Arco: depleting supplies of Alaskan oil pose challenge.

Finding new sources of oil is top priority

Atlantic Richfield Co., L.A. County's second-largest company, is celebrating its 30th birthday this year.

But that celebration is being muted somewhat by the fact that its financial foundation - Alaskan oil - is crumbling.

After holding Alaskan production steady at about 400,000 barrels a day for an entire decade, Arco's production of Alaskan crude is expected to fall by about 6 percent in 1996, said Ken Thompson, president of Arco Alaska Inc., the wholly owned Alaskan oil exploration and development subsidiary.

Worse yet, Arco projects that decline to continue at a 6-percent annual clip until the end of the century.

"How would you like it if your gross revenues were declining at a rate of 6 percent a year over the next five years?" Thompson asked rhetorically in a speech given to the Anchorage Chamber of Commerce in April.

"Our employees didn't like it," Thompson said. "I didn't like it."

So a group of 100 Arco Alaska employees devised a plan to stop the decline. It relies on adding reserves in existing fields, finding new sources of oil and continuing to use new technologies to get more oil out of Arco's existing Alaskan wells.

Thompson has set what he calls "a stretch goal" of halting the decline in oil production by 1999, at which point Arco's Alaskan oil production would be more than 20 percent below 1995 levels.

"It's not a sure shot," said Thompson. "A lot of things have to happen right in the next few years."

Arco's success is critically important to the future of the company, analysts say, because it is so dependent on Alaska for oil production.

Downtown L.A.-based Arco is the second-largest oil producer in Alaska, after London-based British Petroleum. Irving, Texas-based Exxon Corp. is third largest.

In fiscal 1995, about 400,000 of the 650,000 barrels Arco produced on an average day came from Alaskan fields.

To lessen that dependence, Arco is working towards developing new fields in a number of foreign countries, including Algeria, Qatar and Russia.

Arco announced earlier this month that it would invest up to $5 billion in a joint venture deal with the Russian oil company Lukoil to develop and explore fields in the Caspian Sea area. Some Wall Street analysts have expressed concern that Arco may be spending a lot of money on a project with uncertain prospects for the future.

But Alaska remains by far the company's dominant source of production.

Thompson said the plan is to hold production in Alaska steady so it can serve as a "foundation" for Arco's growth of oil reserves in other countries.

Arco Alaska has already begun to make progress towards its goal.

The company announced in September that it has begun an enhanced oil-recovery project that is expected to increase total production at its giant Kuparuk oil field by 10 percent, or 200 million barrels.

The oil-recovery process involves injecting a solvent into the reservoir rock, which forces the oil into the producing wells.

In October, Arco is expected to announce the long-awaited results of its exploration of the Colville High Field on the North Slope of Alaska.

"Colville could be another Kuparuk," said one veteran oil industry analyst who asked not to be identified. Kuparuk is a 2.2 billion-barrel field, the second largest oil field in the United States, that Arco discovered in the late 1960s.

But the analyst added, "There have been a lot of false starts on the North Slope."

Arco "does have a fundamental problem that they haven't found any resources in northern Alaska to offset the resources they have pulled out of there after 20 years of operation," he said.

Arco was only about a year old in December 1967, when, after drilling a dry well on the North Slope of Alaska, Arco roughnecks hit oil.

It was not just another field, but Prudhoe Bay, the largest oil discovery in the United States, with 14 billion barrels of reserves.

Prudhoe Bay is responsible for rocketing Arco, then a medium-sized independent oil company, to where it is today - the seventh largest oil company in the United States and the No. 1 marketer of gasoline in California.

Two years after discovering Prudhoe Bay, Arco discovered Kuparuk, a 2.2 billion-barrel field and the second largest in the United States. Then in 1989, Arco discovered Point McIntyre, a 345 million-barrel field.

Philip Dodge, oil analyst at Southeast Research Partners, praised Arco's work to get more oil out of existing fields as "a very impressive job."

Dodge was not as optimistic about the prospect of Colville being a billion-barrel-plus field. "It could be medium, more like 300 million barrels," Dodge speculated. But even that sized field would help stem the decline in Alaskan production, he said.

Dodge noted that Arco has been more successful than its competitors in holding oil production steady.

For the last 10 years, Prudhoe Bay's production has declined at a rate of 12 percent a year. However, through all of Arco's various initiatives, "we have added 800 million barrels of oil since 1991," Thompson said. That extra production has kept Arco's total Alaskan production level virtually flat in recent years, until this year.

Besides employing new technologies on existing fields, Arco's strategy involves drilling "satellite wells" into smaller pockets of oil around the perimeter of the big fields, like Kuparuk and Prudhoe Bay, Thompson explained.

The new plan is a departure from Arco's traditional approach. "In the late 1980s and the early 1990s, Arco's strategy was to look to find other fields of the size of Prudhoe Bay or of the size of Kuparuk. But we did not succeed in that," Thompson said.

Notably, in 1993 and 1994, Arco announced that it had scrapped plans to develop what it had hoped would be two large offshore fields, the Sunfish field and the Kuvlum field. Those fields were found not to be commercially viable.

That disappointment has caused Arco to lower its goals.

Arco scientists have estimated that, even if the company does find oil, "there is only a 1 or 2 percent chance" that the field would be the size of Kuparuk or Prudhoe, Thompson said.

Scientists give Arco a much better chance of finding new medium-sized fields - in the range of 150 million to 300 million barrels, he said.

"We have now shifted our attention to finding fields of that size, to the concept that finding several of those would be economically attractive," he said.