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Missing links leave oil untapped.

Oil producers continue to search for ways to tap North Slope resources outside Prudhoe Bay before the trans-Alaska pipeline must be closed because of declining oil volumes.

The North Slope is peppered with small, undeveloped oil-fields that by Lower 48 standards contain huge crude reserves, perhaps a billion barrels or more of recoverable oil. Because of low oil prices and high development costs in the Alaska Arctic, however, the fields lie dormant with little immediate hope of bringing them to life.

Fields such as Seal Island/North Star, Gwydyr Bay, Sandpiper, Point Thomson, Niakuk, Badami and West Sak could play a vital role in extending Alaska's oil future. But time is running short: Shrinking oil volumes handled by the trans-Alaska pipeline will lead to its inevitable shutdown, perhaps by the year 2010.

Barring the discovery of another large reservoir, these undeveloped fields, plus any similar discoveries in the future, represent the only practical means of averting an earlier shutdown of the pipeline, as the supergiant Prudhoe Bay field slips deeper into natural decline. Recovery from Prudhoe Bay makes up about three-quarters of North Slope oil production.

While the smaller fields could never produce enough oil to offset Prudhoe Bay's decline rate, they could serve to extend the production life of North America's two largest oilfields -- Prudhoe Bay and Kuparuk River -- by keeping the daily North Slope flow rate above 300,000 barrels, roughly the level at which it would become unprofitable and mechanically difficult to operate the 800-mile pipeline.

The North Slope currently produces about 1.8 million barrels of oil a day, representing 25 percent of the U.S. domestic oil supply and 85 percent of the state's revenue base. About one-third of the undiscovered oil in the United States is believed to exist in onshore and offshore areas of Alaska.

But if the pipeline spigot were to close when the oil flow rate reached 300,000 barrels, that would leave more than 1 billion barrels of recoverable oil in the ground. Over a 10-year period, at $20 a barrel, that resource equates to a whopping $5 billion loss to the state alone.

"When the time comes to shut down, nobody is going to want to leave that much oil behind. That's just too much oil to walk away from. (So) anything that extends the life of TAPS (Trans-Alaska Pipeline System) extends the life of Prudhoe and Kuparuk," says Bill Van Dyke, petroleum manager for the state Division of Oil and Gas.

Though projected closure of the pipeline is some 18 years away, the long lead time required to bring a field into production and then to recover its oil has surfaced as a key factor in company decision making. For many of the undeveloped fields, commitments must be made during the next three years to five years if long-term production objectives are to be met.

"Even under an aggressive scheme, you need 10 years -- but you'd like to have 20," Van Dyke notes.

Time has become particularly critical for the more remote undeveloped oilfields that will require so-called "standalone" production facilities, compared to undeveloped fields whose close proximity to existing facilities means oil can be commingled with oil from producing fields at a considerable savings in both time and money.

One such field is Point McIntyre, a 300-million barrel reserve located just north of Prudhoe Bay. Arco Alaska, BP Exploration and Exxon signed a final agreement in mid-May to bring the field on-line by the third quarter of 1993. The oil will be funneled into the nearby Lisburne production facilities. Oil from the small offshore Niakuk reservoir also could be transported to the Lisburne facilities for processing.

And though there are no immediate plans to develop the huge West Sak reservoir that overlies the producing Kuparuk River field west of Prudhoe Bay, it's also a candidate for oil commingling when space becomes available in the Kuparuk processing facility. But West Sak is beset with its own problems, the biggest of which is developing the technology to extract enough of the cool, thick oil from the shallow formation to make a profit.

Small & Separate. For the more remote undeveloped fields, however, the logistical and profitability equations are much more difficult to balance. "The small fields will have to piggy-back with each other or with an existing development," says Al Hastings, Conoco's Alaska director of external affairs.

The smallest producer on the North Slope, Conoco is one company that's painfully aware of how shaky oil prices and high development costs can affect an economically marginal field on the North Slope. In 1987, Conoco was forced to suspend production from its small Milne Point field after oil prices collapsed. Though the field was restarted in 1989, the company again is contending with weak markets. Conoco had to reduce its 1992 capital budget by 27 percent and concedes Milne Point could face another shutdown if the current economic climate persists.

Nevertheless, Conoco has been able to maintain an active exploration program, spurred by what appears to be the most promising oil find since Arco's Point McIntyre discovery in 1989. Located in Mikkelsen Bay about 35 miles east of Prudhoe Bay, the Badami prospect illustrates the complex problem with undeveloped fields situated so far from the North Slope's nerve center.

If the Badami oil accumulation proves to be large enough to justify development costs, it could serve as the production center for Exxon's Point Thomson field and other undeveloped fields located in the eastern North Slope region. On the other hand, Badami will require its own infrastructure -- oil-processing facilities, pipelines and roads. To make the project work at today's oil prices, Conoco now concedes that Badami must contain more recoverable oil than Point McIntyre, the largest U.S. discovery in more than a decade.

"That's the big question -- the size. But at $19 a barrel WTI (West Texas Intermediate), I'm not sure you could get enough oil out there to get the economics ... because it would have to be a standalone development," Hastings says.

Buying Time. With the shutdown of the trans-Alaska pipeline now on the horizon, the next two years to three years are critical to the Badami project, as well as to other remote undeveloped fields, Hastings adds. "Two to three years in terms of getting things in place to where you can start bringing the small fields on. If you can get two or three smaller fields on, then that 2010 deadline gets pushed down. And if you can get enough under way to get it started, you can continue the process," he explains.

Time also is running short for Point Thomson, a 300-million-barrel field discovered by Exxon in 1975. Exxon and its partners have spent millions delineating the field, which contains an estimated 5 trillion cubic feet of natural gas and a large amount of gas condensates that likely would have to be blended with crude oil from other fields before being shipped down the pipeline.

Says Exxon's Michael Smith, "There is a definite window, and at the end of TAPS, the window closes. Right now (the project) is very iffy because of the time frame. There are some tremendous investment problems to overcome. Certainly it would help us if they were able to bring Badami on."

The federal government appears to differ with the state view of small field development on the North Slope, based on a study issued last year by the U.S. Department of Energy entitled "Alaska Oil and Gas, Energy Wealth or Vanishing Opportunity?" In the study, which is currently being updated, the department argues that all existing field areas on the North Slope, except around Prudhoe Bay, are unprofitable for the producers. The report also states that oil from the smaller undeveloped fields would extend total arctic production only about five years to the year 2014.

Kevin Banks, a petroleum economist for the state Division of Oil and Gas, points out that the producers wouldn't be investing in expansion of the Kuparuk River field or looking to start up fields like Point McIntyre and Niakuk if such projects were unprofitable. "Development projects such as these are likely designed, redesigned, and fine-tuned so that the level of production is determined that just turns a profit at the margin," Banks says.

Lifting the longstanding federal ban on exports of North Slope crude oil also could spur development of economically marginal fields by reducing marine transportation costs to the Gulf of Mexico by $4 a barrel. In early May, the Hickel administration filed a lawsuit against the federal government that could make it possible for producers to transport North Slope oil to the Pacific Rim and other overseas destinations.

"Four dollars is a huge difference at today's oil prices. It probably would pay for the cost of developing the fields," says Conoco's Hastings.

Pipeline Predictions. Just when the trans-Alaska pipeline will shut down is a matter of speculation. It involves not only oil prices, marine shipping costs, pipeline tariffs and operating costs, but a number of wildcards related to future oil production, primarily from the Arctic National Wildlife Refuge, now closed by the federal government to exploration and development.

Many petroleum geologists believe the 1.5-million-acre ANWR coastal plain 65 miles east of Prudhoe Bay could hold the largest remaining onshore reserve in North America, perhaps 3.4 billion to 7.4 billion barrels of recoverable crude oil. A large ANWR accumulation could extend TAPS production beyond the year 2025.

Even if commercial quantities of oil were discovered in ANWR, however, it would take at least a decade to bring the area into production, too late to help offset Prudhoe Bay's average decline rate of 8 percent to 10 percent a year.

Another long shot location is the Chukchi Sea, where offshore prospects are wedged between northwestern Alaska and former Soviet territorial waters. Because of the area's distance from the trans-Alaska pipeline, however, a reserve of 1 billion barrels or more would be required to cover development and the high cost of transporting the oil to market.

A more promising wildcard is being played in the central North Slope region, both in and around the Prudhoe Bay and Kuparuk oilfields, where small discoveries can quickly turn a profit because of their relative closeness to existing production facilities.

The state's largest producer, BP Exploration, has said oil companies also may be able to squeeze Prudhoe Bay for another 1 billion barrels of crude above current estimates of about 12 billion barrels.

Since exploration began on the North Slope in the early 1940s, some 33 oil and gas fields have been discovered, only 7 of which have been brought into production. Hastings believes the smaller fields represent Alaska's oil future.

He says, "There probably is not going to be another Prudhoe Bay up there, unless it's in ANWR. So if there is not a role for the smaller fields, there is not a hell of a lot of future for the oil industry in Alaska."

The North Slope's Smaller Finds

Following is a breakdown of estimated recoverable petroleum reserves from some of the major discovered but undeveloped fields on the North Slope.

Point Thomson: a 300-million-barrel gas condensate field located about 60 miles from Pump Station 1 near the border of the Arctic National Wildlife Refuge. Discovered in 1975.

Seal Island/North Star: a 150- to 300-million-barrel oilfield located in 39 feet of water 6 miles offshore and about 12 miles northwest of Prudhoe Bay. Discovered in 1982.

Sandpiper: a 150-million-barrel oilfield located in 49 feet of water about 10 miles west of Seal Island/North Star. Discovered in 1986.

Gwydyr Bay: a 60-million-barrel oilfield located along the north central Prudhoe Bay Unit boundary. Discovered in 1969.

Niakuk: a 58-million-barrel oilfield located 1.25 miles offshore on the east side of the Prudhoe Bay field. Discovered in 1981.

Point McIntyre: a 300-million-barrel oilfield located two miles north of the Prudhoe Bay Unit producing area. Discovered in 1988 and scheduled for development in late 1993.

West Sak: a 423-million-barrel field that overlies the producing Kuparuk River field west of Prudhoe Bay. Discovered in 1969.

Badami: Field size is unknown but oil reserves could exceed 300 million barrels. Located 35 miles east of Prudhoe Bay in Mikkelsen Bay, the field was discovered in the late 1980s.
COPYRIGHT 1992 Alaska Business Publishing Company, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
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Title Annotation:includes related article; North Slope Borough, Alaska
Author:Tyson, Ray
Publication:Alaska Business Monthly
Date:Jul 1, 1992
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