ConocoPhillips Alaska Inc. is currently exploring in two directions on Alaska’s North Slope - to the west and to the south. But the company is seeing a similar opportunity in both places.
The Houston-based independent’s generation-long move to the west reached a new milestone in early 2017 with the announcement of the Willow discovery at the western edge of the Greater Mooses Tooth unit of the National Petroleum Reserve-Alaska.
The company is also working on a project south of the Colville River unit that was previously associated with the unit before passing into the hands of another company.
In both cases, ConocoPhillips is considering the potential of the Nanushuk formation, which is probably the most important North Slope exploration story of the past year.
The two exploration efforts come amid a renewed interest in Alaska for the company.
ConocoPhillips has been the most prolific exploration company on the North Slope for two decades. But those activities have become more important to the company over the past few years, as relinquishments and market conditions have changed its portfolio.
Willow
In mid-January 2017, ConocoPhillips announced a discovery totaling some 300 million barrels of recoverable oil at its Willow prospect in the Greater Mooses Tooth unit.
The discovery was based on the Tinmiaq No. 2 and Tinmiaq No. 6 exploration wells that the company had drilled at the western end of the federally managed unit in early 2016.
A test of the Tinmiaq No. 2 well produced 3,200 barrels per day of light 44 degree API oil over a 12-hour period, according to the company. Depending on the development strategy the company chooses, the discovery could potentially produce as much as 100,000 barrels per day. ConocoPhillips commissioned a 3-D seismic survey over the region earlier this year to collect more information about the geology of the region.
As with its leases at the Colville River and Greater Mooses Tooth units, ConocoPhillips has a 78 percent interest and Anadarko Petroleum a 22 percent interest in the discovery.
Willow marks a continuation of the westward expansion that has governed most ConocoPhillips exploration activities on the North Slope over the past twenty years.
Those efforts began with the creation of the Colville River unit and the development of its satellites, culminating in the recent CD-5 project. The construction of the CD-5 pad allowed ConocoPhillips to cross a key waterway and better access its federally managed leases in the National Petroleum Reserve-Alaska. The company is currently developing the GMT-1 project in the eastern edge of the unit and permitting the GMT-2 project in the center of the unit. The Willow discovery is situated at the western edge of the unit and could provide a useful geographic link to the federal Bear Tooth unit just to the north.
A major outstanding question for ConocoPhillips is how to develop Willow.
Over the past decade, the company has preferred a sequential development approach at its properties west of the Kuparuk River unit. The approach involves timing new developments against the capacity restrictions of existing Alpine facilities, thereby allowing the company to bring satellites into development without building new facilities.
Willow could be developed either as another Alpine satellite or as a standalone project with independent facilities. A satellite would likely produce no more than 40,000 to 50,000 bpd while an independent field could reach 100,000 bpd.
ConocoPhillips expects GMT-1 to come online in late 2018 and produce 30,000 bpd. If sanctioned, GMT-2 could come online in late 2020 and produce 30,000 bpd, although concerns from Nuiqsut villagers have the potential to push back that timetable. Each of those projects is expected to cost $1 billion, according to the company.
In February 2017, ConocoPhillips offered 2023 as an estimated timeframe for bringing Willow into production, but acknowledged the risk of permitting and regulatory delays.
In a quarterly earnings call for investors, Executive Vice President of Production, Drilling and Projects Al Hirshberg said that the company had recently established a team in Alaska “to figure out what’s the most optimum way to develop this new discovery.”
Given the size of the project and the recent acquisition of nearby acreage, “we need to think hard about how we move forward around infrastructure, et cetera,” he added.
The Nanushuk formation
The Willow discovery was one of three major oil discoveries announced by North Slope operators over the past year, following Armstrong Energy’s discovery from Pikka to Horseshoe in the region between the Kuparuk River unit and Colville River unit, and Caelus Energy’s Tulimaniq discovery in Smith Bay. All three of those discoveries have been either in the Nanushuk formation or in the closely associated Torok formation.
ConocoPhillips is clearly optimistic about the Nanushuk. In December 2016, before announcing its Willow discovery, the company acquired 65 tracts covering 594,972 acres in a federal lease sale and 74 tracts covering 142,280 acres in a nearby state lease sale.
And in a presentation to the Alaska Support Industry Alliance’s Meet Alaska conference in mid-January 2017, ConocoPhillips Alaska President Joe Marushack described Willow as being part of a new oil play running east to west through the leases that the company holds in the northeastern National Petroleum Reserve-Alaska and adjacent state lands.
Titania/Tofkat
Although the Alpine field and its satellites are located in the reservoirs in the older and deeper Beaufortian rock sequence, rather than the shallower Brookian sequences of the Nanushuk and Torok, ConocoPhillips also appears to be interested in a Nanushuk target south of the Colville River unit - a region that is at the center of a permitting dispute.
The company wants to incorporate the leases into the Colville River unit. But the state is requiring a series of bonds, payments and work commitments in return for the expansion.
By the time The Explorers went to print, the Alaska Department of Natural Resources had agreed to a request from the company to reconsider its decision to require bonds and payments in return for expansion, but had yet to issue an updated decision about the case.
The matter stretches back nearly 15 years. ConocoPhillips first asked the state to include the acreage in the Colville River unit back in 2002. The state agreed, but contracted the acreage out of the unit in 2004 after ConocoPhillips failed to meet a drilling commitment.
At the time, ConocoPhillips referred to the expansion acreage as the Titania prospect. A joint venture operated by Brooks Range Petroleum Corp. subsequently acquired the acreage through a lease sale and began referring to the leases as the Tofkat prospect.
Brooks Range Petroleum Corp. drilled the Tofkat No. 1 well and two sidetracks in early 2008 and encountered hydrocarbons. The company formed the Tofkat unit in late October 2011 and proposed various drilling programs over the years. But the state terminated the unit in late March 2016, after the company missed work commitments.
On March 31, 2016, ConocoPhillips asked the state to expand the Colville River unit to include the former Tofkat unit. The state rejected the application less than a week later, claiming that ConocoPhillips had no working interest in the leases. The company filed the appropriate lease assignments in mid-May and again requested a unit expansion.
Of the 22 leases in the former Tofkat unit, seven were still within their primary term and the remainder had already expired and passed into their 90-day secondary term. In mid-June, the state approved the assignments for those leases still within their primary terms but rejected the remaining assignments. ConocoPhillips appealed the decision and re-filed its request toward the end of June. But the state denied the request again in late July.
One issue at play was the original failure to drill, in the early 2000s. The state initially used that missed work commitment as justification for rejecting the current project.
After a personnel turnover at the state, the new Department of Natural Resources Commissioner Andrew Mack allowed ConocoPhillips to keep all the leases and asked the company to file a revised request to incorporate those leases into the Colville River unit.
But when the company filed a new request, the state remained skeptical.
In a decision from mid-February 2017, Mack denied the request unless ConocoPhillips provided a $2.5 million performance bond for an exploration well initially planned for this winter, a $10 million performance bond to guarantee oil production from the area within the next five years and a $1.5 million “bonus bid replacement payment” to compensate the state for theoretical loses it might incur by not re-leasing the acreage.
The state gave ConocoPhillips a 10-day window to agree to the terms. Instead, the company asked the state to reconsider the ruling, and the state accepted the request.
Putu
One major complication is the proposed exploration well.
ConocoPhillips began permitting a Putu No. 1 exploration well in the expansion acreage in 2016, but cancelled the well in December, citing concerns from the village of Nuiqsut.
According to Mack, the company had claimed to have a valid and active surface use agreement with the village, which should have addressed any community concerns. The company later challenged that claim, saying that other regulatory issues still persisted.
The decision to reconsider the ruling put a stay on the drilling commitment.
In its request, ConocoPhillips asked the state to approve the expansion with a clause requiring the company to drill an exploration well into the Nanushuk formation by May 31, 2018, or immediately relinquish the acreage, which would allow the state to make the leases available in the next North Slope areawide lease sale toward the end of 2018. The relinquishment clause would make the bonds and bonus bid payments unnecessary.
Another major complication is the potential design of any future development.
ConocoPhillips would prefer to bring a future Putu discovery into the sequential development model in place at the Colville River unit. But the state believes a sequential development would create unnecessary delays, and that a different company might be able to explore and develop a future discovery more quickly as a standalone project.
An expedited development, either through a standalone project or through extended reach drilling from the existing CD-4 pad, would likely bring oil online quicker than the time-consuming process of revoking acreage and making it available through a new lease sale.
A standalone project would trigger an environmental review from the U.S. Army Corps of Engineers. The review could take at least three years to complete, according to ConocoPhillips. The company projected production in 2022-24 under that option.
But using the existing CD-4 pad could tax the limits of extended-reach drilling.
