LNG List Grows Officially Begun,” Parnell Said in a Statement

page Q&A: Parnell says markets, more 3 state experience, move gas project

Vol. 19, No. 28 • www.PetroleumNews.com A weekly oil & gas newspaper based in Anchorage, Alaska Week of July 13, 2014 • $2.50

l NATURAL GAS FNG seeks rate hike

PETROLEUM NEWS FILE Interior utility wants to recover cost of abandoned North Slope LNG project

By ERIC LIDJI The requested rate increase would, in For Petroleum News part, cover the $5 million the company n its first rate case since becoming a certificat- spent on developing the abandoned North Ied utility some 17 years ago, Fairbanks Natural Slope LNG project over the past eight Gas LLC is asking state regulators for a 6.92 per- years. cent service rate increase. The local distribution company is asking the The request is the first rate case since Fairbanks Regulatory Commission of Alaska to approve a Natural Gas started its life in 1997. The company permanent rate increase and to install a mechanism operated under its inception rates until 2002, when that would allow the company to more easily pass regulators exempted the company from economic along fluctuations in commodity prices in the regulation. Fairbanks Natural Gas voluntarily future. accepted rate regulation in late 2012 as a way to Commercial agreement signed for The increase would offset a nearly $1.4 million AKLNG project; work under way deficit expected under current rates. see FNG RATE HIKE page 14 A formal commercial agreement has been signed for the Alaska liquefied natural gas project, Alaska Gov. Sean Parnell l NATURAL GAS said July 2. Signatories were the Alaska Gasline Development Corp., BP, ExxonMobil, ConocoPhillips and TransCanada. “Environmental and pipeline engineering fieldwork has BC’s LNG list grows officially begun,” Parnell said in a statement. The commercial agreement means the Alaska LNG Project has fully entered the pre-front end engineering and design, or WesPac Midstream requests 25-year export license from National Energy Board pre-FEED, phase, “a milestone no previous Alaska gasline project has achieved,” the statement said. By GARY PARK In entering the public arena, WesPac is The producer parties will spend hundreds of millions of For Petroleum News dollars on design and engineering for the project during pre- the second to propose a terminal in the FEED, and will also begin work to secure an export license ritish Columbia’s lineup of LNG proposals Greater Vancouver area, targeting Delta with the U.S. Department of Energy and continue permitting Bhas grown to 15 with U.S.-based WesPac for its Tilbury LNG plant. work with the Federal Energy Regulatory Commission. Midstream requesting a 25-year export license In addition, the state, and each producing party, will begin from the National Energy Board to ship up to 3 Squamish. to engage the LNG market during the pre-FEED stage. million metric tons a year to customers in Asia, the FortisBC, a utility company serving 1.1 million U.S., Central America and South America. customers, operates the Tilbury Island plant which Passage of SB 138 In entering the public arena, WesPac is the sec- has been scheduled for a C$400 million expansion Passage of Senate Bill 138 in April — the enabling legisla- ond to propose a terminal in the Greater Vancouver before WesPac surfaced. area, targeting Delta for its Tilbury LNG plant. see LNG PROJECT page 20 “LNG is currently produced at the Tilbury LNG It follows Woodfibre LNG, privately owned by plant for sale in both local British Columbia mar- Singapore-based RGE, which received a 25-year kets and regional markets, including truck-based Nunavut edges toward comeback export license last December for 2.1 million metric tons a year from an industrial side near the town of see LNG LIST page 20 A demanding process that could lead to a revival of oil and natural gas exploration in Canada’s High Arctic has taken a key step forward with conditional approval of a 2-D seismic l EXPLORATION & PRODUCTION survey in Nunavut’s Baffin Bay and Davis Strait. The National Energy Board completed a painstaking public examination of an application to conduct the survey over Continuing development five years of open water seasons by issuing a Geophysical Operations Authorization, GOA, along with 15 conditions the proponents must meet. Drilling & oil recovery procedures keep oil flowing from Kuparuk satellites The survey partners are operator Multi Klein Invest AS, Norway’s TGS NOPEC Geophysical Co. and Petroleum By ALAN BAILEY In addition to developments within the GeoServices. Petroleum News existing Tarn field, ConocoPhillips has In response to a “high degree of public interest” the federal regulator conducted four days of hearings last year in Pond lthough much attention on Alaska’s North been evaluating opportunities in two other Inlet, Clyde River, Qikiqtarjuag and Iqaluit, noting that the ASlope tends to focus on Prudhoe Bay and related discoveries, the Cairn and the public participation was unprecedented in its environmental Kuparuk River, the huge legacy oil fields of the Esker prospects, the plan says. assessment process for a GOA. region, continued exploration and appraisal around these fields has led Initial recommendations were prepared by board member how the Kuparuk satellite fields, in particular, are David Hamilton, with the public invited to submit written to the development of a number of more modest-sized fields. Referred being managed, to maximize the recovery of oil from comments and provide oral responses. various oil pools within the Kuparuk River unit. The environmental assessment report concluded that to as “satellites,” and feeding oil implementation of MKI’s commitments, environmental pro- and gas into the production facilities of their larger Tarn tection procedures and mitigation measures, and compliance cousins, these fields make valuable contributions to The Tarn field, discovered from exploration with the board’s regulatory requirements and conditions, the North Slope oil production. In a series of updated plans of development filed drilling conducted in 1997 and brought online in see NUNAVUT COMEBACK page 18 with Alaska’s Division of Oil and Gas, Kuparuk field 1998, had produced a total of 109 million barrels of operator ConocoPhillips has provided insights into see SATELLITE FIELDS page 18 2 PETROLEUM NEWS • WEEK OF JULY 13, 2014 contents Petroleum News North America’s source for oil and gas news ON THE COVER GOVERNMENT FNG seeks rate hike 3 Parnell: markets, experience move project

Interior utility wants to recover cost Governor says North Slope LNG project result of abandoned North Slope LNG project of market changes, alignment of state BC’s LNG list grows and producers, and state’s growing experience WesPac Midstream requests 25-year 6 OIG criticizes BLM permitting delays export license from National Energy Board Says insufficient process management and lack Continuing development of results-oriented goals lead to long review Drilling & oil recovery procedures keep times for drilling permit applications oil flowing from Kuparuk satellites 7 Alberta: budget surplus, still borrowing Commercial agreement signed for AKLNG project; work under way Non-renewable resource revenue up 32%, turning projected deficit into surplus; finance minister Nunavut edges toward comeback rates Alberta as ‘shining light’ EXPLORATION & PRODUCTION SIDEBAR, Page 7: It’s pay up time for Alberta 9 Osum Oil Sands makes bold moves 8 Parnell names municipal advisory board 10 The first of the Cook Inlet giants 12 AOGCC puts Kenai Loop hearing on hold

Alaska’s Kenai gas field has delivered more than Commission makes change in Buccaneer escrow 2.4 trillion cubic feet of dry natural gas since requirement; defers gas field unitization going into production in 1961 action following company’s bankruptcy filing 14 Caelus approved as Oooguruk operator 12 New council for Alaska geospatial data FINANCE & ECONOMY LAND & LEASING 4 Encana leads Western Canada deal making 9 No substantial new info for fall sales

Sheds Bighorn natural gas properties; company narrows NATURAL GAS focus to core areas in Canada, Colorado, 8 Gas price hike comes down to accounting New Mexico, southeastern US Warm winter and spring caused Enstar to overestimate CIRI wants Kenai Loop cases to proceed 11 gas demand, leaving a deﬁcit in utility’s 13 EIA: Brent crude spot price peaks in June gas purchase, sale balance Combined US, Canada liquids production projected PIPELINES & DOWNSTREAM to grow by 1.6 million bpd in 2014, majority 11 Coalition asks to uphold Quality Bank of non-OPEC increase of 1.7 million bpd Three producers, a reﬁner and FERC staff believe FERC was right in preserving the existing methodology despite protests

Alaska’s Oil and Gas Consultants

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l GOVERNMENT Parnell: markets, experience move project Governor says North Slope LNG project result of market changes, alignment of state and producers, and state’s growing experience

By STEVE QUINN er negotiations. I er negotiations — again I was not efit through taking an ownership stake in For Petroleum News left the Division of involved with the producers negotiations the project. The numbers that were cal- Oil and Gas in 2005 — public trust and confidence was lost culated in our experts models that we he word alignment has been closely and I was not there because the companies demanded that saw last fall and presented to the Tlinked to the state’s natural gas when everything the state make a lot of promises and a lot Legislature demonstrated to us as well as pipeline plan, this time to ship North blew up, but I did of commitments without corresponding to them through the public process that Slope gas to a liquefied natural gas gain a very useful commitments on the companies’ side. Alaskans are better off in this project as export facility in Cook Inlet. perspective and saw As a result of that experience, I set a owners in the project. Gov. Sean Parnell believes the word what went wrong new course, and I started it and modeled not only has merit but and what went right. GOV. SEAN PARNELL it after the Point Thomson litigation and Petroleum News: There are not too it is reflected in the So then your that resolution where we were making many models out there in non socialist recent joint venture question is what’s changed that’s put what I call commensurate proportionate countries. Do you see yourselves break- agreement signed Alaska on its current course? It’s a cou- commitments. Meaning, you take a step. ing new ground or feeling your way among the Alaska ple of things. One, certainly the market We take a step. You take a around the dark or a little Gasline Development Corp., has changed. Back then, and not so long step. We take a step. of each? TransCanada and North Slope leasehold- ago, everybody thought the Lower 48 Building a gas line and an Parnell: You know as ers ExxonMobil, ConocoPhillips and BP. states were going to be the market for LNG project is not going to well as I do because our Last week Parnell announced the agree- Alaska’s gas after Alaskans get their be a situation where pro- Constitution says Alaska is ment and the upcoming work, known as own gas for their own energy purposes. ducers say you give up the owner of the resource, the pre-front end engineering and design With the advent of shale gas in the everything and wait for us. That’s totally we not only have to act like an owner of or pre-FEED that will take place over Lower 48, and the loss of that market, unacceptable and we are on a completely the resource but we also have to be the the next 18 months. combined with the urgent need for more different path from that the state was on sovereign that collects taxes as well. The The agreement calls for partners to gas in the Pacific Rim, specifically Japan before. I think that what changed were question really is how do you bring invest millions in pre-FEED work over and Korea and then China beyond them, the markets but also our experience. We those realities together in a competitive the next 18 months for the project, the market has changed. It’s actually set are acting like an owner of the resource environment, where we do want the pri- which could ultimately cost between $45 up an easier system. It’s a complex proj- and we’ve become an owner of a proj- vate sector doing what they do best: billion and $65 billion. ect and it’s easier for Alaskans and the ect. Both are to Alaska’s benefit. competently and efficiently building It also comes two months after the companies to deal with a pipeline projects and getting gas to market. state’s solidly Republican Legislature through the state of Alaska, through one Petroleum News: What is it that you That’s something we don’t have expert- backed Parnell’s plan to work with state, rather than through two different like about taking an ownership stake in ise in. That’s something we do have industry players. countries and multiple jurisdictions that a project like this? I know we got a experts advising us who have done these Parnell has been on the front lines of way. heads up that this might be coming in kinds of things for decades. the state’s efforts to advance a gas line The markets have changed and obvi- the recent session with Black & Veatch project on and off since 2003. He ously our experience has changed, too. report. Petroleum News: You noted how worked for the Division of Oil and Gas The state as an owner of the resource, Parnell: It’s more money and more you’re doing things in stages. The pro- in the early years under Gov. Frank that remains the same. I personally saw opportunity for Alaskans. It’s pure and Murkowski, and was lieutenant governor how in the earlier years with the produc- simple about getting greater Alaska ben- see PARNELL Q&A page 17 when the state pursued a line under Gov. Sarah Palin’s Alaska Gasline Inducement Act. Severe market changes weakened AGIA, making an overland line uneco- nomical. Parnell then turned to the LNG THE HIGHEST STANDARD IN option. Along the way, he convened a ANCHORAGE ENGINEERS • PLANNERS • SCIENTISTS • CONSTRUCTORS 700 G Street, meeting with CEOs from the North ENGINEERING Suite 500 Slope producers, negotiating a produc- URS is one of the world’s leading engineering fi rms. Our professional staff Tel: 907.562.3366 tion settlement on Point Thomson leases EXCELLENCE work together to develop innovative and cost-eff ective solutions to the FAIRBANKS with Exxon and its partners, and challenges facing government and industry. 3504 Industrial Avenue, received support for Senate Bill 138, Suite 125 Tel: 907.374.0303 enabling legislation authorizing the administration to negotiate a project development agreement. Parnell also used this past session to boost up the refining industry after Flint Hills announced plans to shut down and become an oil shipping and storage terminal. Flint Hills followed through with those plans while Parnell and the Legislature created tax credits against increased investment into state’s refiner- ies. Parnell sat down with Petroleum !$#" News to discuss these developments and what he believes they mean for Alaska’s future. Petroleum News: What do you believe has changed that put Alaska on its current course? Is it the market? Is it a more educated administration? Is it a little bit of each working in sync with one another? Parnell: I was the deputy director for the Division of Oil and Gas and I represented the state in negotiations on a gas line in the Murkowski administration. I was on the state team that was negotiating at the time with TransCanada. There was a separate team negotiating with the producers. As you recall, Gov. Murkowski in 2005 elected not to proceed with TransCanada negotiations and focus exclusively after that with produc- %#' 0)'%' !$ !% ! &'0%2 111#' ) #" %&)'(%# $%#' ) #" %&)'(%# !" 4 PETROLEUM NEWS • WEEK OF JULY 13, 2014

l FINANCE & ECONOMY Encana leads Western OUR PASSION IS EXPLORATION Canada deal making Sheds Bighorn natural gas properties; company narrows focus to core areas in Canada, Colorado, New Mexico, southeastern US ^ǆƉůŽƌĂƟŽŶ͛ƐƉĂƐƐŝŽŶĨŽƌƐĞŝƐŵŝĐĞǆƉůŽƌĂƟŽŶŚĂƐƚĂŬĞŶŝƚƚŽƐŽŵĞ By GARY PARK acres of freehold southern Alberta land ŽĨƚŚĞŵŽƐƚŽƉĞƌĂƟŽŶĂůůǇĚĞŵĂŶĚŝŶŐĂŶĚĞŶǀŝƌŽŶŵĞŶƚĂůůǇƐĞŶƐŝƟǀĞ For Petroleum News holdings into PrairieSky Royalty. ůŽĐĂƟŽŶƐŽŶƚŚĞƉůĂŶĞƚ͘&ƌŽŵůĂƐŬĂĂŶĚĂŶĂĚĂƚŽƚŚĞũƵŶŐůĞƐŽĨ^ŽƵƚŚ Jupiter Chief Executive Officer Simon ŵĞƌŝĐĂĂŶĚ^ŽƵƚŚĞĂƐƚƐŝĂ͕^ǆƉůŽƌĂƟŽŶŝƐŵĞĞƟŶŐƚŚĞĐŚĂůůĞŶŐĞ͘ ncana has given the largest prod to Bregazzi rated Bighorn as “one of North Ethe latest round of asset deal-making America’s premier liquids-rich natural gas in Western Canada by shedding its exten- projects in an area that has generated some óóó͘ÝøÖ½ÊÙã®ÊÄ͘ÊÃ sive Bighorn natural gas properties to of Canada’s most prolific well results in Jupiter Resources for US$1.8 billion. recent years.” Chief Executive Officer Doug Suttles Privately owned Jupiter was founded said in a press release that the transaction by Apollo Global Management, which will advance his company’s strategy “by describes itself as an “alternative invest- unlocking value from our portfolio as we ment manager” that concentrates on con- focus on developing our core growth plays trarian bets in private equity, credit and and extracting additional value from our real estate. base assets.” He said Bighorn in west-central Alberta Other recent deals is a “high quality asset that has not been In other deals since mid-June: receiving significant investment in 2014. •Long Run Exploration continued the Going forward, it should serve as an excel- consolidation of its west-central Alberta lent foundational asset” for Jupiter. Cardium assets by acquiring Crocotta The deal, expected to close later this Energy in a C$357 million deal, following year, includes 360,000 net acres of land, the May closing of its purchase of oil and plus Encana’s working interests in all liquids-rich Cardium assets from Crew related pipelines and other facilities. The Energy for C$225 million. reserves are estimated at 1.1 billion cubic Under the arrangement, a separate feet equivalent, with gas accounting for 75 company will be created to own Crocotta’s percent. Montney assets. The properties yielded first-quarter vol- Long Run Vice President of Business umes of 319 million cubic feet equivalent Development Jason Fleury said the “win- (23 percent oil and NGLs) and have 32 win” deal enables his company to consoli- trillion cubic feet and up to 2 billion bar- date in a core area where it established a rels of liquids in place (1.3 tcf equivalent foothold with the Crew assets. proved). The Crocotta properties are producing Under Suttles, who occupied the top 7,500 boe per day, while the Montney suite a year ago, Encana has narrowed its www.PetroleumNews.com based company will produce 2,300 boe priorities to core areas: the Montney and per day. Duvernay in Western Canada; the DJ Crocotta started out as a private com- Kay Cashman PUBLISHER & EXECUTIVE EDITOR ADDRESS P.O. Box 231647 basin in Colorado; the San Juan basin in pany seven years ago with production of Mary Mack CEO & GENERAL MANAGER Anchorage, AK 99523-1647 New Mexico; and the Tuscaloosa Marine 100 boe per day and grew to 9,800 boe per shale in the southeastern United States. day. Kristen Nelson EDITOR-IN-CHIEF NEWS It has also recently added the Eagle Long Run is now targeting average out- 907.522.9469 Susan Crane ADVERTISING DIRECTOR Ford shale play in Texas through a US$3.1 put this year of 31,100 boe per day and [email protected] billion purchase in May. 43,2o00 boe per day in 2015. Bonnie Yonker AK / NATL ADVERTISING SPECIALIST CIRCULATION Other deals have included the sale of •Kelt Exploration has struck a cash- Heather Yates BOOKKEEPER & CIRCULATION MANAGER 907.522.9469 dry gas assets in Wyoming and East Texas. and-shares deal to buy Alberta Montney [email protected] oil and gas assets from a private company Shane Lasley IT CHIEF Price at low end that has not been identified. Marti Reeve SPECIAL PUBLICATIONS DIRECTOR ADVERTISING Phil Skolnick, an analyst with The core producing areas for the assets Susan Crane • 907.770.5592 are at Pouce Coupe and Spirit River in Steven Merritt PRODUCTION DIRECTOR [email protected] Canaccord Genuity, rated the US$1.8 billion price as “disappointing,” while Randy west-central Alberta near Grande Prairie. Alan Bailey SENIOR STAFF WRITER Bonnie Yonker • 425.483.9705 Ollenberger, with the Bank of Montreal, Kelt plans to cover the transaction with [email protected] 4.3 million shares valued at C$53 million Eric Lidji CONTRIBUTING WRITER said the value was at the low end of his expectations of US$1.9 billion to US$2.5 and the balance of C$107 million with Wesley Loy CONTRIBUTING WRITER FAX FOR ALL DEPARTMENTS billion. cash. 907.522.9583 The assets currently produce 2,300 boe Gary Park CONTRIBUTING WRITER (CANADA) Suttles has indicated the once North American gas production leader could per day (70 percent oil), boosting Kelt’s Petroleum News and its supple- Rose Ragsdale CONTRIBUTING WRITER ment, Petroleum Directory, are build a fold of eight core areas, a drastic average 2014 production by 10 percent to owned by Petroleum Newspapers 12,150 boe per day, exiting 2014 at 15,300 Ray Tyson CONTRIBUTING WRITER change from a company that once has of Alaska LLC. The newspaper is widely scattered operations in dozens of boe per day. l published weekly. Several of the Judy Patrick Photography CONTRACT PHOTOGRAPHER individuals listed above work for regions. independent companies that con- Mapmakers Alaska CARTOGRAPHY The company has also reduced staff by tract services to Petroleum 20 percent by spinning off 5.2 million Newspapers of Alaska LLC or are Forrest Crane CONTRACT PHOTOGRAPHER freelance writers. Tom Kearney ADVERTISING DESIGN MANAGER NORTH SLOPE Renee Garbutt CIRCULATION SALES TELECOM, INC. Ashley Lindly RESEARCH ASSOCIATE Alaska’s Premier Motorola Dealer Dee Cashman RESEARCH ASSOCIATE Providing Alaskans with two way radio and OWNER: Petroleum Newspapers of Alaska LLC (PNA) wireless communications. Petroleum News (ISSN 1544-3612) • Vol. 19, No. 28 • Week of July 13, 2014 Published weekly. Address: 5441 Old Seward, #3, Anchorage, AK 99518 MOTOTRBOTM PROFESSIONAL (Please mail ALL correspondence to: DIGITAL TWO-WAY P.O. Box 231647 Anchorage, AK 99523-1647) RADIO SYSTEM. Subscription prices in U.S. — $98.00 1 year, $176.00 2 years The future of two-way radio. Canada — $185.95 1 year, $334.95 2 years Overseas (sent air mail) — $220.00 1 year, $396.00 2 years “Periodicals postage paid at Anchorage, AK 99502-9986.” POSTMASTER: Send address changes to Petroleum News, P.O. Box 231647 Anchorage, AK 99523-1647. 907.751.8200 | www.nstiak.com PETROLEUM NEWS • WEEK OF JULY 13, 2014 5

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l GOVERNMENT OIG criticizes BLM permitting delays Says insufficient process management and lack of results-oriented goals lead to long review times for drilling permit applications

By ALAN BAILEY ment of several government agencies in are no required timelines for completing With possibly more than a dozen Petroleum News this process adds complexity, the report the processing of an application, the participants in the processing of a says, report says. he Office of the Inspector General, single permit, BLM should assign But, with annual revenues from oil and More generally, BLM should adopt a Tor OIG, in the Department of the a project manager to oversee and gas production on federal land averaging more performance oriented approach to Interior, has issued a report criticizing the coordinate the process, the report some $3 billion in recent years, the time- managing the permitting process by set- length of time that it takes the Bureau of says. ly processing of drilling applications is ting performance measures for the Land Management to process drilling important to federal finances. And the process, the report says. Currently, the permits for the oil and gas industry. The OIG made several recommendations for only measure that BLM uses is the over- process the same type of permit in 80 report also comments on the adverse improving the BLM permitting process. all percentage of pending permit applica- days or less. However, compared with impacts on agencies and industry of tions processed. But this measure does state officials, the federal authorities face uncertainties in permit processing times. Improve the process management not enable the agency to identify ineffi- some significant complications — com- “We found that neither BLM nor the With possibly more than a dozen par- ciencies in the process, to pinpoint BLM plications can include mandates for mul- operator can predict when the permit will ticipants in the processing of a single per- offices needing the most attention and to tiple use of land, compliance with federal be approved,” the report says. “Target mit, BLM should assign a project manag- determine corrective actions. Outcome laws that do not apply to state land, and dates for completion for individual APDs er to oversee and coordinate the process, based performance measures would be dealing with land ownership issues, the (applications for permit to drill) are rarely the report says. more constructive and help with produc- report says. set and enforced, and consequently the BLM also needs to implement, enforce tivity the report says. A review under the National review may continue indefinitely.” and report timeline targets for permit pro- The report also recommends that BLM Environmental Policy Act of the potential BLM reported that in 2012 the average cessing. Currently, while there are man- make improvements to the computer sys- surface impacts of the proposed drilling time it took to process a drilling permit dated deadlines for specific steps such as tem that is intended for the management accounts for most of the drilling applica- application was 228 days. By compari- deeming an application complete, there of the permitting process. Because the tion processing time. And the involve- son, state authorities claim that they system is cumbersome and complex, many field office employees do not use it — the system data are unreliable and inconsistent, the report says. Inadequate staffing OIG also found that problems with the permitting can, in part, be attributed to inadequate specialist staffing in some What’s Up? BLM offices. In particular, some federal funding assistance granted under the Energy Policy Act of 2005 has become misdirected, as a consequence of some significant changes in workloads at various BLM offices. The Department of the Interior needs to work with Congress to ensure that funding support goes to the BLM offices with the greatest need, the report says. But time could be saved in BLM Dock. offices through a greater use of existing The big news around here – ASRC Energy Services Marine practices that enable the pre-identifica- Support is now providing marine services in Cook Inlet. Our tion of site-related concerns and the newly refurbished Rig Tenders Marine Terminal is fully equipped avoidance of duplicated work. These practices consist of the pre-staking of to deliver a wide range of specialized services to the Kenai well sites and the development of master plans for multiple drilling operations in Peninsula’s oil and gas industry. In Alaska, only one company specific areas, the report notes. puts it all together – AES. The report also recommends as far as see OIG REPORT page 7

www.asrcenergy.com Engineering l Fabrication & Construction l Pipeline Construction l Marine Services Operations & Maintenance l Response Operations l Quality, Health, Safety, Environmental & Training Regulatory & Technical Services l Exploration, Drilling Support & Geosciences l Bakken Support PETROLEUM NEWS • WEEK OF JULY 13, 2014 7

l GOVERNMENT Alberta: budget surplus, still borrowing Non-renewable resource revenue up 32%, turning projected deficit into surplus; finance minister rates Alberta as ‘shining light’

By GARY PARK C$1.05 billion the previous year. For Petroleum News Returns from the province’s C$17.5 bil- It’s pay up time for Alberta lion Heritage Savings Trust Fund — the As many have predicted for years, the Alberta government is now faced with he Bitumen Bubble, the term created long-term investment vehicle for surplus paying the price for its determination to refine and upgrade more of its heavy by the Alberta government last year to resource revenues — rose 50 percent, T crude production within the province. explain a C$6 billion drop in oil revenue, adding C$3.2 billion to government coffers, The only survivor from a long list of corporate proposals to build facilities in might finally have burst. while total tax revenues increased 6 percent Alberta is now dipping deep into the pockets of its patron. Instead of blaming the province’s fiscal to C$20.3 billion. The fees the government will pay the operators of an Edmonton-area refinery hardships on its inability to get oil sands to convert raw bitumen to transportation fuels are now estimated at C$26 billion bitumen to market and being forced to swal- Agreement lacking over 30 years, up C$7 billion from original estimates. low discounted prices in the United States, Finance Minister Doug Horner said the In its 2013-14 fiscal report, the government disclosed the staggering increase Alberta emerged sunny-side up from the results make Alberta the “shining light” in was contained in a previously unannounced revised “processing agreement” that 2013-14 budget year. Canada. was executed three months ago, putting the processing fee at about C$63 per bar- The originally forecast budget deficit for David Eggen, finance spokesman for the rel, although the province did warn in late 2013 that a hike was in the cards. the year of C$1.97 billion turned into a New Democratic Party, argued that the However, under the restructured agreement, the province gets a 25 percent vot- C$755 million surplus, despite having to Bitumen Bubble has been exposed as a fab- ing right on aspects of construction and operation. carry C$1.2 billion of an estimated C$6 bil- rication since bitumen sold for an average The higher tolls reflect cost overruns for the Sturgeon Refinery, whose price lion in damage from record mid-2013 US$80.11 per barrel, up US$12 from the tag is now C$8.5 billion, up 50 percent from the forecast in 2010. The government floods in southern Alberta. budget prediction, with bitumen alone The shift in Alberta’s economic fortunes pumping C$1.9 billion more into the treas- included C$9.6 billion in non-renewable see PAY UP TIME page 9 resource revenue, which was up 32 percent see BITUMEN BUBBLE page 8 from the target, benefitting from higher oil prices, a lower differential between bitumen and West Texas Intermediate oil and a decline in the Canadian dollar. The price of oil for the fiscal year averaged US$99.05 per barrel for West Texas Intermediate and C$80.11 for Western Canada Select, the oil sands benchmark, with raw bitumen production increasing by 14.5 percent to 2.09 million barrels per day. Conventional crude revenues rose C$444 million to C$2.48 billion, while production edged ahead by 40,000 barrels per day to 580,000 bpd. Bitumen wells up, conventional down A total of 2,123 bitumen wells were drilled in calendar year 2013, up 132 wells from 2012, while conventional crude wells slipped to 2,493 from 2,817. Natural gas revenues were up by C$105 million to C$1.1 billion and average prices rebounded to C$3.27 per gigajoule from C$2.29. Marketable production dipped by 100 million cubic feet to 3.5 trillion cubic feet and the number of conventional gas wells for the calendar year totaled 1,109, up 136 from 2012. Tulio Perez Revenues from auctions of exploration Project Services Challenger land continued their slide in recent years, BP Alaska fetching C$590 million compared with

continued from page 6 Our Commitment to Alaska: OIG REPORT Investing in Our Communities. practicable the implementation of some efficiency improvements that some BLM BP and its employees donate millions of dollars and thousands of hours field offices have identified. Examples to more than 400 community organizations throughout Alaska. These are include the use of strike teams to bring together specialists from multiple BLM investments that impact each and every Alaskan. And they are ones that offices, and the use of aerial photography we’re proud to make. for the visual inspection of some drilling sites. Find out more about BP Alaska at alaska.bp.com Tailored timelines? In general, BLM has accepted the OIG recommendations. However, the agency has pushed back on the question of set- ting a processing timeline, saying that the timeline can vary, depending on the com- plexities and other issues associated with a particular drilling plan. OIG countered that it would be possible for a BLM project manager to evaluate a specific permit application and set a timeline tailored to that application. l 8 PETROLEUM NEWS • WEEK OF JULY 13, 2014

l NATURAL GAS GOVERNMENT Parnell names municipal advisory board Gas price hike comes Alaska Gov. Sean Parnell has named members of the Municipal Advisory Gas Project Review Board, created by the governor to understand potential impacts and benefits of a major natural gas project on communities throughout the state. down to accounting The board, which will review available information, hold public meetings and The board, which the governor provide annual reports to the governor by established by administrative Warm winter and spring caused Enstar to overestimate gas Dec. 15, will be chaired by Department of order in March, will address demand, leaving a deficit in utility’s gas purchase, sale balance Revenue Commissioner Angela Rodell. municipal concerns around Representing boroughs directly By ALAN BAILEY next, as a positive balance if, cumulative- impacted by the proposed natural gas property taxes and impact payments for the proposed Petroleum News ly, payments for gas exceed receipts from pipeline project are North Slope Borough customers, or a negative balance if the Mayor Charlotte Brower of Barrow, Alaska liquefied natural gas ustomers of Enstar Natural Gas Co., utility has received more than it has paid. Fairbanks North Star Borough Mayor project. the main Southcentral Alaska gas Each quarter Enstar tries to move this Luke Hopkins, Denali Borough Mayor C utility, may be shocked to see an increase balance towards zero by adjusting the Clay Walker, Matanuska Susitna Borough from $4.45 to $7.67 per thousand cubic price that it charges its customers for gas, Mayor Larry DeVilbiss of Palmer, Municipality of Anchorage Mayor Dan Sullivan feet in the cost of the gas that they use, moving the price up in the event of a pos- and Kenai Peninsula Borough Mayor Mike Navarre of Soldotna. starting on July 1. But this apparent price itive balance, and down for a negative bal- Appointed to the public seats are Northwest Arctic Borough Mayor Reggie Joule hike results essentially from unexpectedly ance. Over multiple quarters, everything of Kotzebue; Robert Venables of Haines, the energy coordinator for the Southeast warm winter weather and the accounting will balance out, with customers ultimate- Conference; and Robert Bartholomew, finance director for the City and Borough of mechanism whereby Enstar passes the ly paying what the producers charged for Juneau. cost of gas that it purchases from gas pro- the actual gas that was used. The board, which the governor established by administrative order in March, ducers through to gas consumers, John Essentially, Enstar passes the cost of will address municipal concerns around property taxes and impact payments for the Sims, Enstar’s director of business devel- the gas through to its customers, with the proposed Alaska liquefied natural gas project. opment, explained to Petroleum News on utility making its profits from its gas The heads of agreement for the project calls for payments in lieu of property July 2. The actual prices that Enstar, and transportation and delivery services, and taxes, and for the governor to consult with affected municipalities on property taxes. hence its customers, pay for gas supplies not from the sale of gas. In hearings on Senate Bill 138, the enabling legislation for state equity participation are set in a series of contracts, none of With the winter weather of the first in the project, municipalities objected to the PILT proposal and demanded a role in which are currently changing. quarter of 2014 being unusually warm, negotiations for the project. To ensure the availability of gas from Enstar overestimated the gas demand for —KRISTEN NELSON producers, Enstar has to make quarterly that quarter and then compensated with an gas demand forecasts, committing pay- extremely low gas price in the second ments to the producers based on those quarter, Sims explained. Then, with con- forecasts and using the estimated volume tinuing warm weather and resulting low required from each gas supply contract to customer gas bills, Enstar ended up with a compute a gas price to charge gas con- cumulative deficit of about $7 million in 24 sumers. But the payments that Enstar that rolling quarterly balance. Hour receives from its customers during each Recovering that large deficit in the bal- quarter are based on actual gas usage, not ance requires the substantial price rise that on forecasts. And, since the actual demand customers are now seeing. However, as A SUMITOMO CORPORATION SUBSIDIARY never equals the forecast demand, there is the balance normalizes, customers may always a quarterly discrepancy between see a slight decrease in the gas price in the Serving Alaska’s Petroleum Industry for Over 35 Years what Enstar commits to pay for gas and fourth quarter, Sims explained. l what the utility receives in payments from Threading its customers. The utility rolls this dis- API 5CT, lic. # 5CT-1163 • API Spec 7-1, lic. # 7-1-0758 • Vallourec • VAM AB crepancy forward from one quarter to the Tenaris • Hunting • NS Connection Technology • NOV Grant Prideco • Vam USA Machining Welding continued from page 7 coming only two years after a similar turn- OEM Equipment Production Welding BITUMEN BUBBLE around. Accessories Certified Welding For 2011-12 there was a projected deficit Repair and Overhaul Fabrication of C$3.4 billion, which ended up shrinking ury than expected. to a C$23 million shortfall. The opposition parties in the Alberta leg- APIQR ISO9001:2008, reg. # 0717 • APIQR Spec Q1, reg. # Q1-0456 The fiscal year which ended March 31 APIQR ISO/TS 29001, reg. # TS-0268 islature feel they have even more reason to generated more than C$45 billion in rev- doubt the Conservative party government’s 8875 King St., Anchorage | 907 563-3012 | [email protected] | www.umalaska.com enue, 17 percent more than forecast, while budgetary methods, with the latest figures spending was up 10 percent to C$42 billion. In addition to the Heritage Savings Trust Fund, Alberta also has a “rainy day contingency account,” which stands at C$4.7 billion and is expected to grow in the near- term to C$6 billion, with anything over C$5 billion required to either stay in the account, go to capital spending, or go to savings. Borrowing continues Despite its strong revenue stream, Alberta continued borrowing during the last fiscal year to pay for capital projects, raising its debt to C$8.7 billion. It is on track to borrow more than C$21 billion by 2017. Wildrose Party financial spokesman Rob Anderson said “it’s disappointing and an insult to Albertans that, at a time of amazing prosperity and revenues, the government continues to borrow billions and play a financial shell game with taxpayers’ dollars.” Budgeting has become the key issue in TOTAL PROJECT SUPPORT Magtec Alaska, LLC the Conservative Party’s leadership contest (907) 394-6350 to replace former premier Alison Redford in June, with Jim Prentice and Rick McIver — • SUPPORTING THE NORTH SLOPE & COOK INLET Roger Wilson, Prudhoe Bay [email protected] two of the three candidates — calling for a • HEATERS, GENERATORS, VEHICLES, MANLIFTS, LIGHT PLANTS, revamping of the budget format. l ENVIROVACS, RIGMATS & MOBILE BUILDINGS Skeeter Creighton, Kenai • CAMPS & CAMP SERVICES (907) 394-6305 • FULL PROJECT LOGISTICS SERVICES & STAFFING [email protected] PETROLEUM NEWS • WEEK OF JULY 13, 2014 9

l EXPLORATION & PRODUCTION LAND & LEASING Osum Oil Sands No substantial new info for fall sales The Alaska Department of Natural Resources Division of Oil and Gas has found no substantial new information for the state’s 2014 Beaufort Sea, North Slope and North Slope Foothills areawide oil and gas lease sales. makes bold moves A call for new information for the sales was issued in March. The decision, signed by DNR Commissioner Joe Balash in late June, responded to comments from ConocoPhillips Alaska, among them a recommendation that By GARY PARK Osum is paying C$325 million for the division offer nine-section, 5,760-acre tracts or four-section, 2,560-acre tracts, For Petroleum News Shell’s Orion project, a steam- as it has traditionally done, rather than subdivisions. ConocoPhillips said the driven operation that delivered an smaller offerings result in greater administrative burden and potential legal sum Oil Sands, a privately owned description errors. O startup with big plans, is taking average 6,700 barrels per day in The response in the decision was that the comment related to the administra- advantage of Shell’s push to unload about the first quarter. tive lease sale process, not substantial new information, but that the division US$15 billion worth of assets. would consider the comment when preparing terms and conditions for the lease Chaired by former Suncor Energy C$2.4 billion acquisition of BlackRock sales. Chief Executive Officer Rick George, Ventures in 2006. The state began dividing 5,760-acre North Slope tracts into four parcels, each Osum is paying C$325 million for Shell’s It sought buyers two years ago, but 1,440 acres, in 2011, in response to leasing for unconventional development. Orion project, a steam-driven operation pulled the offering a year later when none Division of Oil and Gas Director Bill Barron told Petroleum News in the fall of that delivered an average 6,700 barrels of the bids matched its view of the value. 2011, when that change was announced, that because one well holds a lease and per day in the first quarter. Shell announced plans early this year in unconventional plays like shale more wells are required for development, the If the transaction goes through, Osum to reduce its footprint in Western Canada idea is that leasing in smaller acreage sizes would increase activity and comple- will have some cash flow to fuel its line- by half, starting with the sale in May of tion. up of six other projects that have potential conventional gas producing properties in Barron said that in trying to work through issues of unconventional develop- production capacity totaling more than western Alberta to Qatar Petroleum for ment and how wells do and do not connect and how to manage the land, the divi- 500,000 bpd and are scheduled to come C$50 million. Other potential divesti- sion decided that breaking leases into smaller tracts would give everyone a better on stream over the next six years. tures could involve the Groundbirch opportunity from the development standpoint. Orion is located about 10 miles south- Montney properties in northeastern The change followed the 2010 North Slope areawide lease sale, when Great west of Osum’s 35,000 bpd Taiga project British Columbia and the Deep Bear Petroleum picked up more than 500,000 acres south of Kuparuk and which recently gained regulatory Basin/Fox Creek assets in western Prudhoe Bay and announced plans to use horizontal drilling and fracking to pro- approval in Alberta’s Cold Lake region Alberta. duce oil from source rocks. and is due on-stream in 2016. Shell is also scaling back its interests —KRISTEN NELSON Osum Chief Executive Officer Steve in offshore Nova Scotia by reducing its Spence said the two operations will even- capital costs in the deepwater Shelburne tually be linked up “to build a significant basin. production platform” in the Cold Lake It has farmed out non-operating stakes area. of 30 percent to ConocoPhillips and 20 Osum’s only existing bitumen produc- percent to Suncor, while retaining an tion comes from its Saleski joint venture operated 50 percent working interest in SALMON & SIDING & CARS with Laricina Energy in the Grosmont six exploration licenses, which cover 180 carbonate play, in which it has a 40 per- miles offshore in water depths of 1,600- cent working interest. The JV is designed 11,500 feet. to yield a net 115,000 bpd for Osum. Shell obtained four of the licenses in OH To help pay for the deal, Barclays and 2012 and the other two in 2013 — all of Goldman Sachs have committed credit them carrying a six-year term — for a MY! facilities of US$225 million, with the bal- combined work commitment of C$998 ance of the purchase coming from cash on million. WE’RE OFF TO RURAL ALASKA hand and from existing shareholders. It conducted a 3-D seismic shoot last The company is backed by such pri- year cover 7,662 square miles and plans vate equity players as Warburg Pincus, to further assess potential drilling loca- Blackstone Group, BlackRock, Kern tions through a seabed survey this year. Partners, Korea Investment Corp. and the Pending regulatory approval, the first investment arm of the Singapore govern- two wells are scheduled for spudding in ment. the second half of 2015. l Shell reducing footprint WWW.NAC.AERO • (800) 727-2141 • Shell acquired Orion through its

continued from page 7 PAY UP TIME

is supplying 37,500 barrels per day, or a total of 410 million barrels, of heavy crude over 30 years as feedstock for the refinery in lieu of oil sands royalties it would otherwise have collected. Analysts have consistently argued there was no chance the refinery — a joint venture by North West Upgrading and Canadian Natural Resources — would go ahead without the government’s backing, although Premier Dave Hancock has insisted the facility remains a viable development for the province. But members of opposition parties in the provincial legislature have described the facility as “corporate welfare.” The refinery is due to start refining 75,000 bpd of bitumen in September 2017, a year behind schedule. Even if the partners do take the next design step to 150,000 bpd, the refinery will still be one of the smallest in Canada. —GARY PARK 10 PETROLEUM NEWS • WEEK OF JULY 13, 2014 l EXPLORATION & PRODUCTION The first of the Cook Inlet giants Alaska’s Kenai gas field has delivered more than 2.4 trillion cubic feet of dry natural gas since going into production in 1961

By ALAN BAILEY and Maier wrote. led to the mothballing of both the fertilizer Sterling sands are quite continuous and Petroleum News plant and the LNG plant, although, with a form the highest quality and most laterally Gas market needed resurgence of the Cook Inlet gas industry, extensive reservoirs in the field, Enos and lthough not the largest of the world- With the discovery of a large field hold- the LNG plant has recently re-opened. Maier wrote. The sands, which can be more A class gas fields in Alaska’s Cook Inlet ing almost pure methane, companies start- than 200 feet thick in their thickest parts, basin, the Kenai gas field was the first of ed seeking markets for gas. Union Oil Self-contained system are friable, with little cementation. the major gas fields to be discovered. The Company of California and Ohio Oil Co., The Kenai gas field forms its own self- Sterling production peaked in 1983 and discovery came in 1959, just a couple of the discoverers of the field, partnered with contained petroleum system, with the rocks declined steeply after that, Enos and Maier years after that of the Swanson River oil Anchorage Gas to build a pipeline for that source the gas and the rock reservoirs wrote. field, during a search for oil in the basin. delivering gas into Anchorage. Anchorage that hold the gas all located within a And, since going into production in 1961 Gas later became Enstar Natural Gas Co., sequence of strata of Tertiary age, Enos and The Beluga formation the field has delivered more than 2.4 trillion the main Southcentral Alaska gas utility, Maier wrote. The field occupies a large, The Beluga formation, underneath the cubic feet of gas, according to a paper about Enos and Maier wrote. elongated dome-like geologic structure Sterling, consists of more than 2,000 feet of the field by Jennifer Enos and Brook Maier, But, with gas production exceeding which has acted as a trap for the field’s gas. sediments deposited from a complex sys- published recently by the American local utility needs, the construction of the However, some gas has also become tem of streams and out-washes over ancient Association of Petroleum Geologists in an Kenai-Nikiski pipeline allowed the start of trapped in isolated sand bodies, in some of plains. Unlike the Sterling, whose sediment a memoir on the oil and gas fields of the delivery of gas to the Swanson River field the more discontinuous sands, the authors appears to have originated from a volcanic Cook Inlet basin. in 1967 — the gas was used for pressure wrote. area to the west, the sediments that formed The discovery well for the field, origi- maintenance in the Swanson River oil The gas is biogenic in origin, generated the Beluga originated from metamorphosed nally called the Kenai Unit No. 1 but now reservoir. In 1969 the export of gas as liq- from the microbial decomposition of sedimentary rocks to the east. The sand called the Kenai Unit 14-6, was spud at the uefied natural gas began to Japan, from a organic material in the abundant coal seams bodies that form gas reservoirs range from crest of a geologic structure identified from newly constructed export facility at and organic-rich mudstones found in the continuous lenses in the upper Beluga to seismic data and situated to the south of the Nikiski. And the construction by Union Oil Tertiary sequence. The coal seams and thin, discontinuous units in the middle and town of Kenai, on the Kenai Peninsula. of a fertilizer plant at Nikiski provided an mudstone layers act as barriers to gas lower sections of the formation. Drilled to a depth of 15,047 feet, seeking additional market for Kenai gas. Agrium migration, thus acting as seal rocks for the The upper part of the Beluga contains 13 oil in the deep Hemlock formation, the well Inc. later purchased the fertilizer plant. field’s hydrocarbon traps. distinct sand units in a 700-foot section, encountered major quantities of gas in the Eventual declines in Cook Inlet gas pro- with this part of the field having a similar relatively shallow Sterling formation, Enos duction, including that of the Kenai field, The Sterling formation production history to that of the Sterling. The Sterling formation in which gas was But reservoir quality is poorer in the middle originally discovered is the youngest and and lower parts of the Beluga and the sands shallowest of the productive rock intervals tend to be relatively thin and discontinuous in the field. The Sterling in the Kenai gas in this part of the section. One particular field consists of 11 distinct sands in five challenge in this part of the field is the dif- separate gas pools, with each pool repre- ficulty of imaging the relatively small sand • Commercial Diving bodies from seismic data. And the upper • Marine Construction Services senting a group of sands that are in pressure • Platform Installation, Maintenance and Repair communication with each other. The for- part of the Tyonek formation, below the • Pipeline Installation, Maintenance and Repair mation accounts for 1.8 trillion cubic feet of Beluga, is similar to the lower Beluga — • Underwater Certified Welding more than 30 individual gas-bearing sands • NDT Services the field’s overall gas production, Enos and • Salvage Operations Maier wrote. However, one of the pools, have been identified in the section, from the American Marine • Vessel Support and Operations pool six, is now used as a reservoir for gas middle Beluga down through the upper Services Group storage, the authors wrote. Tyonek, Enos and Maier wrote. As appears to be the case with all of the To improve gas production from the 6000 A Street, Anchorage, AK 99518 Tertiary rocks in the Cook Inlet basin, the multiple sand bodies in the Beluga and upper Tyonek, Marathon Oil Co., operator • Environmental Services sediments that ultimately formed the 907-562-5420 • Oil-Spill Response, Containment and Clean-Up Sterling in the Kenai field were laid down of the field for many years, devised what it Deadhorse, AK • Hazardous Wastes and Contaminated Site Clean- on land from a system of sediment-bearing called the Excape technology, a well com- Up and Remediation • Petroleum Vessel Services, e.g. Fuel Transfer rivers. In the Kenai field the Sterling sands pletion technology that enables well perfo- 907-659-9010 • Bulk Fuel Oil Facility and Storage Tank were deposited from meandering streams, ration and fracturing stimulation for indi- Maintenance, Management, and Operations www.amarinecorp.com • www.penco.org with mudstones and coal forming in areas vidual sands. And, with those individual [email protected] outside active river channels. sands rarely traceable through the subsur- Anchorage Honolulu Los Angeles Consequently, while the sands tend to vary face, reservoir modeling and reserve esti- in thickness and extent, in general the mation tend to use statistical techniques and to rely on performance data, Enos and Maier wrote. Despite the challenges of the middle Beluga, the lower Beluga and the upper Tyonek sands as productive gas reservoirs, Expro the sands have cumulatively produced an estimated 217 billion cubic feet of gas since first being developed in 1977, Enos and Delivers well fl ow management Maier wrote. Deep Tyonek Expro’s business is well fl ow management, providing the In the Cook inlet basin, the lower part of products and service you need to measure, improve, the Tyonek formation, referred to as the control and process fl ow from high-value oil and gas wells. “Deep Tyonek” tends to hold oil but in the We provide tailor-made solutions across the lifecycle of a Kenai field it only contains gas. Reservoir well, from exploration and appraisal to abandonment. quality is much better than in the upper part of the formation. And with sands having In Alaska our expertise includes: been laid down from meandering rivers, • Well Testing individual sand bodies can reach thickness- es of up to 50 feet and they tend to be later- • Electric Line ally extensive. The Deep Tyonek has yield- • Downhole Video Services ed 206 billion cubic feet of gas since production from this section of the field started • Mechanical Caliper Services in 1968, Enos and Maier wrote. Given the differing characteristics of Contact: different reservoir sands within the field, Telephone: 907-751-8700 production from different reservoirs tend to Email: [email protected] meet different market needs — steady production from the Beluga and Tyonek tends www.exprogroup.com see KENAI GAS FIELD page 12 PETROLEUM NEWS • WEEK OF JULY 13, 2014 11 l PIPELINES & DOWNSTREAM FINANCE & ECONOMY Coalition asks to CIRI wants Kenai Loop cases to proceed Cook Inlet Region Inc. believes a pair of legal cases over the Kenai Loop field should be resolved before operator Buccaneer Energy Ltd. completes its bankruptcy proceedings. uphold Quality Bank The Alaska Native corporation has asked the U.S. Bankruptcy Court for the Southern District of Texas to allow two cases concerning the onshore natural gas field to continue. Three producers, a refiner and FERC staff believe FERC was The cases concern correlative rights at the field, which CIRI believes is “essen- right in preserving the existing methodology despite protests tial” for determining how Buccaneer and its eight affiliate companies will sell its assets and distribute the resulting funds. “The debtors cannot, for example, effec- By ERIC LIDJI companies from profiting when they ship tively market assets to third parties in connection with the sale process proposed For Petroleum News lower quality crude through the pipeline. in the sale motion, or seek outside financing, unless and until the appropriate allo- Without such a mechanism, a company cation of subsurface mineral rights for the Kenai Loop gas field is resolved,” he three owners of the trans-Alaska shipping less-than-average crude through attorneys for CIRI wrote in a July 1 motion. Toil pipeline, a pair of third-party the pipeline would unfairly collect aver- users of the pipeline and Federal Energy age crude from the other end. Damages sought for drainage Regulatory Commission staff want regu- CIRI is seeking damages against Buccaneer in Alaska State Court for claims lators to uphold their decision to keep the Alternative can’t be proposed of illegal drainage at Kenai Loop. In April 2014, the court stayed its decision to existing methodology for determining According to the state, the FERC allow an Alaska Oil and Gas Conservation Commission case to conclude on pool- payments to the Quality Bank. administrative law judge overseeing the ing issues at the field. The state of Alaska and refiners Flint case determined that the parties could not In late May, the AOGCC required Buccaneer to set up an escrow account to Hills Resources Alaska Inc. and PetroStar challenge the Quality Bank methodology collect proceeds from two producing wells at the field while the cases proceed. Inc. had opposed the FERC decision, say- by proposing a superior alternative, but The order required Buccaneer to establish the account by June 1 and start making ing it would distort the Alaska refining only by highlighting existing deficien- deposits June 10. market. cies. The state worried this would codify The AOGCC also proposed forced pooling or unitization to resolve future dis- The case stemmed from a complaint “competitive distortions” in an already putes. The area in question also includes state of Alaska and Alaska Mental Health Flint Hills made against the three owners fragile industry. Trust leases. of the pipeline, saying the existing The three parties also challenged how Buccaneer filed for bankruptcy protection on May 31 and is proposing an auc- method for determining Quality Bank the methodology values Resid, which tion of its Alaska assets in early August, a proposal that the court has yet to payments was outdated because it under- involves a series of actual and hypotheti- approve or reject. valued Resid, a residual product left cal appraisals of processing costs and behind after lighter petroleum products market conditions. Also challenging sale have been distilled from crude oil. FERC BP Exploration (Alaska) Inc., CIRI is also challenging a point in the proposed sale. dismissed the complaint on technical ConocoPhillips Alaska Inc. and Exxon In a motion to schedule the proposed auction, Buccaneer included its CIRI grounds, but launched an investigation Mobil Corp., in separate filings, and the lease among the potential assets to be made available, noting that the lease was into the matters Flint Hills raised. producer Anadarko Petroleum Corp. and “pending litigation.” The investigation, though, upheld the the refiner Tesoro Alaska Corp. in a joint CIRI wants the bankruptcy court to remove its lease from the assets made existing Quality Bank methodology. filing and FERC trial staff all opposed the available at the auction, citing an Alaska State Court ruling that the lease expired The 800-mile pipeline co-mingles challenge, saying Flint Hills bears the by Jan. 9, 2013. shipments from numerous companies. burden of proof for determining that the —ERIC LIDJI The Quality Bank system prevents oil see QUALITY BANK page 12 FAI ARCTOS,LLC -3@-9,,-(:;,9

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l GOVERNMENT GOVERNMENT New council for Alaska geospatial data AOGCC puts Kenai Gov. Sean Parnell has signed a memorandum of agreement, establishing the Alaska Geospatial Council, to coordinate Alaska digital mapping and the collection of geospatial data relating to the state. The council, with co-chairs from the Alaska Department of Natural Resources and the Alaska Department of Transportation and Loop hearing on hold Public Facilities, and with representation from several government agencies, the University of Alaska and Alaska Native corporations, will take over an existing Commission makes change in Buccaneer escrow requirement; defers statewide digital mapping initiative and expand that initiative to integrate geospatial data into the mapping effort. gas field unitization action following company’s bankruptcy filing “The purpose of the council is to integrate geospatial efforts in Alaska, with the intent to eliminate unnecessary taxpayer expense and redundant staff activity across By KRISTEN NELSON Foerster said at the scheduled July all agencies,” according to a news release from the Department of Natural Resources. Petroleum Nelson “The council will focus on modernizing Alaska’s geospatial data holdings while 7 hearing that all parties to the enhancing data sharing and making the data holdings broadly available to the public.” he Alaska Oil and Gas Conservation proceeding had agreed it was According to information on the new council’s website, the current map of Alaska TCommission put its Kenai Loop uniti- appropriate hold off on the is 50 years old, does not meet modern accuracy standards and does not support mod- zation hearing on hold in a brief hearing hearing until the bankruptcy court ern electronic information management practices. The existing initiative, an ad-hoc July 7 due to the Chapter 11 bankruptcy fil- stay was lifted. program known as the Statewide Digital Mapping Initiative, which the new council ing by Buccaneer, the Kenai Loop operator. replaces, has been on track to complete a base digital map of Alaska, the memoran- The bankruptcy petition was filed May 31 dum of agreement for the new council says. in the U.S. Bankruptcy Court for the account be timed to coincide with the pay- —ALAN BAILEY Southern District of Texas (see story in this ments Buccaneer receives for natural gas issue and previous Petroleum News cover- from the field. The commission’s order age of the bankruptcy). required that payments be made into the In the notice for the hearing commission escrow account no later than the 10th day of continued from page 10 tinuous operation, supported by the ingenu- Chair Cathy Foerster said the commission each month beginning in June, with the KENAI GAS FIELD ity of new development technologies, the proposed to “compel pooling and/or uniti- deposit to equal 100 percent of total gas Kenai gas field has provided energy for zation of the Kenai Loop Gas Field in order sales from wells at the field during the pre- Southcentral Alaska, supporting many to meet base-load gas demand, while the to protect the correlative rights of the oper- ceding month multiplied by the prevailing jobs and generating government rev- higher gas deliverability of the Sterling ator and landowners.” value of Cook Inlet gas published by the enues, Enos and Maier wrote. l tends to be more suited to support the high Foerster said at the scheduled July 7 Alaska Department of Revenue, less operat- swings in utility gas demand during the hearing that all parties to the proceeding had ing expenses. Alaska winters, Enos and Maier wrote. agreed it was appropriate hold off on the Buccaneer’s response said it had three And, through more than 50 years of con- hearing until the bankruptcy court stay was gas sales contracts with Alaska Pipeline Co. lifted. and under the provisions of those contracts The commission has been hearing Kenai Buccaneer does not receive payment for gas Loop issues since last August when Cook until on or about the 25th day of the follow- Inlet Region Inc. appealed a spacing excep- ing month. tion requested by Buccaneer for a Kenai Buccaneer requested that the commis- Loop well. sion modify its order to provide that it make Buccaneer is producing natural gas from its deposit into the escrow account on or wells on Mental Health Trust acreage, but in before the last business day of the month. the course of the hearings all parties — The commission gave other parties until Buccaneer, the Mental Health Trust, CIRI June 9 to respond. and the state of Alaska — agreed that the CIRI responded that the Chapter 11 wells were draining acreage from all three bankruptcy petition filed by Buccaneer landowners. Buccaneer has been making “automatically stays the commencement or royalty payments only to the Mental Health continuation of a judicial, administrative, or Trust. other action or proceeding against Buccaneer that began before the filing of Buccaneer requests escrow change the bankruptcy case,” and said that neither On May 22 the commission ordered CIRI nor any other party would be able to Buccaneer to establish an escrow account respond to Buccaneer’s motion pending l for future revenues from the Kenai Loop further order of the bankruptcy court. field. Buccaneer responded to that order May 29, asking that payments into an escrow

continued from page 11 On time, every time. QUALITY BANK

methodology needs to be updated. Some things can wait, others can’t. For Alaska contractors “We are the only participant without a financial (or similar) interest at stake,” needing to meet tight timelines and protect sensitive cargo, Kenneth M. Ende, counsel for the com- Totem Ocean is their first call. mission trial staff, wrote in a June 30 filing, responding to criticisms that FERC staff “took a passive role” in the proceed- We specialize in white glove service for high priority cargo, ings. “We represent only the public inter- can easily accommodate oversized and over dimensional est. Our role is objectively to review and evaluate the evidence and develop a posi- shipments and are the fastest ocean carrier for panic cargo. tion on the issues consistent with applica- Our logistics experts help create creative and cost-effective ble Commission and judicial precedent. That objective review led to the conclu- plans to meet our customers’ needs. sion that the Exxon Mobil Corporation, ConocoPhillips Alaska Inc. and Tesoro With 37 years of the best on time record in the trade, Alaska Alaska Company and Anadarko Petroleum Corporation presented over- counts on Totem Ocean to be on time, every time. whelming evidence that (Flint Hills Resources) and (PetroStar) failed to demonstrate that the existing (Quality Bank) Formula is unjust and unreason- able. l

www.TotemOcean.com 800.426.0074 PETROLEUM NEWS • WEEK OF JULY 13, 2014 13

l FINANCE & ECONOMY EIA: Brent crude spot price peaks in June Combined US, Canada liquids production projected to grow by 1.6 million bpd in 2014, majority of non-OPEC increase of 1.7 million bpd

By KRISTEN NELSON heavier crudes,” with more than 60 percent pressure on imports from Canada, with net Henry Hub natural gas spot prices Petroleum News of the agency’s forecast production growth imports of 3.7 billion cubic feet per day this are expected to average $4.77 per for 2014 and 2015 consisting of “light, year and 3.1 bcf per day in 2015 — the orth Sea Brent crude oil spot prices million Btu this year and $4.50 sweet grades with API gravity of 40 or 2015 level would be the lowest since 1987. Npeaked for the year at more than per million Btu in 2015. above.” Liquefied natural gas imports have fall- $115 per barrel June 19, the U.S. Energy en in recent years because higher prices in Natural gas Information Administration said July 8 in Natural gas plant liquids production is Europe and Asia are more attractive to sell- its June Short-Term Energy Outlook. expected to increase to 3 million bpd in U.S. natural gas marketed production is ers than the relatively lower U.S. prices. EIA attributed the spike primarily to 2015, up from 2.6 million bpd in 2013. projected to grow by 4.1 percent this year Several companies are also planning to upward price pressures due to unrest in Overall, the share of U.S. liquid fuels and 1.2 percent in 2015, EIA said. export LNG from the U.S., with Cheniere Iraq. consumption met by net imports fell from “Rapid natural gas production growth in Energy’s Sabine Pass facility expected to The North Sea Brent spot price aver- 60 percent in 2005 to an average of 33 per- the Marcellus formation has contributed to be the first to liquefy natural gas in the aged $112 per barrel in June, up from $110 cent in 2013 and EIA is projecting the net low natural gas forward prices in the Lower 48 for export. That facility is sched- per barrel in May. June was the 12th con- import share to decline to 22 percent in Northeast, and as a result new infrastruc- uled to come online in stages beginning secutive month in which the Brent average 2015, the lowest import rate since 1970. ture has been proposed to take gas to other next year. was between $107 and $112 per barrel, the The highest average U.S. production market regions.” The natural gas spot price averaged agency said. level was 9.6 million bpd in 1970. The eastward-flowing Rockies Express $4.59 per million Btu at Henry Hub in Brent is projected to average $110 per EIA said recent U.S. production growth Pipeline began service in June on its June, and EIA said it expects spot prices to barrel this year and $105 per barrel in 2015, has been from lighter, sweet crude from Seneca Lateral pipeline, which takes remain near current levels until the start of up $2 and $3 per barrel, respectively, from tight resource formations, with roughly 96 Marcellus gas westward to the Midwest. the next winter heating season. EIA’s May projection. percent of the 1.8 million bpd increase EIA said Rockies Express’ parent com- Henry Hub natural gas spot prices are The West Texas Intermediate discount from 2011 to 2013 consisting of “sweet pany, Tallgrass Energy, “plans to add bidi- expected to average $4.77 per million Btu to Brent is projected to average $9 per bar- grades with lighter API gravity of 40 or rectional capability on a significant portion this year and $4.50 per million Btu in l rel in 2014 and $10 per barrel in 2015. above.” of (Rockies Express Pipeline)’s eastern- 2015. In addition to conflict in Iraq, EIA said EIA said it is forecasting that the U.S. most segment.” record-high levels of Chinese crude oil “supply of lighter API gravity crude will EIA said growing domestic natural gas imports and ongoing delays in Libyan oil continue to outpace that of medium and production is expected to put downward exports also contributed to upward price pressure. The WTI spot price averaged $106 per barrel in June, up from $102 per barrel in May, driven partly by “relocation of crude oil to refining centers along the Gulf Coast through new pipelines,” EIA said. Crude inventory levels at Cushing, Oklahoma, the delivery point for WTI, “have fallen by more than half since the start of the year, from 42 million barrels on January 24 to below 21 million barrels on June 27, the lowest level since November 2008,” EIA said. The discount of WTI to Brent averaged more than $13 per barrel from November through January, and fell to $6 in June. EIA said the U.S. Commerce Department’s Bureau of Industry and Security has authorized two companies to export “stabilized lease condensate processed in a distillation tower.” US crude production up EIA said U.S. crude oil production is expected to average 8.5 million bpd this year and 9.3 million bpd in 2015, up from 7.4 million bpd in 2013. “The 2015 forecast represents the highest annual average level of oil production since 1972,” EIA said. Serving Alaska for Over 25 Years

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EXPLORATION & PRODUCTION Caelus approved as Oooguruk operator Caelus Energy Alaska has been approved as the operator of the North Slope Oooguruk unit. Caelus acquired Pioneer Natural Resources Alaska in a $300 million deal that closed April 15, a deal which replaced a mid-sized independent operator with a small independent operator. Alaska Division of Oil and Gas Director Bill Barron said in a July 1 letter to Caelus that the division finds Caelus “qualified to fulfill the duties and obligations” in the Oooguruk unit agreement, and approves Caelus as successor unit operator. Pioneer purchased the Oooguruk leases in the nearshore waters of the Beaufort Sea in 2002 from Armstrong Resources and put the field online in 2008. When Pioneer Chairman and CEO Scott Sheffield announced the sale last November, he said it represented a strategic move to focus Pioneer investment on shale development in Texas. Sheffield said Oooguruk holds the North Slope record for the short- est time from first oil discovery to first oil production. Caelus has formed a strategic partnership with Apollo Global Management, an international investment management company, which has said it intends to invest up to $1 billion in Caelus for development of existing assets and to pursue acquisi- tions or additional investments. —PETROLEUM NEWS

continued from page 1 Fairbanks Natural Gas to get public financing for the LNG plant, assistance FNG RATE HIKE with the trucking operation and an expansion of its service area to include much of settle a long-running dispute with state the Fairbanks North Star Borough. officials. Considering the historically high cost of The rate case is a direct result (and a heating oil compared to natural gas, the requirement) of the settlement, but it also scenario would have certainly made incorporates costs associated with an Fairbanks Natural Gas a near-monopoly abandoned attempt to build a North Slope in the Interior heating market. The utility liquefied natural gas plant to offset con- voluntarily accepted rate regulation, in cerns about dwindling supplies in the part, because monopolization would have Cook Inlet basin. made regulation inevitable. Given the upheavals in the Interior “(Fairbanks Natural Gas) always energy market at the moment, including thought that at some future time econom- state-backed plans to truck LNG to the ic regulation would be appropriate,” region from a proposed North Slope Britton wrote. “We thought, however, that plant, Fairbanks Natural Gas said it (Fairbanks Natural Gas) would be subject expects the proposed rates to be obsolete to regulation when it developed a much by 2016, and also expects to file rate larger market share and its position in the cases “on a frequent basis until things set- market was much more comparable to a tle down, hopefully by the end of the typical gas distribution utility.” decade.” Instead, though, the Alaska Industrial A transition Development and Export Authority chose MWH Americas Inc. to be its private sec- The rate case marks the beginning of a tor partner for the LNG facility and the transition for Fairbanks Natural Gas. Regulatory Commission of Alaska gave After a supply disruption in Cook Inlet the municipal Interior Gas Utility a cer- in late 2006 threatened consumers in tificate to operate in the those areas of the Fairbanks, the RCA told Fairbanks Interior where Fairbanks Natural Gas had Natural Gas to find an alternative source hoped to expand. of supplies and the company launched an The requested rate increase would, in ambitious program to move its supply to part, cover the $5 million the company the North Slope by building a liquefied spent on developing the abandoned North natural gas terminal and establishing a Slope LNG project over the past eight trucking operation. years. The $5 million represents roughly “While it may sound simple enough to one quarter of the utility’s rate base, build an LNG production facility on the according to Britton. North Slope and begin providing additional gas supplies to Fairbanks, the real- Still needs supplies ity is much different,” President Dan Those setbacks have necessitated a Britton wrote in a recent affidavit sup- change of strategy, according to Britton. porting the rate increase. “While it was not initially our goal, For starters, Fairbanks Natural Gas FNG is ready to accept economic and spent more than two years negotiating a political realities and transition towards a supply contract with one of the North more traditional gas distribution company Slope producers. Even with the contract model, in which FNG’s primary role is to in hand, the utility needed anchor tenants provide rate regulated gas distribution to justify the cost of the facility. While the service,” Britton wrote. utility made some initial progress with This year and next year, Fairbanks Golden Valley Electric Association and Natural Gas is adding 30 miles of Flint Hills Resources Alaska Inc., those pipeline to its existing system, which will two large industrial users later split off to allow the utility to serve some 1,300 addi- develop a separate LNG facility. tional customers. At the same time, Britton said, a series Those customers, though, cannot join of state and industry ventures to bring the system without supplies, Britton North Slope natural gas to Southcentral noted. threatened to make the Fairbanks Natural While Fairbanks Natural Gas intends Gas proposal obsolete. Eventually, to purchase supplies from the proposed Fairbanks Natural Gas approached the North Slope LNG plant being promoted state about forming a public-private part- under the Interior Energy Plan, the suc- nership, which led to the passage of the cess of the plant remains uncertain. If the $325 million Interior Energy Plan. program gets delayed, or is unsuccessful, Opportunity for public financing Fairbanks Natural Gas would be unable The plan presented an opportunity for see FNG RATE HIKE page 15 PETROLEUM NEWS • WEEK OF JULY 13, 2014 15

continued from page 14 tion from heating oil. Natural Gas thought common ownership May 31. The Aurora contract sold sup- Fairbanks Natural Gas is particularly between its distribution and liquefaction plies for $6 per thousand cubic feet, FNG RATE HIKE worried about large interruptible cus- entities would strengthen its application according to Fairbanks Natural Gas. tomers leaving the company if heating oil to expand its service area and its applica- Now, Titan is acquiring its supplies to add those customers unless it could prices come down in the future. The utili- tion to be the private sector partner for the from Hilcorp Alaska LLC at a base price first find additional supplies. ty “could accept this risk when it was not Interior Energy Plan. “In retrospect, it of $6.86 per mcf and a swing price of Currently, Fairbanks Natural Gas pur- regulated, because it could make up any seems clear that the common ownership $8.58 per mcf. Those rates will jump to chases its supplies from its affiliated Titan losses when heating oil prices increased,” structure hurt both its presentation to the $7.13 per mcf and $8.91 per mcf, respec- Alaska LNG LLC, which holds a contract Britton wrote. Over the long run, he RCA and its presentation to AIDEA.” tively, next year, according to Fairbanks for Cook Inlet supplies through March 31, added, Fairbanks Natural Gas may need The RCA rejected the expansion Natural Gas. 2018, “and anticipates being able to to revise its terms for providing interrupt- request because the Fairbanks Natural Including associated operational and obtain additional gas supplies after that ible service to address this imbalance. Gas proposal relied too heavily on sales transportation costs, Fairbanks Natural date,” Britton wrote. When it expected to become an expan- to Golden Valley Electric Association. If Gas expects to pay $15.06 per mcf under Last year, Fairbanks Natural Gas also sive monopoly, Fairbanks Natural Gas Fairbanks Natural Gas had been focused the Titan contract for the remainder of the purchased supplies from the Kenai LNG believed the costs of regulation would be solely on providing distribution services, year. By comparison, the company noted, facility, and the utility expects to do the offset by the benefits of state financing. it wouldn’t have needed to worry about its contract with ConocoPhillips for inter- same over the next two winters, according Whether the calculation remains valid is having an industrial anchor, such as the ruptible supplies — which are usually to Britton. an open question. The proposed rate Interior electric cooperative. cheaper — from the Kenai LNG plant is a Advantages to smaller operation increase, in part, offsets the cost of When it came to making a case to delivered price of $17.35 per mcf. preparing the rate case, Britton wrote. AIDEA, other Fairbanks utilities worried While Fairbanks Natural Gas had pre- Britton said his company would have But, on the other side, regulation allowed about Fairbanks Natural Gas being on viously adjusted its rates at will to preferred to expand its role to include the the utility to secure a $15 million loan both sides of the negotiating table, respond to changing commodity prices in upstream component of the supply chain, from AIDEA “on very generous terms.” according to Britton. the market, the proposed rate increase but acknowledged there were advantages would segment costs. The proposed rates to its smaller operation. With an LNG Why FNG lost twice Cook Inlet prices would include a component for fixed plant in place, the utility would be able to Regulation also highlights the com- The rate case also reveals some of the costs and a Gas Cost Adjustment that avoid the financial and technical risks of plexities of the Fairbanks Natural Gas intricacies of the Cook Inlet gas market. would allow the utility to tinker its rates liquefying and transporting natural gas business model. Fairbanks Natural Gas currently gets as gas prices fluctuate. l (although the utility would still have to When the company started, it separat- the majority of its supplies through its bear the risk of re-gasifying the LNG ed its rate-regulated distribution operation contract with Titan, but the utility fin- once it arrives in Fairbanks, a risk that tra- and its unregulated LNG operations as a ished a contract with Aurora Gas LLC on ditional pipeline-supplied utilities like way to seek different types of investors Enstar Natural Gas Co. are able to avoid). for each component of its business, And, as a utility focused only on distribu- according to Britton. When the company tion, Fairbanks Natural Gas won’t need to became exempt from rate regulation in worry about the potential of a major 2003, it combined the two operations for North Slope gas pipeline making the the sake of convenience. LNG plant irrelevant. The return to regulation necessitated a Still, Britton wrote, the return to regu- return to the original structure, Britton lation will bring challenges. wrote, which is why Fairbanks Natural The reliance on LNG creates higher Gas handed over the LNG operation to capital costs for Fairbanks Natural Gas Titan last year. than for other, similar distribution compa- “In hindsight,” Britton wrote, “I wish nies, he wrote. Those costs would be dif- that we had separated the businesses ficult to recover if customers leave years ago, and made a more complete because of supply disruptions or competi- separation of ownership.” Fairbanks

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Great Northern announces passing of John Riggs cerns going forward should be directed to Korpi at 907-745-6988 or at [email protected]. “We have a strong team at GNE and are committed to keeping business running Dave Jarrett, chief operating officer of Old Harbor Native Corp., said in an open letter to smoothly as we know John would have wanted,” Jarrett said. “As we search for a more customers and vendors July 2, “It is with a heavy heart I write to you today to inform you permanent solution, I want to assure you that business will continue as usual and we will that John Riggs, founder and president of Great Northern continue to deliver quality work.” Engineering, passed away from an apparent heart attack on June 28, 2014. The impact of this loss will be felt for many years to come. “John built an impressive legacy in Alaska through his various ASRC board endorses Dan Sullivan for U.S. Senate roles in the community and on important projects such as the Trans- Members of the Arctic Slope Regional Corp. board of directors have taken the unique Alaska Pipeline, the Ted Stevens Anchorage International Airport, step of endorsing a candidate for U.S. Senate, making their choice of Dan Sullivan known and the Port of Anchorage Valve Yard, to name just a few,” Jarrett after a regularly scheduled meeting in Barrow. Sullivan’s military experience, responsible said. “With his tireless work and ethical standards John built a solid energy development record, his history of working with the North Slope on issues ranging company with a stellar reputation that gained him the respect and from justice to energy, diplomacy at the U.S. State Department, his stance against domestic admiration of those who had the pleasure of meeting him. violence, the importance he personally places on education and his commitment to Alaska “In the six short months since we became John’s partner in make him a strong and favorable candidate for U.S. Senate, the board said. Great Northern Engineering, we have developed a deep respect and JOHN RIGGS “It is a rare move for our board members,” said Crawford Patkotak, ASRC board chair- friendship with him, his family, and the dedicated family of employ- man. “We concluded that we believe in U.S. Senate candidate Dan Sullivan and his ability ees at Great Northern Engineering. In these trying times, I know their deep bond will carry to effectively engage all sectors of the Alaskan community to positively move Alaska for- them through.” ward.” Jarrett said Dave Korpi, a senior mechanical engineer and 17-year veteran employee of Great Northern Engineering, has been named interim CEO. Jarrett said questions or con- see OIL PATCH BITS page 19 Companies involved in Alaska and northern Canada’s oil and gas industry

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Crowley Solutions Motion Industries All of the companies listed above advertise on a regular basis Cruz Construction with Petroleum News PETROLEUM NEWS • WEEK OF JULY 13, 2014 17 continued from page 5 alignment on gas. In fact, I recall the eral years as part of DNR. So he does Petroleum News: Also this session, Denali project was in the process of disin- bring a wealth of knowledge both from after the Legislature pretty much wrapped PARNELL Q&A tegrating and the companies were in dif- the legislative branch and the executive up discussions on the LNG export project, ferent orbits. Then through bringing the branch that are extremely valuable to the you introduced legislation to boost the ducers will take a step; Alaska will take companies together, we’ve been able to state and to its people. state’s refining industry. It was kind of a step; the producers will take a step and gain alignment first on Point Thomson last-minute work by the Legislature. Do Alaska will take a step. SB 138 seems to resolution because we need that as well as Petroleum News: His supporters in the you see yourself taking a closer look at be that step Alaska is taking. Many who Prudhoe Bay for a large-volume line. Legislature cite a balance of a demeanor the industry next session? supported the bill did so with skepticism Ever since Point Thomson was resolved, that blends tenacity of a high school state Parnell: From a national security per- and cautious optimism, their words. It we had to reach alignment on a project champion wrestler with the calmness and spective and making sure we have jet fuel wasn’t so much directed at the bill as it concept selection. In other words the par- composure of a statesman. Does that play for those Interior base facilities and air- was past attempts. Can you relate to that ties had to agree that this pipeline is going into it? planes, and from a job perspective, an in- cautions optimism? to go from the North Slope to Nikiski, for Parnell: those traits you described are state refining capability is hugely impor- Parnell: Absolutely. I’ve lived here for example, and the project concept is for an possessed by Joe and possessed by the tant to us. When we took action this past about four decades. Like many, I’ve seen LNG project. So the parties had to get team day in and day out. I also think it’s year — the administration and legislators projects come and go. At the same time, I alignment on that. Now we have align- important to point out the role of — to assure a more healthy refining believe we are on track to getting ment on moving into real engineering, (Revenue) Commissioner Angie Rodell industry, I think we need more time to let Alaska’s gas to Alaskans first because we real environmental field work in this pre- and (Deputy Commissioner) Mike that play out. I understand one of the made historic progress in doing so. You FEED stage. The alignment has been Pawlowski. Those three in the role they companies is already starting to invest mentioned SB 138. The significant growing stronger but it’s been a step-by- play between tax issues, royalty issues more heavily in refining capacity in this announcement now is we have a commer- step evolving alignment as the parties and negotiations on behalf of the state, state. So we’ll have to wait and see what cial agreement now, an alignment with all become more and more confident that the they are stronger together than one indi- happens. At this point, I think we’ve the parties, so real work is beginning now project can move to the next phase. vidual. Alaskans are better off for their made it clear a healthy refining industry is on engineering, design and environmental serve. important to our state. fieldwork. Petroleum News: With AGIA off the The state is now a full partner in the books, what value did AGIA have in the Petroleum News: The argument in Petroleum News: Do you see Flint project. That summer field season work current efforts moving forward and what Washington to export LNG seems to be Hills ever coming back to its old form? has commenced. So while many projects does TransCanada bring, if they don't gaining ground, at least in favor of Parnell: That requires a willing Flint have faltered in the past, I am cautiously have a stake in the resource? exporting. Does this help Alaska, or are Hills. They made it very clear, they want optimistic about this one because it’s the Parnell: TransCanada’s participation in we still seen as a separate market? to be a terminal at this point. What I’m first time in our history when all the nec- the Alaska LNG Project means greater Parnell: I think we’ve been able to working to do is make sure that other in- essary parties for a project are aligned, all monetary return to the state. And, make a good case that Alaska is separate. state refiners who want to invest and the necessary parties are putting down TransCanada is the only party aligned We are not selling into the Lower 48 mar- expand their capacity can. Clearly we’ve their money and have agreed to work with the state's interests in ensuring natu- ket. We would not put U.S. consumers at made it possible for a purchaser of Flint together for the next 18 months in this ral gas resources beyond Point Thomson risk to higher prices by our exporting gas Hills to take advantage of those tax incen- pre-FEED stage. The safeguard for and Prudhoe Bay get maximized for to the Pacific Rim. At the same time, I do tives as well. l Alaska is the commensurate proportionate Alaskans’ benefit. TransCanada, like the believe as Lower 48 consumers and mem- approach I spoke of. After 18 months of state of Alaska, is an expansion-minded bers of Congress become more comfort- Editor’s note: See part 2 of this inter- work that the Legislature has authorized, party, an important partner to have early able with the economic benefits of being view in the July 20 issue. we will be able to take all of that work in the project. part of the global market in gas I think and show the Legislature and the public Further, AGIA was essential to pro- that helps Alaska’s chances as well. I can what’s going on, so the accountability and moting alignment amongst all of the par- also make a case that this attitude does transparency is there. The Legislature, ties, as was the formation of the Alaska help Alaska’s prospects as well. just like the boards of directors of the cor- Gasline Development Corp. It was under porations who are parties to this, the the AGIA license that the parties collabo- Legislature can make a decision — an rated to develop a concept for an LNG informed decision — about whether and project after I asked them to shift focus to how to progress. In other words, are we an LNG project. willing to make the next financial commitment to go into FEED? These are the Petroleum News: We talked about front commensurate proportionate steps that lines experience dating to the Murkowski each of the parties are taking together. So negotiations. One member of your admin- far we’ve reached a milestone by walking istration, Commissioner (Joe) Balash also and working together into pre-FEED. brings those traits to the table. Most just see him on television testifying and may Petroleum News: There’s been a lot of not know that. What do you think he talk about alignment, again something brings as you move forward with the LNG we’ve heard before under another propos- export project? al. Where do you believe your alignment Parnell: One of his benefits is that he’s first began? Was it when the three North been on earlier gas line discussions on the Slope producer CEOs met you in legislative side as a staff member, plus the Anchorage or another time? A progres- last several years as DNR commissioner sion of all of that? and before that as deputy commissioner. Parnell: Alignment has been a progres- Whereas I in 2003 and 2004 had day-to- sion. The first phase of alignment began day experience in the executive branch, when I brought the CEOs together. When he’s been doing it for some time, for sev- I first started in this office, there was no

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In 2013 the field lion boe of resources in Nunavut from ing-gas, or WAG, laboratory tests of rock icant adverse” impacts. produced oil at an average rate of 5,600 180 completed wells. from the Tarn reservoir indicated the likeli- MKI is required to make status barrels per day, the Tarn development plan The geological surveys of Canada and hood of reservoir damage, should water be updates of environmental commitments says. In that year the field had 38 active the United States estimate the territory injected, the plan says. and marine mammal observer reports that production wells and 23 active injection could hold recoverable resources of 9.2 But the subsequent discovery of better will be available to the public. wells. However, some development drilling billion to 23 billion barrels of oil and 97.2 quality reservoir rock following some Those reports may provide informa- scheduled for 2013 was deferred into 2014 tcf to 262.3 tcf of gas. development drilling led to the implemen- tion on sightings of whales and birds in because of drilling rig issues, the plan says. Concerns over the dangers of explo- tation of a full-scale WAG program, using offshore areas that would not otherwise The plan says that, with recent studies ration in the area were heightened in 2011 miscible injectant. The use of this program be made public, while MKI will be having indicated some new development when S.L. Ross Environmental Research in conjunction with a field simulation required to hold project update meetings opportunities, both for infilling existing was commissioned by the NEB to assess model has resulted in an effective response with interested communities. developments and for developing the options for cleaning up spills in Canada’s from production wells, the plan says. perimeter of the field, ConocoPhillips plans First move in almost 30 years Arctic offshore, including Davis Strait west of Greenland’s Disko Bay. to drill four new wells and two sidetracks to Reservoir simulation There has been no announcement of existing wells in 2014 and 2015. The wells The consulting firm said those options Reservoir simulation studies are helping the schedule for the survey work. will involve horizontal and slanted drilling, would be impractical 20 percent to 84 understand the benefits both of continued But the seismic plans are the first while one well, a production well, is percent of the time during the open-water development drilling and of changes to the industry move in almost 30 years after expected to require multi-stage fracturing, season because of bad weather and sea enhanced oil recovery program at Tarn, the exploration companies pulled out of the the plan says. ice. plan says. And a full-field model has been Nunavut area in 1986 after posting 20 The original development plan for Tarn Against that backdrop, aboriginal developed for forecasting future production discoveries, most of them in the Sverdrup involved the injection of miscible injectant, communities in the High Arctic have and for identifying development opportuni- basin, a sedimentary formation that cov- insisted on greater care in weighing a mixture of natural gas and natural gas liq- ers about 200,000 square miles. exploration plans at a time when the uids, into the field reservoir, to maintain see SATELLITE FIELDS page 19 The finds were highlighted by three industry is urging the NEB to drop its large deposits: Cisco, 1 billion barrels of requirement for same-season relief wells oil equivalent; Drake Point, 6 trillion to deal with blowouts or spills. cubic feet on Melville Island; and Hecla —GARY PARK Development continues to evolve at West Sak in the Prince Gustaf Adolf Sea, 2 billion Faced with the challenge of retrieving viscous oil from relatively shallow and boe of oil and 10 tcf of gas. unconsolidated reservoir sands in the company’s West Sak development, above the But, beyond a handful of annual Kuparuk River field on Alaska’s North Slope, ConocoPhillips has tried an evolving series of production techniques, according the latest West Sak plan of development. The field went into production in 1997. By the end of 2013 cumulative oil pro- Essential Expertise for Alaska duction was 67.5 million barrels. The average production rate during 2013 was 15,772 barrels of oil per day, the plan says. Nalco is the world leader in delivering programs that maximize production, protect assets and Initial development reduce TCO for Mining, Oilfield production, Initial West Sak development involved the use of vertical injection and production Refining, Industrial producers and Utilities. Our differentiated technologies and services wells, with waterflood used to sweep oil from the underground rock reservoir. Multi- • Save water stage fracturing with gravel packing, or fracturing in combination with epoxy resin, • Increase energy was used to control the sand that tended to enter the production well bores. Downhole • Deliver cleaner air and water electric submersible pumps and progressive cavity pumps drove oil up the well bores to the surface. Beginning in 2000 ConocoPhillips tried a new production technique at West Sak involving the use of multilateral, horizontal production wells, in which more than one well bore was driven horizontally through the reservoir from a single well bore drilled steeply from the surface. This approach evolved into the use of horizontal wells for water injection, as well as for oil production. In a 2003 development program, undulating horizontal production and injection wells were drilled, with the undulations enabling a single horizontal well to access more than 100 vertical feet of reservoir sands. Slotted liners in production wells lim- YYoour TTootal ited the entry of sand into the well bores, while downhole jet pumps drove oil towards the surface. The lengths of the horizontal lateral wells averaged 6,000 feet. Protection In 2004 ConocoPhillips drilled nine wells in West Sak, including the first tri-lateral wells, with three lateral wells running horizontally from a single steeply inclined TTeeeam well bore, the development plan says. Multiple laterals In 2005 the drilling strategy changed, with ConocoPhillips abandoning the undulating well design and, instead, using parallel multiple lateral wells to target individ- YYoour CompleteComp Source For Design, ual reservoir sands — the company had experienced drilling and well performance Installation & Service inefficiencies, as the undulating wells passed through shale layers between the sands,

see WEST SAK page 19

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907- 274-7973 877-978-6265 www.efs-ﬁre.comwww.efs-ﬁre.com 3138 Commercial Dr.Dr. Anchorage, AK 99501 PETROLEUM NEWS • WEEK OF JULY 13, 2014 19 continued from page 18 cerns, the field has operated through the continued from page 18 evaluated. Two new wells were started in continuous injection of just miscible SATELLITE FIELDS November 2013 and the planning of six injectant, the Meltwater plan says. WEST SAK new wells involving a variety of comple- Having discovered that gas injection is ties. A high-resolution 3-D seismic survey tion technologies will continue in 2014, particularly effective at Meltwater, the plan says. conducted in 2008 is being interpreted and the development plan says. ConocoPhillips plans to maximize oil Following exploration and delineation incorporated into the reservoir model. This recovery using gas injection for the fore- drilling between 2004 and 2006, in 2008 survey is also providing insights into the Further developments seeable future. And the gas/oil ratios of a first phase of development in the more movement of fluids in the Tarn reservoir, A development team is also evaluat- individual production wells will be moni- northeasterly part of the West Sak area the plan says. ing the possibility of four new multilater- tored, to assess the performance of con- began. Horizontal water injection wells Although ConocoPhillips had originally al producers and 15 vertical injectors in tinuous miscible injectant usage, the plan in this development used new technology anticipated that miscible injectant injected the eastern part of the northeast West Sak says. to hydraulically isolate two sand horizons into the Tarn reservoir would help lift oil to area. and improve the injection process. The the surface through production wells, prob- ConocoPhillips has also been con- Low pressures lems relating to paraffin deposition caused multilateral junctions in the wells were of ducting a pilot project, testing the use of From the outset of production from the company to install hydraulic jet pumps a new, advanced type, allowing improved viscous reducing water-alternating-gas Meltwater, ConocoPhillips has experi- as an alternative “artificial lift” technique to injection control. enhanced oil recovery in West Sak. The enced difficulties with anomalously low aid oil production. But, as more water starts Along with evolving well designs, Alaska Oil and Gas Conservation reservoir pressures, a problem that the to break into the production stream, it may ConocoPhillips has tried different down- Commission recently approved the full- company eventually attributed to a loss of be possible to revert to the original gas-lift hole pump designs, in particular to deal scale use of this recovery technique in the injection fluids through one of the subsur- concept, the plan says. With water associat- with the problem of sand entering and West Sak oil pool. The commission also face rock intervals. As a consequence, in ed with the pumping technique creating plugging wells. The plan of development approved an extension of the pool, to 2012 the company adopted a new reser- some corrosion issues in the wells, gas lift says that evaluation of well completion adjust the pool boundary and to add some voir management strategy involving the techniques are planned for new wells. designs continues for northeast West Sak, further reservoir sands above the existing placement of upper limits on injection And as the field matures, some produc- with the use of gas for the artificial lift of West Sak sands. pressures, the Meltwater plan says. tion wells are being converted for injection oil in production wells being a possible —ALAN BAILEY However, observed pressure commu- operations, the plan says. alternative to downhole pumps. And the nication between an injection and a pro- In addition to developments within the pace of development has slowed while duction well has indicated the presence of existing Tarn field, ConocoPhillips has the results of recent developments are a linear feature in the subsurface that been evaluating opportunities in two other allows the rapid flow of injected fluids. related discoveries, the Cairn and the Esker ConocoPhillips uses a variety of artifi- prospects, the plan says. oil from Tabasco through an improved oil miles south of Tarn. Field development recovery program and through the drilling began in 2001, with the field coming cial lift techniques on a well-by-well Tabasco of additional development wells. The com- online in November of that year. basis at Meltwater, including the use of hydraulic jet pumps, gas lift and plunger The Tabasco satellite field was discov- pany says that it is currently using water- By the end of 2012 cumulative total oil flood to maximize oil recovery and that the production reached 17.7 million barrels, lift systems. The company is reviewing its ered in 1985 during development drilling future options for artificial lift in the field. for the Kuparuk field. Development of the use of horizontal wells on the periphery of while the average production rate in 2013 the field has minimized water production. was 1,971 barrels per day. Of the 19 wells In addition the company has been analyz- satellite started in 1998. ing some new seismic data to identify Total cumulative production through to Reservoir modeling suggest that the injec- drilled in the field, 11 production wells tion of lean gas, polymer and water has the and four injection wells were active at the new Meltwater development opportuni- the end of 2013 was 17.9 million barrels of ties, including the possibility of coiled oil. The average oil production rate in 2013 potential to better sweep oil from the reser- end of 2013, the plan says. voir at Tabasco — further modeling and Initially ConocoPhillips used a WAG tubing sidetrack wells, the development was 1,711 barrels per day. plan says. l An original plan to drill up to 19 some laboratory testing is being considered approach with miscible injectant for oil Tabasco development wells was scaled to evaluate this approach, with a rework of recovery from Meltwater. But since 2009, back to seven production wells and two the field model targeted for 2014-2015. when the field’s water injection line went injection wells, because of a problem asso- Meantime, ConocoPhillips says that it out of service because of corrosion con- ciated with water in the reservoir. To date, will monitor the performance of a newer 12 wells have been drilled in the field, with completion strategy used in three existing five producers and two injectors being on production wells at Tabasco, as a guide to We use over 200 words to describe snow and only four line in 2013. Three deviated production the design of possible future development wells have been shut in because of high wells. Words to describe how to travel in the Great Land: water production and other problems, the Meltwater plan says. BALD MOUNTAIN AIR SERVICE ConocoPhillips says that in 2014 it plans In early 2000, exploration drilling dis- to continue to seek ways of producing more covered the Meltwater field, about nine

continued from page 16 OIL PATCH BITS

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continued from page 1 Woodfibre projected for 2015 approval LNG LIST Meanwhile, British Columbia Premier Christy Clark said Woodfibre should be exports to the United States by other par- up and running in the first quarter of ties,” said the WesPac application. 2017, assuming a final investment approval in 2015. Construction could start in 2015 She said that will enable the province Some energy supplies from Tilbury’s to start LNG shipments to Asia faster than storage are shipped considerable dis- expected. tances to domestic markets such as However, the provincial government Watson Lake, in the southern Yukon. has yet to unveil the final details of its tax FortisBC also draws on the Tilbury plan that will lead to a project develop- operation to supplement natural gas sup- ment agreement with Woodfibre. plies during peak consumption periods in In response to those who suggest the Lower Mainland. British Columbia is falling behind its WesPac said that obtaining an export rivals in the United States and Australia, permit is “an important step in the devel- Clark said that “just because the critics opment of the WesPac LNG marine ter- think (the competition) is going to be minal and further expansion of LNG hard doesn’t mean we’re going to start export production capacity” at the plant. waving the white towel. I’m determined Subject to receipt of the necessary we’re going to win this race.” approvals, construction will start in 2015, “And the only way we’re going to win with completion scheduled for late 2016. is to aim high, work hard and put our The company is confident it can find pedal to the metal every day. We have sufficient natural gas feedstock in invested a lot of time and a lot of political Western Canada, while preliminary dis- capital in this.” l cussions indicate that sufficient pipeline capacity is available on the Spectra net- work.

continued from page 1 The MOU provided for the termination of the state’s license with TransCanada LNG PROJECT under the Alaska Gasline Inducement Act and a transition to a commercial agree- tion for state equity participation — was ment. Parnell told a Fairbanks audience a requirement for pre-FEED to begin. June 17 that the state had “terminated the Under provisions of SB 138 the state license with TransCanada under AGIA” will take a 25 percent equity position in the and completed a “traditional precedent project, based on taking both royalties and agreement.” Creative photography for the oil & gas industry. production tax on natural gas in kind. That termination had been negotiated in judypatrickphotography.com Two documents, the heads of agree- 907. 258.4704 the MOU, which along with the HOA was ment — between all the producing parties, ratified with the passage of SB 138. the state and TransCanada — and the The cost estimate for the state during memorandum of understanding between the pre-FEED phase is $43 million to $100 the state and TransCanada, were drawn up million, about 1 percent of the total invest- 907.522.9469 prior to the 2014 legislative session. SB ment. Pre-FEED has been estimated at 18 138 enabled the state to participate in the months. Alaska LNG project as proposed by those Movement on to Phase 2, FEED, agreements. requires additional legislative approval, as well as approval by the other parties. The state’s cost of the FEED stage is estimated at $180 million to $450 million, some 2-3 percent of the total investment. Phase 3 is the final investment decision, and will, once again, require legislative approval for state participation as well as approval by the other parties. FID marks the beginning of construction, estimated to take place from 2019 to 2023, with the state’s cost from $7 billion to $13 billion, 95 to 97 percent of investment costs. —KRISTEN NELSON

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