Arco to drill on possible giant oil find offshore from Alaska.

One billion barrels of crude may be under Beaufort Sea 

Atlantic Richfield Co. plans to begin drilling this week on exploratory wells that industry analysts and Arco officials said could confirm the largest domestic oil discovery in recent history.

The two "delineation wells," situated on floating platforms in the Beaufort Sea, some 16 miles offshore from Alaska's Arctic National Wildlife Refuge, are being sunk to confirm Arco's preliminary estimates that the so-called Kuvlum Field could contain as much as 1 billion barrels of crude oil reserves.

Results from those tests are expected by the end of this year, according to officials at downtown L.A.-based Arco, Los Angeles County's largest publicly traded company.

Arco's window of opportunity to pull off its high-stakes exploration is very narrow, however. Due to treacherous conditions and heavy ice floes in the Beaufort Sea, manned drilling can only be undertaken from August through October, Arco officials said.

"Arco has a long history of working in the Arctic; but no doubt about it, this will be a real challenge for us," said Albert Greenstein, an Arco spokesman.

Meeting that challenge could yield Arco a huge financial bonanza, although that bonanza admittedly would not reach Arco's bottom line for years to come.

It would also require a huge financial investment from Arco to build a pipeline connecting the Kuvlum Field to the existing oil pipeline infrastructure some 60 miles away in Prudhoe Bay.

"It would obviously be an extremely costly venture (to commercially develop Kuvlum). That's about as specific as we're getting right now," Arco's Greenstein said.

"This discovery (Kuvlum) presents the tantalizing prospect that a whole new province would be opened up to Arco," said Bernard J. Picchi, oil industry analyst at the New York investment banking firm Kidder, Peabody & Co.

Greenstein confirmed that, if and when the pipeline infrastructure is extended to the Kuvlum Field, not only would that field open up, but so would several smaller, nearby fields that otherwise would not be commercially viable.

The new oil "province" that would open up to Arco is under the Beaufort Sea, directly north of the virtually untouched Arctic National Wildlife Refuge and about 60 miles northeast of Prudhoe Bay, where a joint venture of Arco and British Petroleum in 1968 discovered the largest U.S. oil field to date.

But crude oil production in Prudhoe Bay and elsewhere on Alaska's North Slope has been petering out in recent years, causing concern that the flow might soon be insufficient to continue efficient operation of the multibillion-dollar Trans-Alaska Pipeline.

North Slope crude production for the first six months of 1993 averaged 1.634 million barrels a day, according to Platt's Oilgram News, an oil industry trade paper. That represented a decline of about 100,000 barrels a day from the previous 12 months' average and a huge decline from the North Slope's peak year of 1988, when more than 2 million barrels a day gushed out of North Slope fields, on average.

Depletion of the North Slope crude oil reserves holds particular significance for Arco.

"Due to the declining production of Prudhoe Bay, it is essential that new sources (of crude oil) be discovered in northern Alaska to keep supplying the Trans-Alaska Pipeline system," said Greenstein. "Alaska accounts for 66 percent of our domestic liquids production and almost 60 percent of our worldwide liquid production. This is a key area for Arco."

And more than 99 percent of all Arco's Alaskan crude comes from the North Slope fields, with less than 1 percent coming from southern Alaska, he said.

But northern Alaska is also a "key area" for environmentalists and resident Eskimos, two groups that are fighting to derail oil and gas development activities in the Beaufort Sea.

The North Slope Borough, the municipality (roughly equivalent to a county) that extends the length of Alaska's North Slope, issued a press release last week stating that it intends to file a lawsuit opposing Arco's Beaufort Sea activities. The borough's opposition stems from its contention that Arco's activities will threaten bowhead whales, which Eskimos hunt in waters off the North Slope.

"While Inupiat Eskimo whalers were negotiating with Arco Alaska to protect the bowhead whales..., an Arco lawyer (Mark Savit) and a federal official (Margaret Lorenz) conspired with Arco negotiators to sneak through a permit to allow Arco to drill for oil in the path of the bowhead whales where they are traditionally taken by Inupiat whalers," the release stated.

North Slope Borough Mayor Jeslie Kaleak and Burton Rexford, chairman of the Alaska Eskimo Whaling Commission, jointly stated in the release, "We will not be treated in this manner by Arco and the federal government. Frankly, we expected more from President Clinton and Arco Chief Executive Lodwrick Cook. People who pretend to negotiate with us in good faith and then send their hired-gun attorneys to conspire with the federal government will learn they cannot deal with the Eskimo community in this manner."

The release further stated that resident Eskimos plan to send a whale-hunting flotilla into the waters Arco intends to explore. "It will be difficult, if not impossible, for the industry to operate with all our little boats blocking their path," Kaleak is quoted as saying in the release.

Jessica Lefevre, a Washington, D.C., attorney representing the Eskimo whalers, said, "We have been instructed to file an action, but have not done so yet." She said a definite date for a filing had not yet been determined.

In response to the Eskimos' release, Arco issued a prepared statement last week. "This action by the North Slope Borough, to threaten a lawsuit to stop our exploratory activities in the Beaufort Sea, comes as a complete surprise to Arco," the statement reads.

"We have been working extensively with North Slope whaling communities for months and had been assured by their attorney that we had reached agreement in principle on a plan that addresses their concerns," the statement said. "We are shocked, in view of our extensive, sincere discussions with the North Slope whaling communities and their legal counsel. Nevertheless, we continue to welcome discussion of legitimate concerns about our operations."

Meanwhile, the Trustees For Alaska, an Anchorage-based environmental public interest law firm, is also opposing Arco's activities in the Beaufort Sea and elsewhere off the Alaska coast.

Specifically, the law firm is trying to convince federal officials to impose a moratorium on all oil and gas leases in federal waters off Alaska, which begin three miles offshore, until "baseline" environmental data can be gathered.

"The Minerals Management Service (a section of the U.S. Department of the Interior responsible for granting oil leases) is forging ahead with permitting large-scale oil and gas activities without knowing what the impacts of those activities will be," argued Peter Van Tuyn, an attorney at Trustees For Alaska.

Van Tuyn said the federal government agreed to impose a moratorium on oil and gas development activities in the Gulf of Mexico and off the coasts of North Carolina and California until baseline environmental data had been gathered. "But Alaska, because we're viewed as the last frontier by the gas and oil development community, is always treated differently," he said.

Trustees For Alaska opposes not only Arco's Kuvlum development, but also another Arco development with huge potential. That highly touted development, called the Sunfish Field, is in the Cook Inlet in southern Alaska, an area previously thought to have been virtually exhausted of commercial-grade crude.

"(Sunfish) is the first major discovery in Cook Inlet since 1965," said Arco spokesman Greenstein. "People had pretty much given up on Cook Inlet for production."

But Arco's early estimates indicate that Sunfish Field may hold as much as 750 million barrels of crude reserves. The company sank two delineation wells there in June, and expects to sink two more later this year, and possibly two more early next year. Results from the initial four wells are expected by year end, providing a much clearer picture of Sunfish's actual potential, Greenstein said.

Wall Street is clearly more excited about Sunfish than about Kuvlum, even though Kuvlum could be larger, because Sunfish is much closer to becoming commercially operational. Arco officials estimate Sunfish could be put into commercial operation by late 1996 or early 1997.

"Sunfish could add 50 cents a share to Arco's earnings," said Kidder, Peabody analyst Picchi. "I'm very bullish on this development for three reasons.

"First, it's a very high-quality crude and could fetch a $2 to $3 premium per barrel, or more, over the $12 to $13 a barrel other Alaskan crude is fetching. Second, because it's coming from south Alaska, Arco doesn't have to incur the transportation cost of moving the oil through the (Trans-Alaskan) pipeline," he said.

"And third," Picchi added, "because Sunfish would operate under a state and not a federal lease, it would be exempt from the new federal limit on domestic oil exports. That means Sunfish oil could be exported to Asian markets, like Japan, which are closer (to the Sunfish Field) than California."

Robin Shoemaker, domestic oil analyst at New York securities firm Lehman Brothers, agreed. "The Sunfish Field is definitely more interesting, from an immediate financial standpoint, than Kuvlum, because they (Arco) are much further along with Sunfish. It could be massive."

Shoemaker said Arco's announcements, scheduled for later this year, revealing the results of the exploratory drilling at Sunfish and Kuvlum will be the "most significant announcements" to come out of Arco in years.