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The Kuvlum Well.

This could be the start of something big

Arco's new Kuvlum oil discovery could revitalize North Slope exploration -- if it contains enough oil and if its developmental challenges can be overcome.

ARCO Alaska Inc.'s big oil strike in the Beaufort Sea did more than give the state's waning petroleum industry a shot in the arm. It raised hope that the discovery will prove large enough to open the eastern North Slope to development.

After Arco announced it Kuvlum discovery in mid-October, industry observers also wanted to know whether there was any geological connection between the prospect and the nearby coastal plain of the Arctic National Wildlife Refuge, which many believe holds the last major oil reserve in the United States. The answers are "yes," "no" and "maybe."

But one thing became clear: Kuvlum's oil accumulation will have to be enormous to justify the cost of development. The prospect is located miles from the coast and the North Slope's production nerve center. It also lies beneath an ice-clogged ocean, requiring engineering techniques never before used in the high Arctic.

"The good news is that they found oil; the bad news is can they afford to produce it," says Stu Hirsh, publisher of the Alaska Oil Scout Report.

"It's good news, but I'm looking forward to the confirmation well," says Ken Boyd, deputy director of the state Division of Oil & Gas. "To my knowledge, nobody has ever built a pipeline under ice anywhere in the world."

Adds John Miller, assistant executive director of the Alaska Oil & Gas Association, "It brings back the fact that this is oil country. There are source rocks and structures up there. And here's more very strong evidence of that."

Jim Davis, Arco's vice president of exploration and land, says"it's not beyond the realm of possibilities" that Kuvlum will prove to be "the second or third largest" oil field in the country. That could make Kuvlum a field as big as or larger than Kuparuk River, the second largest U.S. field next to super giant Prudhoe Bay. Located 40 miles west of Prudhoe Bay, Kuparuk produces about 310,000 barrels a day on estimated recoverable oil of 1.8 billion barrels.

Says Davis, "You're talking to the eternal optimist. Until we demonstrate otherwise, that's the way I'm thinking."

Even before the Kuvlum discovery, Davis said it would take at least 1 billion barrels of oil to bring Kuvlum into commercial production. What Arco has now is a single well that tested at 3,400 barrels a day, the largest strike ever on Alaska's outer continental shelf, and a quality of crude oil (34 gravity) that's highest among all producing fields on the North Slope.

To gauge the size of the Kuvlum oil accumulation, located 60 miles northeast of Prudhoe and 16 miles offshore, Arco plans to drill one or two delineation wells next summer at an estimated cost of $60 million. That would bring the total investment by Arco and its partners to about $105 million. If the field proves to be commercial, one of the next steps will be figuring a way to move it to shore.

Environmental Obstacles. Davis says Arco already has begun collecting information on similarly harsh environments, such as the Canadian Arctic and the North Sea. He adds, "After next season's work, I think we would be in a position to then seriously embark upon some real design."

In all likelihood, Kuvlum development would require a platform or man-made island to serve as a production base, and a subsea pipeline to transport the oil to shore. Even to the casual observer, the environmental obstacles to developing a field in 110 feet of water would be monumental.

For one, the platform or island would be vulnerable to the powerful, shifting ice pack. Moreover, the Beaufort Sea is noted for "ice-gouging," meaning the pipeline would have to be buried deep enough to prevent errant icebergs from scraping the bottom and damaging the line. In reality, Kuvlum would be the first of its kind in Alaska and perhaps the world.

Says Davis, "There's lots of historical data that we're pulling together in terms of just what the ice conditions are like out there. That's the sort of thing that's going to be rolled into the engineering work."

Possible ANWR Link. Located just northwest of the ANWR border, the Arco strike immediately raised the question of whether the discovery pointed to a substantial oil accumulation beneath the coastal plain, which is currently off limits to exploration and development.

While Davis would not discuss reservoir characteristics or other confidential information, he did say the Kuvlum formation butts ANWR geologically, but "has its own distinct geological characteristics separate from ANWR. There's no one-to-one relationship."

But, he explains, "It certainly shows that there's oil generated in the neighborhood and trapped in the neighborhood, but we knew that before Kuvlum. They are both very prospective areas. Beyond that, you'll never know until you actually have an opportunity to test some of the features in ANWR."

Boyd, a geologist by training, agrees that it's premature to link Kuvlum to ANWR, noting that a lot more questions need to be answered about the Kuvlum prospect itself.

He says, "An interesting thing is where the oil was generated. Was it generated from younger rocks, or has it migrated from a fault system? Is it the older, traditional oil-generating formation, or is it something new? If you've got oil generating up shallow, you've got a shot -- in ANWR or anywhere in the eastern Beaufort."

Eastern Arctic Catalyst. For years, oil companies have been looking for a large enough oil discovery to justify the high cost of opening the remote eastern North Slope to development, particularly in light of declining North Slope production that could lead to a shutdown of the trans-Alaska oil pipeline by the year 2010, if additional sources of oil aren't brought on line.

Although the focus has been on the highly prospective ANWR coastal plain, a number of small discoveries in the region -- Point Thomson, Badami and Hammerhead -- would help to fill the oil gap, if enough of them could be strung together to make a commercial operation.

While Arco's Kuvlum discovery could serve as the catalyst, the estimated 1 billion barrels of oil needed to bring the reservoir into production is for a stand-alone operation, Davis emphasizes.

He says, "If Kuvlum becomes developed, it would provide at least the access to the TAPS pipeline but probably not much more beyond that. But for those other prospects, that's a significant piece of development."

Cautions Chuck Logsdon, the state's chief petroleum economist, "It's not the missing piece of the puzzle yet to getting the eastern North Slope moving. You've got to understand that this is pretty costly oil to get to market."

Adds Boyd, "I think the best news for ANWR is that if Kuvlum is commercial, and you bring an infrastructure through Point Thomson and Badami, then your economic field size in ANWR goes down. But you can immediately see the downside, because the environmentalists will say save ANWR until we really need it."

Good News, But No Royalties.

Because Kuvlum lies in federal waters, the state of Alaska would receive no direct financial benefit in the way of royalties and taxes on production, although the state likely would receive some income through corporate taxes, as well as property taxes on pipelines and facilities located on its land.

Says Logsdon, "We really don't get much at all in the way of any direct revenue interest. In our petroleum taxation system, royalties and severance taxes are really our big revenue collectors."

But Arco's Kuvlum discovery could help to stem the flight of explorers from Alaska's outer continental shelf. As of early November, oil companies had relinquished some 250 of 474 federal leases in the Chukchi Sea, 63 of 192 leases in the western Beaufort Sea and 44 of 180 in the eastern Beaufort Sea. Of the 75 exploratory wells drilled in all regions of the Alaska outer continental shelf, none yet has been deemed commercial.

"It |Kuvlum discovery~ is very important because it comes at a time when lessees have written off the Beaufort. It's going to force people to reevaluate their holdings up there," says Jim Eason, director of the state Division of Oil & Gas.

Give Arco Credit. Arco held only a small 3 percent informational interest in Kuvlum until a little more than a year ago. Initially permitted by Chevron as the West Maktar prospect, it was handed over to BP Exploration (Alaska) Inc. after Chevron was unable to secure drilling partners. BP dropped the project when its exploration budget was cut. Arco was then able to put together a partnership consisting of Union Texas Petroleum, Phillips, Total Minatone, Murphy Oil and Mobil.

Says Arco's Davis, "When folks started dropping out left and right, we saw an opportunity to pick up more interest. And they gave us the kind of terms that we could interest third parties in."

Over the years, Arco has been the most successful oil explorer in Alaska. Credit the company with opening Cook Inlet to production with its discovery at Swanson River in 1957, and on the North Slope with the discovery of Prudhoe Bay in 1968.

Whether or not Kuvlum will rank as another large oil field, it still represents a "triumph of individuals, the explorationists," notes Harold Heinze, a former Arco Alaska president who now serves as Gov. Walter J. Hickel's resource development advisor.

Explains Heinze, "I'll give credit to Arco as a company for sticking with it, for making the investment at risk, doing the things that allowed them to make the find. But people forget exploration is a process of people. That's important because it provides encouragement to the people, as well as encouragement to the companies to keep exploring."
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Title Annotation:Arco Alaska Inc.'s Kuvlum oil well
Author:Tyson, Ray
Publication:Alaska Business Monthly
Date:Jan 1, 1993
Previous Article:Business looks at 18th Legislature.
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