the movement ofoil and gas.

The resources in Canada’s Arctic Islandsand waters have not been developedbecause of the challenge and cost of extrac-tion and delivery to market, but thoseimpediments are “lessening,” making theeconomic development of the Arctic withships rather than pipelines “much morelikely,” he said. ●


EXPERTISE

● I N T E R N A T I O N A L

Politicians make promises on Arctic policyRenewable energy to be a priority, and international shipping rules must be established, Arctic parliamentarians decide

WLISA MURKOWSKI

see POLICY page 13

http://www.totemocean.com/

Pacific Energy now wants to focus on itsremaining prospects in California andAlaska. But the company is also lookingto further reduce its leverage ratio, or therelationship of debt to assets used as agauge of financial solvency.

Some reductions will come from new oilproduction brought online over the past sixmonths, especiallyfrom the long shut-inEureka platform offthe coast ofCalifornia.

But the companysees further opportu-nities in Alaska,according to GerryTywoniuk, who tookover as chief financialofficer for the company on Aug. 15.

“We’ve also begun the process of evalu-ating our options of selling down our inter-est in the Alaska properties in some fashion,whether that is to farm-out some of the newdrilling, or by selling our working interest insome specific asset,” Tywoniuk said.

The Long Beach, California-based inde-

pendent came north nearly a year ago afterpicking up the Alaska assets of Forest Oil,which include a complete and partial stakein several units and stand-alone leases in theCook Inlet basin. During the second quarter,Pacific Energy produced 4,300 barrels of oilper day on average from its Alaska opera-tions.

With the price of oil doubling since thesale, Pacific Energy’s Alaska assets couldprovide the company with a tremendousreturn on investment, should it decide to goshopping for partners.

“We’ve been very fortunate to experiencea substantial increase in our equity value in ashort time period,” Tywoniuk said.

One of those wholly owned prospects,the offshore Corsair unit, is the core ofPacific Energy’s exploration efforts, and thecompany intends “to farm out a large portionof the project to fund the exploration pro-gram,” said Darren Katic, president ofPacific Energy.

Corsair and Osprey in 2Q 2009With a year of “planning and integra-

tion” under its belt, Pacific Energy offereda firmer timeline for work in Alaska, nowexpecting to begin exploration drilling atCorsair and development work from theOsprey platform at the Redoubt unit in

mid-2009.Pacific Energy originally hoped to get

those projects underway by the end of thisyear, but “rig-availability and weather-relat-ed logistics” cause a six-month delay, Katicsaid.

While the company is looking at leasingor buying a rig for the Osprey platform, the“availability” problem likely refers toCorsair.

Exploration drilling at Corsair requires ajack-up rig, a mobile drilling unit well suitedfor shallower offshore prospects. Previousfailed attempts to get a jack-up to Alaskahave forced other companies to delay orabandon drilling projects in the Cook Inletbasin.

Earlier this year, Pacific Energy signed a

three-year lease on a Blake Offshore jack-uprig, but is now working to get the large pieceof machinery to Alaska from its current loca-tion in the Gulf of Mexico near Louisiana.

Katic estimates that the voyage aroundthe southern tip of South America wouldtake “roughly” two months, but first PacificEnergy needs to contract with a shippingcompany capable of making the trip. Thestate recently gave Pacific Energy until Sept.29 to sign a contract with a heavy lift vesseloperator, or face losing the unit.

If Pacific Energy is successful, though,the company will have several new optionsfor partnership, because a jack-up rig is inhigh demand in the Cook Inlet. The rig couldbe used to drill the Escopeta-operatedKitchen unit and the Renaissance-ownedNorthern Lights prospects, which both sitalong the same geological formation asCorsair.

Katic said Pacific Energy is “in discus-sions” with other companies.

“Currently, the rig does have enoughwork, assuming we all drill our wells for theentire 2009 drilling season,” Katic said,referring to the period from spring to fallwhen the ice covering the Cook Inlet thawsenough to use a jack-up rig.

Economics still in questionAlthough the timing would be tight,

leasing out time on a jack-up rig wouldimprove the economics of Corsair, whichPacific Energy began questioning after thestate rejected the company’s request toexpand the unit boundaries to include fouradjacent leases.

The expansion would have more thandoubled the unit. Instead, three of the fourleases expired at the end of April, andremaining lease expires at the end of theyear. Pacific Energy appealed the decisionMay, but the state has not responded to theappeal and is under no statutory timelineto do so.

For a time, Pacific Energy suggestedCorsair might not be economic withoutthe expansion acreage, but now the com-pany is presenting a more nuanced pic-ture.

“While we believe that the originalCorsair Unit has significant stand-aloneeconomic merit, the decision of the Statenot to include the additional leases couldhave a negative impact on the overall eco-nomics of the project,” company manage-ment wrote in an analysis of second quar-ter operations released Aug. 15.

Offering the first revised estimates insince February, Katic said recoverablereserves at Corsair might prove to be ashigh as 500 billion cubic feet of gas or 100million barrels of oil.

Under the terms of exploration planswith the state, the company has until June30, 2009 to start drilling on the prospect orface losing the unit.

Benefits from McArthur RiverBefore work begins on either Osprey or

Corsair, though, Pacific Energy could seethe benefits from development work at theMcArthur River unit, which the companydoes not operate.

According to Katic, Chevron plans tostart development drilling from theSteelhead platform in the McArthur Riverfield in the first quarter of 2009. PacificEnergy owns just less than a 50 percentworking interest in several leases at theCook Inlet field, and many of those leaseshold existing platforms.

“Top side improvements continue onall five platforms in preparation for anextensive redevelopment and exploita-tion program, which will span the nextthree years,” Katic said.

—ERIC LIDJI


MOVING ENERGY


PACIFIC ENERGY


DARREN KATIC

“We’ve also begun the process ofevaluating our options of sellingdown our interest in the Alaska

properties in some fashion,whether that is to farm-out someof the new drilling, or by selling

our working interest in somespecific asset.” —Gerry Tywoniuk, new

chief financial officer of Pacific EnergyResources Ltd.

http://www.denali-thealaskagaspipeline.com/


photograph of Big Diomede and LittleDiomede islands in the Bering Strait thatwas shown in one of the presentations wasa visual reminder of how narrow the watersbetween Alaska and Russia are,Murkowski said. “You get tankers movingup there, you get cruise ships moving upthere. There really needs to be an under-

standing of what the rules of the road are,”she added.

As Arctic nations compete for sover-eignty over disputed territories in theregion, the United States can stake its claimto resources on the outer continental shelfby ratifying the Law of the Sea treaty,Murkowski said.

In addition to representatives fromArctic nations, there were observers fromChina at the Fairbanks conference. ●


POLICY

arrangements and access to previousgeothermal studies.

Iceland Energy America will start witha geologic survey to find the best spot fora test well. The study will cover not onlyAnchorage, but also lands and watersaround the Cook Inlet and Mt. Spurr, thesite of an upcoming state geothermallease sale.

Iceland Energy America is a Californiacompany with ties to Iceland, a countryfamous for turning its vast geothermalresources into heat and electricity.

Iceland Energy America was formedin 2004 and currently operates severalgeothermal projects, many in California.One of the company’s largest sharehold-ers, Enex of Iceland, has been involvedwith geothermal energy projects for 70years.

“Currently Iceland’s capital Reykjavikis the largest municipal geothermal heat-ing service in the world,” MagnusJóhannesson, CEO of Iceland EnergyAmerica Inc., said during the signing cer-emony with Anchorage Mayor MarkBegich. “This study will determine ifAnchorage has the potential to take itsplace as number one.”

Begich said geothermal resourcescould be used to both lower energy costsin Anchorage and reduce locally pro-duced greenhouse gas emissions.

If the upcoming study ultimatelyproves nearby geothermal resources to beviable for development, Anchorage couldstart to see the results by 2016, accordingto the municipality. The agreement coversonly the study, not any future develop-ment plans.

— ERIC LIDJI

of the world’s richest people make asneaky, flying visit to northern Alberta?

As guests of the CanadianAssociation of Petroleum Producers,the multi-zillionaires were whisked inAugust 18 to have a peak at CanadianNatural Resources’ massive Horizonproject.

CAPP vice-president GregStringham told reporters that Gates andBuffett asked his industry lobby groupfor a general overview of the oil sandsand where the resource fits intoCanada’s position in the energy world.

“They were exercising curiosity,basically saying ‘Wow, this is neat,’”Stringham said.

Canadian Natural refused to com-ment beyond confirming the two menwere accompanied by chairman AllanMarkin and vice-chairman MurrayEdwards.

One source told the Calgary Heraldthe two men had “investment in mind.”

Buffett is already a stakeholder inConocoPhillips, which controls its ownoil sands projects and is a partner withEnCana in a production/refining jointventure.

But given that Buffett and Gateshave been liberally pouring some oftheir wealth into charitable causes,there is an undercurrent of disquiet thatthey might be more concerned aboutgrowing U.S. reliance on so-called“dirty fuel” from the oil sands.

The visit comes at a time when the

oil sands are increasingly under fire ona global scale, especially from environ-mentalists and governments unhappywith Canada’s stance on greenhousegas emissions.

It coincided with a speech byCanada’s Industry Minister JimPrentice in Atlanta, Ga., when he sur-prised some in the industry byannouncing his government will soonintroduce legislation pushing for moredramatic cuts in emissions than the 45percent per barrel cut in carbon dioxideachieved since 1990.

—GARY PARK

Mexico to open consulate in Anchorage

Mexico will open a full consulateoffice in Anchorage to provide servicesand promote trade.

In the past Mexico has assisted itscitizens living in Alaska through travel-ing consular officials.

An office is under construction andwill open this fall. The consulate islooking for temporary space, said con-sul Jose Luis Cuevas. It will employ 10people.

There are 50 Mexican consulates inthe U.S.

Hispanics make up one of the fastestgrowing ethnic demographics inAlaska. Nearly 40,000 Hispanics livein Alaska and about half are ofMexican descent, according to esti-mates from the U.S. Census and theconsulate.



GEOTHERMAL


INSIDER


ENVIRONMENT & SAFETYStudy: Seismic doesn’t impact Gulf whales

Powerful acoustic devices used by oil companies searching for new sources of hydro-carbons in the Gulf of Mexico have had no discernible effect on endangered spermwhales living in those waters, according to a federally funded study released Aug. 21.

The six-year, $9.3 million study examined the impact of offshore seismic activity,which involves firing air guns into the water, on the Gulf’s sperm whale population.

“The two are not mutually exclusive,” said Randall Luthi, director of the U.S.Minerals Management Service, which oversees E&P activities in federal waters andwhich funded the study. “That’s the kind of knowledge we need to have.”

The study sought to establish baseline information about the whales’ biology andbehavior, and to determine the effect of man-made noise like seismic probes for subseaoil and natural gas.

“The bottom line is that air-gun noise from seismic surveys that are thousands ofyards distant does not drive away sperm whales living in the Gulf,” said Doug Biggs, aprofessor of oceanography at Texas A&M University and a study participant.

In May, Alaska Native and environmental groups sued to stop exploration by oilcompanies in Arctic waters frequented by whales, seals and other marine species. Thegroups are challenging federal permits that allow the companies to search for oil and gasusing acoustic devices.

The plaintiffs claim the signals could disrupt tens of thousands of animals as theyfeed, socialize and travel through the seas of northern Alaska. They say it’s especiallyworrisome to Alaska Natives in the region who depend on the marine mammals for foodand worry they will desert traditional hunting areas for quieter waters.

The Minerals Management Service and National Marine Fisheries Service, both ofwhich grant permits, are defendants in the suit.


http://www.nana-colt.com/

“illogical, not true” and “without merit.”The pipeline’s owners had outlined

their calculations and plans earlier for theFederal Energy Regulatory Commissionin a July 21 filing meant to comply withthe commission’s June 20 order to lowerthe rates, issue some refunds and config-ure more reasonable shipping rates goingforward.

With its order, the commission uphelda May 2007 administrative law judge rul-ing that interstate rates charged on theTrans-Alaska Pipeline System in 2005 and2006 were not “just and reasonable.” Thejudge also ordered limited refunds to ship-pers who had overpaid.

Shippers Anadarko Petroleum Corp.,the State of Alaska and Flint HillsResources Alaska LLC filed protests andcomments separately, citing reasons whythe pipeline owners erred in their calcula-tions or asked for clarification of the com-mission’s directions to the owners. (Seestory in the Aug. 10 issue of PetroleumNews.)

Owners counter Anadarko’s argumentsIn its Aug. 5 protest, Anadarko said it

objected to the pipeline owners includingin their compliance filing different pro-posed rates for the various years in ques-tion and trying to introduce new evidenceafter the hearing is closed. The shipperalso said $1.92 per barrel of oil should bethe rate adopted for 2005 and $2.02/bblfor 2006.

The shipper also accused the pipelineowners of improperly presenting alterna-tive rates “based on new and untesteddata.”

The owners defended their right tointroduce new information in the compli-ance filing by noting that the FERC hasallowed additional data to be introduced incompliance filings in the past, “providedthe data is adequately supported.”

The owners also said due process isserved by allowing the shippers to reviewand comment on this “new” data beforethe commission takes any action thatrelies on its accuracy.

The owners called Anadarko’s argu-ments in support of a uniform rate “mis-guided,” noting that the five of them donot have the same costs, and a uniformrate would cause any owner with above-average costs to “under-recover” its costof service.

Secondly, they do not transport vol-umes in proportion to their ownershipshares of the pipeline’s capacity, and auniform rate would necessarily cause anowner with throughput that is less than itsownership share of total system-widethroughput to under-recover its cost of

service, the owners said. Thirdly, an owner with a relatively

small ownership share of the pipeline willbe precluded by a uniform rate fromrecovering fixed, base-line costs that areincurred in the owner’s operation of thepipeline.

“Because a uniform rate guaranteesthat certain TAPS (owners) will under-recover their costs of service while otherowners will over-recover their costs ofservice, it produces a rate that is necessar-ily unjust and unreasonable,” the attorneysargued.

“Anadarko is also incorrect in assertingthat these problems can be resolvedthrough pooling. Indeed, Anadarko’sreliance on pooling is tantamount to anadmission that a uniform rate cannot –without a subsequent adjustment – pro-duce just and reasonable rates for eachTAPS (owner). Moreover, the commissiondoes not have the authority to order theTAPS owners to pool revenues – a factthat Anadarko simply ignores in itsAnswer,” the attorneys wrote

The owners further said it is specula-tive to assert that the problem would begreater for the trans-Alaska oil pipelinethan for other oil pipelines that set ratesindividually.

Criticisms lacks meritThe owners also criticized Anadarko’s

protest for failing to raise any specificissue regarding the accuracy or suitabilityof the actual 2006 data other than “alleg-

ing that TAPS throughput ‘during the peri-od in

Question’ was ‘abnormally low.’ ”The owners said Anadarko failed to

show that the actual level of petroleumthat flowed through the pipeline in 2006was unrepresentative, “particularly giventhe general declining trend in TAPSthroughput over the years.”

“Anadarko further argues that the useof actual data is somehow inconsistentwith Opinion No. 502. Anadarko Protestat 5-6. But nothing in Opinion No. 502directed the Carriers not to use actual data,and nothing about the use of actual costand throughput information for 2005 and2006 is inconsistent with the methodologyestablished in the commission’s order,”wrote attorneys for the owners.

They also noted that the use of actualdata is consistent with commission prece-dent.

The owners further defended theirinterpretation of when the FERC meantfor prospective rates to take effect, butacknowledged that the commission’sorder is subject to different interpretationsof how 2007 and 2008 rates should be set.

However, Anadarko is wrong in itsinterpretation, they argued.

“The prospective rate in this case can-not take effect from 2006 forward orsupersede the 2007 or 2008 rates asAnadarko suggests,” the attorneys wrote.

In a separate filing the owners arguedthat Anadarko’s answer to their compli-ance filing should be rejected by FERCbecause the 20-page argument does notmeet the commission’s prerequisite thatsuch filings be “brief” and “factual.”

They further charged that Anadarkobrought up many of the same issues itraised during the regular proceedings.

“In sum, Anadarko has not shown goodcause for waiving the prohibition onanswers to requests for rehearing. Rather,it is largely repeating its earlier arguments,which will not assist the commission in itsdecision-making process,” the owners’

attorneys wrote.

State protest lacks meritThe State of Alaska filed a protest Aug.

5, accusing the pipeline owners of makingseveral mistakes in their compliance fil-ing, including improperly using 2005 and2006 actual cost figures, interpreting thecommission’s order to set prospectiverates and interjecting discussion of extra-neous and immaterial issues beyond thescope of the commission’s order.

The pipeline owners said state’sprotests are without merit and its claimthat the prospective rate should begin Jan.1, 2005 is illogical, given that theSupreme Court has said the meaning of“prospective” is “to be thereafterobserved” and FERC’s order was issuedJune 20, 2008, not Jan. 1, 2005.

The owners also said the state present-ed no grounds to strike so-called “extrane-ous” issues from the compliance filing.

BP counters Anadarko’s criticismsBP, which owns more than 50 percent

interest in the trans-Alaska oil pipeline,said Anadarko is attempting to “mis-frame” its request for rehearing certainaspects of the FERC’s June 20 order.

BP said that it would not oppose a uni-form rate if an acceptable FERC-approvedpooling arrangement could be put in placethat would eliminate the over- and under-recoveries that would otherwise flow froma uniform rate.

BP said its percentage ownership of thepipeline significantly exceeds its share ofpetroleum that flows through the line. Thismeans the owner is “doomed to chronicunder-recovery under a uniform rate sys-tem unless the commission orders full rev-enue pooling as a prerequisite to uniformrates,” BP argued.

BP said Anadarko’s claims that theowners’ concerns are hypothetical and thatthe pooling issue is not yet germane isuntrue.

“The losses BPPA faces are real, theyare huge, and they are imminent. If BPPAmust charge a uniform rate, it stands to fallshort of recovering its cost of service bytens of millions of dollars a year com-mencing January 1, 2009 - less than fivemonths from today - the TAPS SettlementAgreement is terminated, unless theCommission orders pooling, as itacknowledges it has the power to do.

” BP’s attorneys wrote.Moreover, if the FERC requires pool-

ing, it could alleviate the pipeline owners’antitrust concerns by authorizing them toshare the information needed to calculateand file uniform rates, BP said. ●


Anadarko asks FERC to deny Flint Hills’ motionAnadarko Petroleum Corp., a shipper on the trans-Alaska oil pipeline, asked the

Federal Energy Regulatory Commission Aug. 19 to deny a motion filed two weeksago by Flint Hills Alaska LLC.

Flint Hills, also a shipper on the pipeline, filed comments and a motion for clari-fication of the pipeline owners’approach to calculating lower rates for 2005 and 2006and their suggestions for determining 2007 and 2008 rates.

Flint Hills also asked the FERC to direct the owners to refund to the shippers thefull difference between pipeline tariffs charged for 2004 and the amounts charged for2005 and 2006 “in light of the fact that rate calculations submitted by the Carriers areall lower than the 2004 rates.”

Anadarko said Flint Hills appears to be seeking the FERC’s endorsement of itsinterpretation of parts of the commission’s June 20 order, directing the pipeline own-ers to lower their interstate shipping rates.

Anadarko urged the commission to deny the motion, saying it is not pertinent tothe only issue in question at the compliance stage of the proceedings.

The shipper said Flint Hills initially stated “correctly” that nothing in the FERCorder grants the pipeline owners license to increase their rates for indexing or anyother reason.

But then Flint Hills requested clarification that the compliance filing dealt onlywith refunds due for the 2005-2006 period and not the 2007 and 2008 rate periods.

Anadarko said no such clarification is necessary because the owners’ compliancefiling does not deal with rates for the 2007 and 2008 period, which the commissionplans to address in separate proceeding pending the outcome of the current case

Moreover, Flint Hills appears to be seeking endorsement of its interpretation ofpart of the FERC’s June 20, an interpretation that is “inconsistent” with its “plain lan-guage,” Anadarko added.

—ROSE RAGSDALE


OWNERS On the WebSee previous Petroleum News coverage:

“Shippers protest new tariff proposals”in Aug. 10, 2008, issue athttp://www.petroleumnews.com/pnads/746907414.shtml

“Williams seeks rehearing; says FERCoverlooked inequitable dismantlementfees collected from shippers by TAPSowners” in July 27, 2008, issue athttp://www.petroleumnews.com/pnads/3631989.shtml with sidebar “Pipelineowners ask FERC for rehearing”

http://www.amarinecorp.com/


STAND UP FOR ALASKA.

Do you believe that one proposal should threaten an entire industry, jobs, and future revenue for Alaska communities? YES NO

Do you believe special interests from the Lower 48 should dictate how Alaskans develop our resources?

YES NO

Do you believe rural Alaska has too many good-paying jobs?

YES NO

Do you believe an arbitrary and untested proposal should replace Alaska’s thorough, science-based laws

and pristine water? YES NO

THEN VOTE NO ON 4. YES NO

● M I N I N G

AOGAopposesballotmeasure

By SHANE LASLEYPetroleum News

n a rare move the Alaska Oil & GasAssociation’s board of directors passed aresolution opposing Ballot Measure 4,aimed at changing regulations on water

discharged from Alaska’s large-scale metal-lic mines.

In its Aug. 7 resolution AOGA said theAug. 26 primary ballot measure would dra-matically change portions of Alaska’s waterquality laws without the level of review andscrutiny they would receive under the regu-lar legislative and/or rulemaking process —processes that require public hearings, pub-lic comment periods, scientific analysis,input from stakeholders and, often times, adetailed economic analysis.

When asked why AOGA is weighing inon a ballot measure targeting mining,AOGA Executive Director MarilynCrockett told Petroleum News, “It is badpublic policy to bedeciding scientificand technical issuesin a voter referendum.It doesn’t bring with itthe appropriate scruti-ny that the legislatureor an agency withexpertise in that areawould bring with it.That is not a goodway, from our perspective, for issues tech-nical in nature such as the ones beingaddressed in that ballot measure. That is notthe appropriate way for those issues to beaddressed and resolved.”

AOGA said the state of Alaska and thefederal government each have a rigorousand comprehensive permitting process toensure that thorough environmental analy-ses are conducted on all resource develop-ment projects before any project is allowedto proceed. The association said state andfederal permitting processes include specif-ic requirements that ensure water quality isprotected.

AOGA also pointed out that because theinitiative language will not receive a thor-ough examination by most voters, Alaskansmay not fully understand the significantramifications and implications of the pro-posed changes.

“It doesn’t matter whether the issue isone that addresses restrictions on dischargesinto water, discharges into air; any of thosekinds of issues really need to be run throughthe rigorous scientific evaluation that thelegislature or the agencies would do, andnot simply in a confusing voter referendumthat don’t meet that sort of rigorous review,”Crockett said.

AOGA board members decided tooppose Ballot Measure 4 because it “couldpreclude a project from proceeding before iteven begins the governmental reviewprocess and more importantly, this initiativewould set a precedent for scientificallybased policy to be determined without thebenefit of a full public process.” ●

I

MARILYN CROCKETT

JUD

Y P

ATR

ICK

http://www.akrdc.org


Companies involved in Alaska and northern Canada’s oil and gas industry

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All of the companies listed above advertise on a regular basis with Petroleum News

Business SpotlightVictaulic Piping SystemsSolutions

What began as a faster, easier and cheaperway to join pipe evolved into Victaulic’s total “sys-tems” approach. Today, Victaulic Piping SystemsSolutions offers Alaska companies complete solu-tions that anticipate a project’s every need. TheVictaulic grooved-piping method accommodateslightwall, standard and extra-heavy steel, stainless,aluminum, high-density polyethylene, PVC andother plastics. Products for copper tubing (CTS) andductile iron (AWWA) for water supply, and under-ground and waste-treatment process piping arealso available.

Stover Smith joined Victaulic in 2003, transferringto Alaska in 2007. He, his wife Amy and their two daughters — Briede, age 5, and Laurel, 10months — are on a mission to experience as much of Alaska as possible. They’re enjoying thenice, cool summer but would be happy with somewhat less precipitation.

—PAULA EASLEY

Stover Smith, Alaska Territory Manager

FOR

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ACS is Alaska’s leading broadband, wireline andwireless services provider to business and mass-market customers. The Anchorage-based companyrecently purchased Crest Communications and itsNorthstar fiber optic cable between Alaska and thecontiguous 48 states. ACS is also building a geo-graphically diverse undersea fiber optic network —called AKORN, or Alaska Oregon network — togreatly enhance Alaska’s bandwidth capacity.

Steve Gebert, who served a 20-year career as anaval flight officer, was tapped to head the $105-million AKORN construction. During his careerSteve flew combat missions in Bosnia and Iraq,including numerous aircraft carrier deployments inan F-14 Tomcat. Now, settled in Alaska, he and hiswife Pamela and their three children are enjoying allthe state has to offer, including the world’s best fishing, Steve’s favorite pastime.

—PAULA EASLEY

Steve Gebert, Director, ProgramManagement

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Oil Patch Bits

Nabors names new leaderNabors Industries, the world’s largest

land drilling contractor, has named DennisSmith, 58, to oversee its Alaska opera-tions. This includes Nabors Alaska Drilling,the largest drillingcontractor in Alaska.Smith will overseeNabors joint ventureholdings with CookInlet Region Inc.,specifically PeakOilfield Services Co.,Precision Power andAlaska InterstateConstruction as well.Prior to joining Nabors in 1992, Smithlived in Anchorage for nearly 14 yearswhere he served as chief executive of PoolArctic Alaska, acquired by Nabors in 1999.In addition to his new role, Smith will con-tinue as director of corporate develop-ment with Nabors Industries Ltd. based inHouston, and report to Gene Isenberg,chairman and CEO of Nabors Industries.

American Tire acquiresland for new plant

In line with its objective of becomingthe “largest and best manufacturer” for63-inch and 57-inch tires, American TireCorporation said Aug. 18 that it has pur-chased a 22,605,000-square-foot feet(about 2,100,000 square meters) parcel ofland for one of its new plants inWashington, and intends to purchaseanother piece of land of similar size to“support its long-term development in theOTR tire industry.” For more information,go to American Tire’s Web site athttp://www.americantire.us.

GCI gives broadband giftGCI has contributed a $30 million

broadband gift to the University of Alaskasystem. University of Alaska PresidentMark Hamilton said the gift is essential tothe university’s mission of education,research and public service. The university,he said, had requested the money fromthe Alaska legislature for several years toincrease its broadband capacity, but didn’treceive the support it needed. The broad-band gift from the communications com-pany provides up to 10 gigabits-per-sec-ond from Anchorage to Seattle, benefit-ting not only the university but Alaskaschools through a network that is part ofthe state’s multi-partner DistanceEducation Consortium.

See full stories in next PetroleumDirectory

is operator) and 27.5 percent of White Rose.Never hesitant about trumpeting his suc-

cesses, real or imagined, Williams, whobrought development of Hibernia to ascreeching halt more than two years ago isnow proclaiming a new era of industry-gov-ernment partnership.

The consortium has made guarantees oflocal contracting, which Newfoundlandhopes will see a return of constructionworkers from the Alberta oil sands to join awork force expected to reach 3,000.

“This really is a win-win,” he told anews conference. “We are soon to become a‘have’ province as master of our own des-tiny. This is a day that all (Newfoundlandresidents) can take pride in and celebrates.The signing of this agreement reflects abold new era of partnership … it marks ouremergence as a full participant on the glob-al energy stage …” he said.

The taxpayers of Newfoundland, whoare now part of the industry gamble, havereason to hope he is right.

To reassure them, Williams said the part-ners could count on generous profits even ifoil prices fall back from current levels.

Based on average oil prices of $87 perbarrel, Newfoundland would collect C$20billion in royalties, corporate income taxand return on equity over Hebron’s 25-yearoperating life. The Canadian government

and other provinces could receive morethan C$8 billion.

Newfoundland’s existing generic oilroyalty regime will apply with some modi-fications. It provides for an additional superroyalty of 6.5 percent on top of existingrates any time after net royalty payoutwhere the price of West Texas Intermediateexceeds $50 per barrel. This results in a toproyalty rate of 36.5 percent.

The basic royalty remains at 1 percent ofgross revenue until project costs are recov-ered. Conceding the wrangling that hastaken place, Williams said: “We had to playtough to up the ante … there were sometough things said and we went throughsome tough times.”

As oil prices started rising last year,Williams said “both sides just said let’s geton with it.”

At the height of the furor, he blamedExxonMobil for blocking his bid for a gov-ernment equity stake and accused the super-major of holding his province to ransom.

Chevron Canada President Mark Nelsonsaid the construction and production phaseswill “deliver significant benefits to the peo-ple of Newfoundland, generate a competi-tive rate of return for Chevron and our co-venture companies … and provide addition-al energy supplies for the North Americanmarketplace.”

The pact is accompanies by the mostpositive trends in many years for theNewfoundland offshore.

Transocean’s dullish Henry Goodrich

has arrived in the region under a two-yearcontract with Husky Energy, StatoilHydroand Petro-Canada to drill a series of explo-ration and delineation wells in areas wherethe three companies are active.

StatoilHydro will move the drillship tothe Flemish pass basin in about 1,100meters of water later this year to test theunexplored Mizzen prospect in partnershipwith Husky, which can acquire an interestof up to 35 percent.

ExxonMobil has contracted for a rig todrill a second exploration well in the deep-water Orphan Basin and ConocoPhillips isgearing up for an exploration program inthe gas-prone Laurentian Basin.

In all cases, the companies are aware thatthe Williams government, under its newenergy policy, will insist on a 5 percentstake if commercial oil or natural gas is dis-covered.

Wade Locke, an economist atNewfoundland’s Memorial University, saidthat if the Hebron negotiations had failedfor a second time the offshore would havelost its fresh momentum.

He said the deal is “extremely important(because) it reconfirms that there is anindustry going forward here for the next 30or 40 years.”

Paul Barnes, Atlantic Canada managerfor the Canadian Association of PetroleumProducers, welcomed the two latest pacts— with Hebron and with Husky to expandits White Rose development, as a “very pos-itive signal for the industry.” ●


DESTINY

● N A T U R A L G A S

State keeps LNG pipeline on the tableBy ERIC LIDJI

Petroleum News

oping to alleviate the concerns of those who favor an “all-Alaska” option for marketing North Slope natural gas, Gov.Sarah Palin on Aug. 20 signed an order directing her admin-istration to continuing pursuing a liquefied natural gas proj-

ect.Although the administrative order outlines a simple framework

for the Departments of Natural Resources and Revenue to workwith project sponsors, the document is mostly meant to assurethose who felt betrayed after the legislature gave TransCanada alicense and matching grant to pursue an overland pipeline fromAlaska to Alberta.

An LNG project, such as the one long proposed by the AlaskaGasline Port Authority, would involve a pipeline contained entire-ly within the boundaries of the state, and would ship LNG either tomarkets in East Asia or on the West Coast of the United States.

Testifying before state lawmakers recently, TransCanada prom-ised to allow potential shippers to commit gas to a LNG project, aswell as an overland route, during the first open season. Withenough customers committing enough gas, TransCanada evenpromised to build a Y Line, a configuration combining the over-land and LNG routes.

The new Administrative Order is “memorializing that same

intent, that same attitude for the state,” according to NaturalResources Commissioner Tom Irwin.

“Everything comes back to the market conditions,” Irwin said.“If you a market for LNG only, we agree that will be built. If there’sonly a market for the U.S through Canada, that will be built. If forboth, both can get built.”

During legislative hearings, some experts questioned whether anLNG project would get Congressional approval to export domesticnatural gas supplies to overseas markets, especially as energy secu-rity becomes an increasingly hot topic across the country.

Proponents, especially those at the Alaska Gasline PortAuthority, say they already have the export license, and believe itwill remain valid if the project moves into development.

Others now believe a Y Line could relieve some pressure byaddressing domestic demand, while also giving the state diversitythrough overseas markets.

“It helps us deal with a lot of that concern,” said Sen. GeneTherriault, R-North Pole, a proponent of an all-Alaska line who alsovoted to give TransCanada the state license.

Voters in three municipalities created the Alaska Gasline PortAuthority by an overwhelming majority nearly a decade ago, andPalin supported the project during her 2006 run for governor, butthe agency failed to submit a conforming application to the AlaskaGasline Inducement Act, and spent much of the past year strugglingto remain in front of the public. ●

H

DENNIS SMITH


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by the end of 2008, Eric West, BP’s heavyoil project manager, told a media tour ofthe Milne Point test facility Aug. 18.

If the phase one testing demonstratesthe technical feasibility of heavy oil pro-duction, the project will move into a sec-ond phase of testing, to evaluate whetherheavy oil production at Milne Point willprove economically viable, said MaxEasley, Alaska Consolidated Team busi-ness unit leader.

20 billion barrelsAnd, with an estimated 20 billion bar-

rels of heavy oil in place in the centralNorth Slope, the stakes couldn’t be high-er.

“If we only get 10 percent of it, that’sa lot of oil,” West said.

The oil in the Prudhoe Bay region hasmigrated into various reservoirs at differ-ent depths. But bacteria that become par-ticularly active in the temperature condi-tions at depths of around 4,000 feet eatout the lighter hydrocarbons, West said.That results in a residue of heavy oil inrelatively shallow reservoirs far above theconventional light oil reservoirs of theNorth Slope oil fields.

Methane waste from the bacterialaction bubbles towards the surface andbecomes trapped around the base of thepermafrost as gas hydrate, West said.

About three years ago BP decided toembark on a project to try to develop theheavy oil while there is still significantproduction of light oil from the NorthSlope. The light oil is needed to thin theheavy oil so that the resultant fluid canflow down the trans-Alaska pipeline,West explained

“We need the light oil to blend it with,

so it’s the perfect time in the NorthSlope’s life,” Easley said.

Were BP to stick to the conventionalconcept of waiting for depletion of theNorth Slope light oil before producing theheavy oil, the company would have toresort to an expensive technique such ashydrogen cracking to create a lightenough fluid for export by pipeline, Westsaid.

Which way?But which of the many possible ways

of producing that residue of heavy oil islikely to work?

The most widely publicized methodsconsist of either the surface mining of oilsands or the application of heat to theunderground reservoirs, West said.However, in Canada, the epicenter ofheavy oil development, techniques forcold heavy oil extraction have also beendeveloped, he said.

BP has a policy of not mining forheavy oil, West said. But the choicebetween hot and cold in-situ productiondepends on the nature of the oil reservoir

and the characteristics of the oil, he said.On the North Slope much of the Kuparukunit area heavy oil appears most suitablefor hot extraction, while in the PrudhoeBay and Milne Point units cold tech-niques seem more appropriated.

West also said that cold techniquescreate a smaller carbon footprint than hottechniques.

The particular technique that BP haschosen to try at Milne Point is called coldheavy oil production with sand, or

CHOPS Elements

Elements• Unconsolidated rocks• Progressive Cavity Pump• Surface Drive• Sand Separation Facilities• Sand Disposal


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http://www.spe.org/atce

CHOPS, a technique that has seen sever-al commercial developments in Alberta.

In this technique, which depends on anunconsolidated sand reservoir, the pro-duction well has large perforations and noscreen for keeping the sand out of thewell. Sand is produced along with the oiland is subsequently separated from the oilat the surface by heating the oil/sand mix-ture in a tank.

“You’re actually producing a bit of thereservoir into the wellbore,” West said.“That is totally contrary to light oil reser-voirs where you always want to keep thesand out.”

Downhole pumpA key part of the well technology is the

downhole pump, known as a progressivecavity pump, consisting of a long augur-like rotor that spins at high speed insidean enveloping tube. The rotating augurscrew will draw material up the well,while being less susceptible to wear thana piston-based pump design.

Because the sand in the well wouldtend to cause a downhole electric motorto overheat, the pump’s motor drive isplaced at the surface and is connected tothe pump rotor by means of a long rotat-ing rod that extends through the wellinner casing. A huge spool called a mobilegripper unit feeds the drive rod down intothe well casing.

The pump should cause a pressuredrawdown or drop of around 1,000pounds per square inch or more at the bot-tom of the well.

“We’re going to put really significantdrawdown against these open perfs,”West said. “And that’s going to induce theformation to produce into the well.”

Once a well goes into operation, initialsand production should be high, perhaps40 percent of the total production volume,said Grant Encelewski, operations leadtech for the BP heavy oil team. Then,after a system of fissures and wormholes

in the reservoir has opened up and some-what stabilized, sand production will dropto 10 percent or less, with a correspon-ding increase in oil production.

But, although the project team hasalready recovered a small amount of oilfrom the test well in the course of prepar-ing the well for pump installation, the keyto success will be the pumping of sand upthe well.

“We define success, not so much asoil, but as being able to bring sand to thesurface in a sustainable manner,” Westsaid. “… If we can do that we know we’regoing to have a project, because the oilwill come with it.”

Initial testing is using adapted conven-tional oilfield equipment to process thematerial drawn from the well. If that testproves successful the team will drill threemore wells by end 2009 and install along-term test kit consisting of processingequipment purpose built for handlingheavy oil. Sand separated from the oilwill be disposed through the Prudhoe Baygrind and inject facility.

The total cost of this phase one testingwill be $68 million.

Phase two will involve an additional

extension to S-pad, the drilling of fourmore wells and possibly the installationof additional well test facilities. Phasetwo is likely to cost about as much asphase one.

“We’re going to put over $100 millioninto this, before we even know if this is abusiness opportunity,” West said.

Several hurdlesPhase two could culminate in a devel-

opment decision, but for a viable full-scale development the testing will need tocross several hurdles.

“This is a journey that is going to takesome time,” West said.

Assuming that the initial well configu-ration works successfully, the team willtry to improve flow rates — higher thannormal cold heavy oil production rateswill be needed to offset high Alaska wellcosts. The technique of choice for flowrate optimization is the use of multilateral

horizontal wells but no one knowswhether the sand production will workthrough horizontal well bores.

“No one has yet determined how youcan pull sand along a horizontal well,”West said. “That’s our technology chal-lenge.”

And one key factor will be the use ofgood reservoir imaging from seismic datato enable precise well placement.

“In Alberta they have a 40 percent(CHOPS) well failure rate,” West said.

Cost and valueThe project team will try to apply

innovative technologies to reduce costs.And, finally, the team will need to ensurethat the footprint of the required surfaceequipment is acceptable.

By crossing these various hurdles, BPexpects to overcome the two major chal-lenges of heavy oil production: high pro-duction costs resulting from the high oilviscosity and the relatively low value ofthe product. Because the heavy oil con-tains a smaller proportion of high valueproducts such as gasoline than light oil,BP expects the North Slope heavy oil tosell at about $9 per barrel below the regu-lar price for Alaska North Slope crude.But at current oil prices, the economicslook good, West said.

And BP’s strategy for its North Slopeproduction is to bolster overall fluid oilproduction by bringing heavy oil on line.

“Without the heavy oil the future ofAlaska is very much one of diminishinglight oil, but then gas coming on big,”West said. “But with heavy oil you …have a rejuvenation of the fluids businessfor Alaska, and it becomes as much a flu-ids future as a gas future.”

“This to me is the next big oil boom,”Encelewski said. “… This is a domesticproject that’s under our noses. … That’swhat gets me enthusiastic.” ●



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Grant Encelewski, operations lead tech for the BP heavy oil team, points to the top-drive motorunit for the downhole pump. The pump will be installed on the wellhead of the test well.

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The auger-like rotor of the progressive cavity pump used to reduce the well downhole pres-sure and draw a mixture of sand and oil up the well.

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